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You are an expert at summarizing long articles. Proceed to summarize the following text:
Leading organizations use their performance management systems as a key tool for aligning institutional, unit, and employee performance; achieving results; accelerating change; managing the organization on a day-to-day basis; and facilitating communication throughout the year so that discussions about individual and organizational performance are integrated and ongoing. Performance management systems in these leading organizations typically seek to achieve three key objectives. First, they strive to provide candid and constructive feedback to help individual employees maximize their potential in understanding and realizing the goals and objectives of the agency. Second, they seek to provide management with the objective and fact-based information it needs to reward top performers. Third, performance management systems provide the necessary information and documentation to deal with poor performers. Most federal performance management systems fail to achieve these objectives. In addition, many federal agencies are just beginning to recognize that their performance management systems can be strategic tools to achieve success. In my opinion, modernizing agency performance appraisal and management systems and linking them to agency strategic plans and desired outcomes should be a top priority. Results-oriented performance agreements are one mechanism in a performance management system that creates a “line of sight” showing how individual employees can contribute to overall organizational goals. Agencies that effectively implement such systems must first align agency leaders’ performance expectations with organizational goals and then cascade performance expectations to other organizational levels. These employees are then held accountable for their contributions to achieve desired results. Our work has shown that agencies have benefited from their use of results-oriented performance agreements for political and senior career executives. The performance agreements strengthened alignment of results-oriented goals with daily operations, fostered collaboration across organizational boundaries, enhanced opportunities to discuss and routinely use performance information to make program improvements, provided a results-oriented basis for individual accountability, and maintained continuity of program goals during leadership transitions. Governmentwide, agencies need to place increased emphasis on holding senior executives accountable for organizational goals. OPM amended regulations that change the way agencies evaluate the members of the Senior Executive Service (SES). While agencies will need to tailor their performance management systems to their unique organizational requirements and climates, they nonetheless are to: hold executives accountable for results; appraise executive performance on those results balanced against other dimensions, including customer satisfaction and employee perspective; and use those results as the basis for performance awards and other personnel decisions. Agencies were to implement the new policies for the SES appraisal cycles that began in 2001. Ultimately, an effective performance management system must link pay and incentive programs to individual knowledge, skills, and contributions to achieving organizational results. The affect of poor performers on agencies’ performance and morale can far exceed their small numbers. Still, while important, dealing with poor performers is only part of the challenge; agencies need to create additional incentives and rewards for valuable and high-performing employees who represent the vast majority of the federal workforce. Congress and the administration have repeatedly expressed a commitment to more fully link resources to results. The American people expect and deserve this linkage as well. However, we will never achieve this linkage without modern and effective performance management strategies. Additional information on the performance management programs in use in agencies and the relative strengths and weaknesses of those programs, along with best practice information, would prove very helpful as agencies seek to link pay to individual knowledge, skills, and performance. Efforts to link federal pay to knowledge, skills, and performance should be part of a broader effort to align resource decisions to results. As I noted, fostered in part by the Government Performance and Results Act (GPRA), there has been an increasing interest within the executive branch and the Congress in linking performance and results to resource allocation and other decisions. Consistent with that view, we need to continue efforts to shift agency accountability—with appropriate safeguards and oversight— to budgeted resources and results and away from other inputs and processes. The work of the recently completed Commercial Activities Panel, which I had the privilege of chairing, is illustrative in this regard.One of the sourcing principles adopted by the Panel was that the federal government’s sourcing policy should avoid arbitrary full-time equivalent (FTE) or other numerical goals. The principle is based on the unarguable point that the success of government programs should be measured by the results achieved in terms of providing value to the taxpayer, not the size of the in-house or contractor workforce. I believe that the Panel’s principle should also apply to resource allocation generally. We need to continue— and even augment—efforts to shift the focus of management, resource allocation, and decisionmaking from inputs and process to a greater focus on results and outcomes and to provide management reasonable flexibility while incorporating appropriate safeguards to prevent abuse. In this regard, holding managers accountable for results based on a specific dollar allocation versus FTE caps would be a major step in the right direction. As you know, I believe that a greater emphasis should be placed on knowledge, skills, and performance in connection with federal employment promotion and compensation decisions at all levels, rather than the passage of time, the rate of inflation, or geographic location, as so often is the case today. In recent years, widespread concern has been expressed about the methodology and results of the procedures to determine the federal pay gap. These concerns are among the reasons that the pay gap has never been fully addressed. I believe that careful study is needed to develop more realistic and workable methodologies and solutions to federal pay issues. Part of that assessment should focus on options for moving away from a compensation system that contains governmentwide pay increases with locality adjustments, and toward a system that is based to a greater degree on the knowledge, skills, and performance of the individuals involved. I fully appreciate that much work may be needed before agencies’ respective performance management systems are able to support a more direct link between pay and individual knowledge, skills, and performance. OPM certainly has a continuing and vital role to play in connection with these issues. OPM’s recently released white paper on federal pay provides a good foundation for the results-oriented pay reform discussion that must now take place. The greater use of “broadbanding” is one of the options that deserves to be discussed. In the short term, Congress may wish to explore the benefits of (1) providing OPM with additional flexibility that would enable it to grant governmentwide authority for all agencies (i.e., class exemptions) to use broadbanding for certain critical occupations and/or (2) allowing agencies to apply to OPM (i.e., case exemptions) for broadbanding authority for their specific critical occupations. However, agencies should be required to demonstrate to OPM’s satisfaction that they have modern, effective, and validated performance management systems before they are allowed to use broadbanding. The nature and scope of the cultural transformation that needs to take place in many agencies across the federal government will take years to accomplish—easily outrunning the tenures of most political appointees. At the same time, GAO’s work over the years, most prominently in our High- Risk and Performance and Accountability Series, has amply documented that many agencies suffer from a range of long-standing management challenges and a lack of attention to basic stewardship responsibilities, requiring concerted action and sustained top-level attention if they are to be addressed. One option for addressing the issues agencies face is to create a Chief Operating Officer (COO) position for selected agencies that would provide the sustained management attention essential for addressing key stewardship responsibilities in an integrated manner while helping to facilitate the transformation process within an agency. These long-term responsibilities are professional and nonpartisan in nature. They cover a range of “good government” responsibilities that are fundamental to effectively executing any administration’s program agenda. Statutory COOs would differ from—but hopefully complement—the roles often assumed by the current Deputy Secretaries in assisting the Secretaries in executing the administration’s policy and program agenda and achieving an agency’s mission. The good government responsibilities that could be led by a COO include: strategic planning, organizational alignment, core values stewardship, human capital strategy, performance management (aligning institutional, unit, and individual measurement and reward systems to achieve overall organizational goals), communications and information technology management, financial management, acquisition management, risk management, knowledge management, matrix management, and change management. While various models for structuring such a position could be used, one option would be to have a COO who is appointed, subject to Senate confirmation, to a term of 5 to 7 years (generally considered to be the minimum time needed for major change initiatives to provide meaningful and sustainable results). The COO should be at an organizational level equivalent to the current deputies in major departments and agencies in order to help assure the effectiveness of this position. A term appointment would help to provide continuity that spans the tenure of the political leadership to ensure that long-term stewardship issues are addressed and change management initiatives are successfully completed. The individual would be selected without regard to political affiliation based on (1) demonstrated leadership skills in managing large and complex organizations, and (2) experience achieving results in connection with a number of the above responsibilities. To further clarify accountability, the COO could be subject to a clearly defined, results-oriented performance contract with appropriate incentive, reward, and accountability mechanisms. If Congress and the executive branch decide to move forward with the COO approach, it may make sense to use a pilot in a select number of agencies using a value and risk-based approach. For example, an agency that is experiencing particularly significant challenges in integrating disparate organizational cultures (such as the proposed Department of Homeland Security) may be an especially appropriate first phase candidate. Agencies engaged in major transformation efforts, like the FBI, the Internal Revenue Service (IRS), and the National Aeronautics and Space Administration (NASA) could also benefit from such an approach. Similarly, a “challenged agency’’—one that has longstanding management weaknesses and high-risk operations or functions, such as the Department of Defense (DOD)—may also be a good first phase candidate. The point would be for the Congress, executive branch leadership in OMB and OPM, agencies, and others to gain experience with the COO approach before deciding how and where it should be applied across the government. More generally, we need to comprehensively examine opportunities for better using the federal government’s career SES leadership. This examination should focus on a number of issues that have been suggested to strengthen the SES and thereby improve federal performance and foster transformation efforts. These issues include, for example, concerns over SES compensation and pay compression. I believe that the issue of whether and how much to increase SES pay must be discussed within the context of how to make any pay increases variable and performance-based rather than across-the-board and fixed. We also must carefully examine the composition of the SES. It seems to me that, in general, current members of the SES fill three broad roles: executive leadership, program management, and senior technical and specialists positions. We need to look at the implications that these differing roles have for a range of issues, such as SES core competencies, performance standards, recruitment sources, mobility, and training and development programs. We also need to look at whether the number of levels within the SES (i.e. ES 1 through 6) are necessary and appropriate. As the federal government’s leading accountability organization, we have made a concerted effort to identify and encourage the implementation of human capital practices that improve the efficiency, effectiveness, and accountability of the federal government. Over the last few years, we have issued numerous reports with practical recommendations on the steps individual agencies can take to address their specific human capital challenges. In addition, we have reported on governmentwide trends and lessons learned by successful organizations. We also understand that we have a responsibility to “lead by example” and “practice what we preach” in all key management areas, including strategic human capital management. On March 15, 2002, we released A Model of Strategic Human Capital Management, the latest in a series of tools designed to assist agency leaders in effectively managing their people. Our model is designed to help agency leaders effectively lead and manage their people and integrate human capital considerations into daily decision making and the program results they seek to achieve. In so doing, the model highlights the importance of a sustained commitment by agency leaders to maximize the value of their agencies’ human capital and to manage related risks. Accordingly, it raises the bar for all of us—those in positions of leadership, federal managers, employees, unions, and human capital executives and their teams. Consistent with OPM’s and OMB’s views, our model of strategic human capital management embodies an approach that is fact-based, focused on strategic results, and incorporates merit principles and other national goals. As such, the model reflects two principles central to the human capital idea: People are assets whose value can be enhanced through investment. As with any investment, the goal is to maximize value while managing risk. An organization’s human capital approaches should be designed, implemented, and assessed by the standard of how well they help the organization pursue its mission and achieve desired results or outcomes. The model highlights the kinds of thinking that agencies should apply, as well as some of the steps they can take, to make progress in managing human capital strategically. The concepts presented in the model are arranged around eight critical success factors, which are organized in pairs to correspond with four cornerstones of effective strategic human capital management. (See Fig. 1.) As I noted before, OPM and OMB also have developed tools that are being used to assess human capital management efforts. We provided drafts of our human capital model to OPM and OMB for their review prior to publication to help ensure that the three efforts are conceptually consistent. We hope that the perspective and information provided in our model will help inform agencies’ efforts to respond to the administration’s management initiatives, such as “getting to green” on OMB’s management scorecard and using the tools developed by OPM. While we remain sensitive of the need to maintain our institutional independence, we are working constructively with OPM, OMB, and others to explore opportunities to develop a more fully integrated set of guidance and tools for agencies to address their human capital challenges. In addition to providing tools to help agencies help themselves, we believe it is our responsibility to lead by example. We are in the vanguard of the federal government’s efforts to modernize existing human capital strategies and we are committed to staying in this position. Our people are our most valuable asset and it is only through their combined efforts that we can effectively serve our clients and our country. By managing our workforce strategically and focusing on results, we are helping to maximize our own performance and ensure our own accountability. By doing so, we also hope to demonstrate to other federal agencies that they can make similar improvements in the way they manage their people. We have identified and made use of a variety of tools and flexibilities, some of which were made available to us through the GAO Personnel Act of 1980 and our 2000 legislation, but most of which are available to federal agencies. The most prominent change in human capital management that we implemented as a result of the GAO Personnel Act of 1980 was a broadbanded pay-for-performance system. The primary goal of this system is to base employee compensation primarily on the knowledge, skills, and performance of individual employees. It provides managers flexibility to assign employees in a manner that is more suitable to multi-tasking and the full use of staff. Under our current broadbanded system, analyst and analyst-related staff in Grades 7 through 15 were placed in three bands. We expect to modify our banded system in the future based on our experience to date. In January 2002, we implemented a new competency-based performance management system that is intended to create a clear linkage between employee performance and our strategic plan and core values. It includes 12 competencies that our employees overwhelmingly validated as the keys to meaningful performance at GAO. (See Fig. 2.) Our October 2000 legislation gave us additional tools to: realign our workforce in light of mission needs and overall budgetary constraints; correct skills imbalances; and reduce high-grade, managerial, or supervisory positions without reducing the overall number of GAO employees. This legislation allowed us to create a technical and scientific career track at a compensation level consistent to the SES. It also allowed us to give greater consideration to performance and employee skills and knowledge in any Reduction-in-Force actions. We believe that other agencies could benefit from these additional authorities. Since the legislation was enacted, we have established agency regulations and conducted and completed our first offering of voluntary early retirement opportunities. Once employees registered their interest in participating in the program, we considered a number of factors including: employee knowledge, skills, performance, and competencies; the organizational unit or subunit in which an employee worked; an employee’s occupational series, grade, or band level, as appropriate; and the geographic location of the employee. As authorized by the 2000 legislation, employee performance was just one of many factors we considered when deciding which employees would be allowed to receive the incentives. However, let me assure you, we did not use performance to target certain individuals. We are also using many recruiting flexibilities that are available to most agencies, including an extensive campaign to increase our competitiveness on college campuses and extending offers of employment during the fall semester to prospective employees who will come on board the following spring and summer. We are also using our internship program in a strategic fashion and we often offer permanent positions to GAO interns with at least 10 weeks of highly successful work experience. Moreover, we are building and maintaining a strong presence of both senior executives and recent graduates on targeted college campuses. We have also taken steps to streamline and expedite our hiring process. In this regard, the current length of time that it takes to hire a person in most other federal agencies is much too long and must be addressed. Even after we hire good people, we need to take steps to retain them. We have taken a number of steps to empower and invest in our employees. For example, we have active employee feedback and suggestion programs. In addition, we are in the midst of implementing our first student loan repayment assistance program for about 200 employees who have indicated interest and are willing to make a three-year commitment to staying with the agency. Overall, we have implemented the following initiatives and targeted investments, some of which are relatively recent and some of which are longstanding: Prepared a human capital profile and needs assessment to understand employee demographics and distribution. Conducted an employee survey in 1999 and 2002 to understand the status and progress of the agency and the areas in which we need to improve. Completed a knowledge and skills inventory for all employees. Conducted an employee preference survey so that employees could be given the opportunity to work in the areas that interest and energize them in light of our institutional needs. Implemented an Executive Candidate Development Program to prepare candidates for assignments in the SES. Initiated a Professional Development Program for newly hired GAO analysts to help them transition and progress. Initiated a redesign of our training curriculum to directly link and support our validated core competencies. Established an Employee Advisory Council to facilitate open communication and direct input from line employees to the Comptroller General and other GAO senior leadership. Provided an on-site child care center called “Tiny Findings” and the Wellness and Fitness Center. Implemented additional employee-friendly benefits such as business casual dress, flextime, and public transportation subsidies. Used recruitment bonuses, retention allowances, and student loan repayment assistance to attract and retain employees with specialized skills. Implemented a new “state of the art” performance appraisal system that is linked to our strategic plan and based on key competencies. As we engage in these changes, we also know that we are not perfect and we never will be. This is a work-in-progress for us as it is for others. Our approaches are not the only way for agencies to proceed, but they can help others identify ways to address their individual human capital challenges. In this regard, we have shared our lessons and experiences with others, and are happy to do so. | Strategic human capital management is critical to maximizing government's performance and ensuring its accountability for the benefit of the American people. The early years of the 21st century are proving to be a period of profound transition being driven by several key trends, including global interdependence; diverse, diffuse, and asymmetrical security threats; rapidly evolving science and technology; dramatic shifts in age and composition of the population; important quality of life issues; the changing nature of the economy; and evolving governmental structures and concepts. GAO designated strategic human capital management as a governmentwide high-risk area because of a long-standing lack of a consistent strategic approach to marshaling, managing, and maintaining the human capital needed for government to deliver on its promises. Three broad human capital reform opportunities are instrumental to agency transformation efforts: aligning individual and organizational performance, implementing results-oriented pay reform, and sustaining agency transformation efforts. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
To enable DOD to close unneeded bases and realign others, Congress enacted BRAC legislation that instituted base closure rounds in 1988, 1991, 1993, and 1995. For the 1991, 1993, and 1995 rounds, special BRAC Commissions were established to recommend specific base realignments and closures to the President, who in turn sent the Commissions’ recommendations and his approval to Congress. A special Commission established for the 1988 round made recommendations to the Senate and House Committees on Armed Services. The four commissions generated 499 recommendations—97 major closures and hundreds of smaller base realignments and closures. For the 1988 round, the legislation required DOD to complete its realignment and closure actions by September 30, 1995. For the 1991, 1993, and 1995 rounds, the 1990 act required DOD to complete all closures and realignments within 6 years from the date the President forwarded the recommended actions to Congress. However, property disposal and environmental cleanup actions may continue beyond the 6-year period. The economic impact on communities near base realignments and closures has been a long-standing source of public anxiety. Because of this concern, DOD included economic impact as one of eight criteria that it used for making BRAC recommendations in the last three rounds. While economic impact did not play as large a role in initial BRAC deliberations as did other criteria and was not a key decision factor, its importance was such that DOD components were required to estimate the economic impact of their recommendations. Generally, BRAC property no longer needed by DOD is offered first to other federal agencies. Any property remaining is then disposed of through a variety of means that initially include transfers to states and local governments for public benefit purposes and thereafter is disposed of by negotiated or public sales. Under public benefit conveyances, local redevelopment authorities can obtain property for such purposes as schools, parks, and airports for no or little cost. In 1993, the BRAC act was amended to provide local redevelopment authorities with BRAC property by sale or lease at or below fair market value or without cost for rural communities to promote the economic recovery of areas affected by closures. Later, these provisions were replaced with others that also allowed the transfer of real property at no cost to local redevelopment authorities for job generation purposes or for lease back to the federal government. Consequently, local redevelopment authorities usually first sought to obtain property at no cost since, failing that, property could still be obtained through negotiated sales. Figure 1 shows the general process used to screen real property under BRAC. Many BRAC properties require environmental cleanup. The 1990 BRAC act requires compliance with a provision of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, in transferring contaminated federal property. Under this provision, DOD has a continuing responsibility for cleanup but may, by way of so-called “early transfers,” transfer BRAC property before all cleanups on the property have been completed. Under the early transfer process, either the receiving communities or DOD perform environmental cleanup. In both cases, DOD funds the costs of cleanup. While the loss of jobs for DOD civilians and other adverse effects are in the short term inescapable byproducts of base closures, such effects can continue for some time. However, our prior studies and the studies of others indicate that over time many communities have absorbed the economic losses. Several factors affect the economic recovery of communities near base realignments and closures. Local officials have cited the strong national or regional economy as one explanation of why their communities have avoided economic harm and found new areas for growth. In addition, federal programs are available to assist communities in adjusting to base closures. Economic data related to unemployment rates and average annual real per capita income growth suggest that the majority of communities surrounding closed bases are faring well economically in relation to the U.S. rates and show some improvement since base realignments and closures began with the 1988 BRAC round. In addition, while two communities we recently revisited have progressed in recovering economically, they still face problems. Figure 2 shows several factors that play a role in determining the fate of communities affected by base realignments and closures. Officials from BRAC communities have stressed the importance of having a strong national economy and local industries that could soften the impact of job losses from a base closure. Following the 1991 recession until the recent slowdown, the economic performance of the United States has been robust. In a January 1998 report, we examined defense-related spending trends in New Mexico and the relationship between those trends and New Mexico’s economy. We reported that while defense-related spending had declined in the state, the state’s gross product and total per capita income had increased and that this economic growth might be due to efforts to diversify the economy to counter the loss of defense jobs. Officials also pointed to regional economic trends at the time of a closure, during the transition period, and at the present. For example, officials from the communities surrounding Fort Devens, Massachusetts, said that at the time of the closure, the area was suffering from the downsizing and restructuring of the computer industry. Those same communities are now benefiting from the economic growth in the larger Boston metropolitan area. Beeville, Texas, where Chase Field Naval Air Station closed, has a long history of farming and ranching but has recently benefited from an expanding state prison industry. An area’s natural resources also can help economic recovery. In Blytheville, Arkansas, for example, where Eaker Air Force Base closed, the steel industry found a foothold in the late 1980s before the announcement of the base closure and has been a growing presence ever since. The Blytheville area is attractive to the steel companies because of its access to the Mississippi River and a major interstate as well as an available labor pool. Officials from communities surrounding closed bases said that publicizing redevelopment goals and efforts for former bases is key for attracting industry and helping the community gain confidence. Leadership and teamwork among participants at the federal, state, and local levels are essential to reaching agreement on key issues such as property transfer, base reuse, and environmental cleanup. To help communities to successfully transform closing bases into new opportunities, federal agencies have provided over $1.2 billion in direct financial assistance to areas affected by base closures. This assistance was in numerous forms— planning assistance to help communities determine how they could best develop the property, training grants to provide the workforce with new skills, and grants to improve the infrastructure on bases. Finally, the redevelopment of base property is widely viewed as a key component of economic recovery for communities experiencing economic dislocation due to jobs lost from a base closure. The closure of a base makes buildings and land available for use that can generate new economic activity in the local community. Our analysis of selected indicators shows that the economies of many BRAC-affected communities compare favorably to the overall U.S. economy. We used unemployment rates and real per capita income growth rates as broad indicators of the economic health of those communities where base closures occurred during the BRAC rounds. We identified 62 communities surrounding base realignments and closures from all four BRAC rounds for which government and contractor civilian job losses for each were estimated to be 300 or more. Our analysis of calendar year 2000 unemployment rates indicates that the rates for 62 BRAC-affected communities compare favorably with the U.S. rate. Forty-three (or 69 percent) of the 62 communities affected by the recent base closures had unemployment rates at or below the U.S. rate of 4 percent (see fig. 3). Attachment II compares the 2000 unemployment rate for each of the BRAC-affected locations, grouped by east and west of the Mississippi River for ease of presentation, to the U.S. rate. The unemployment situation is about the same as we reported in 1998. At that time, 42 (68 percent) of the 62 communities had unemployment rates at or below the then U.S. rate of 5.1 percent. For example, the 2000 unemployment rate for the Salinas area surrounding the former Fort Ord, California, dropped to 9.7 percent from 10.3 percent in 1997. Similarly, the rate for the communities near the former Naval Station and Shipyard, Charleston, South Carolina, decreased to 3 percent from 4 percent in 1997. For all BRAC-affected communities we examined with a higher average 2000 unemployment rate, only two—the Merced area surrounding the former Castle Air Force Base, California, and the Blytheville area surrounding the former Eaker Air Force Base, Arkansas—have had double-digit unemployment rates: 14.1 percent and 10.1 percent, respectively. The Merced area also had double-digit unemployment when we reported on this issue in December 1998. Local officials told us that these locations have historically had high unemployment rates, partly because of the large seasonal employment associated with the local agriculture. In a 1996 RAND National Defense Research Institute report on the effects of military base closures on three local communities, RAND concluded that “while some of the communities did indeed suffer, the effects were not catastrophic (and) not nearly as severe as forecasted.” RAND’s analysis showed that the burden of defense cutbacks such as base closures tended to fall more on individuals and companies rather than on the community. For example, a base with a large civilian employment might displace many workers, but the overall employment rate of the community might remain relatively stable. Finally, RAND demonstrated that economies of all types of communities can also be affected by longer term patterns of population and economic growth; the redirection of military retirees’ retail and medical expenditures from the base to the local community; and the withdrawal of working spouses from the local labor market, which frees up jobs for other local citizens. In a 2000 Massachusetts Institute of Technology report for the Department of Commerce, the Institute noted that military-base employment losses did not necessarily translate into employment losses in counties where bases were closed. In its analysis of 51 counties containing 52 closed bases, 21 counties (or 41 percent) in 1997 had greater post-closure job growth rates relative to the national average, and in 6 of those counties the job growth was more than twice the national average. In the remaining 30 counties, job growth was lower than the national average, of which 7 counties had job losses. The Institute concluded that redevelopment of closed bases will take at least 20 years or more and that time is needed to identify promising companies, persuade them to locate on the closed base, find a suitable site, negotiate an acceptable lease or sale, recruit qualified workers, and find jobs that match worker skills and expectations. As with unemployment rates, our analysis indicates that average annual real per capita income growth rates for 62 BRAC-affected communities compare favorably with the U.S. average rate. During 1996-99, 33 communities (or 53 percent) had average annual per capita income growth rates that were at or above the U.S. average rate of 3.03 percent (see fig. 4). Another seven communities (or 11 percent) had average annual per capita income growth rates that were in close proximity to the U.S. average rate of 3.03. Attachment III compares the 1996-99 average annual real per capita income growth rate for each of the BRAC-affected locations, grouped by east and west of the Mississippi River for ease of presentation, to the U.S. average rate. During the same period, the rate for communities near the former Fort Ord, California, increased 6.4 percent from the $27,620 rate in 1997 to $29,393. In addition, the rate for communities near the former Naval Station and Shipyard, Charleston, South Carolina, increased 9 percent from the $21,092 rate in 1997 to $22,944. Currently, all of the 29 communities below the U.S. average rate had positive average annual per capita income growth rates. In an analysis of 51 counties containing 52 closed bases, the Massachusetts Institute of Technology reported that 31 counties (or 61 percent) had per capita income greater in 1997 relative to the national rate than it was at the time of the BRAC closing announcement. However, the counties containing the four closed naval shipyards—Mare Island and Long Beach Naval Shipyards, California; Philadelphia Naval Shipyard, Pennsylvania; and Charleston Naval Shipyard, South Carolina—did not fare well. In addition, 10 of the 20 counties that lost income relative to the national rate were in California and most of the other counties that lost income were rural, such as Aroostook County, Maine; Clinton County, New York; Bee County, Texas; and Tooele County, Utah. In our 1998 report, we augmented our use of broad economic indicators with visits to selected communities to learn firsthand how they had fared economically after base closures. We reported that in general, the communities surrounding the six major base closure sites we visited suffered initial economic disruption, including decreased retail sales; declining residential real estate values; and social losses felt in local schools, churches, and organizations. However, we also reported that these initial losses were followed by recovery. We are currently updating this information and plan to visit several of the communities we visited previously and additional communities to obtain more in-depth information on their economic recovery. We recently revisited communities surrounding two of the major base closures—Beeville, Texas, near the former Chase Field Naval Air Station, and Merced and Atwater, California, near the former Castle Air Force Base—that we reported on in 1998. As attachment IV discusses in more detail, we found that each community has continued its economic recovery from the base closures, but some problems still exist. As of August 20, 2001, DOD reported that it has essentially implemented all of the BRAC Commissions’ 451 recommendations. Despite timely completion of actions on the recommendations, transfer of unneeded base property is only partially complete. DOD has decided how to dispose of about 99 percent of the 518,300 acres that the military services and components reported they do not need. DOD data as of June 2001 indicate that 229,800 acres (or 44 percent) will be retained by the federal government, 285,900 acres (or 55 percent) of the unneeded BRAC property will be transferred to nonfederal entities, and the disposition of 2,600 acres (less than 1 percent) has not yet been determined. About 206,800 acres (or 90 percent) of the federally retained property are being transferred to the Departments of the Interior and Justice for uses such as wildlife habitats and detention centers. DOD intends to retain about 14,500 acres (or 6 percent) for, among other things, administrative space for the Defense Finance and Accounting Service. DOD is actually retaining more property than this because, in many cases, during the BRAC process the property of an active military base was turned over to a reserve component without being declared excess. In our 1998 report, we noted that DOD data indicated that over 330,000 acres of BRAC property were being retained for use by the reserve components. While DOD has plans to transfer most of its unneeded property, fewer actual transfers than planned have taken place. In our December 1998 report, we noted that progress in transferring the title of BRAC properties to users had been affected by many factors. These factors included the iterative process of preparing site-specific reuse plans, preparing conveyance documentation, and environmental cleanups. As of June 2001, DOD data indicate that title to 212,400 acres (or 41 percent) of the 518,300 acres of unneeded property had been transferred to federal and nonfederal entities. Specifically, title to about 106,600 acres had been transferred to federal agencies and title to about 105,800 acres had been transferred to nonfederal entities. According to DOD officials, the transfer of the remainder of the property for federal agencies and nonfederal entities will be completed by 2007 and 2029, respectively. As discussed previously, the disposition of 2,600 acres has not yet been determined. While awaiting property transfers, communities and others can sometimes begin using base property through leasing. Of the 305,900 acres for which title has not been transferred, about 48,200 acres (or 16 percent) have been leased. According to community representatives, leasing is a useful interim measure to promote reuse and job creation. As noted earlier, Congress authorized the transfer of property prior to the completion of environmental cleanup, but the authority has been used in a limited number of instances and its implementation is still evolving. Program officials believe this approach is a powerful tool to help local communities obtain early ownership and control of property, thereby allowing for earlier reuse than otherwise possible. At the end of fiscal year 2000, DOD had transferred 10 properties at 8 BRAC-affected installations using the early transfer authority. The properties range from 12 acres to about 1,800 acres. In most of the transfers, DOD has continued the cleanup activities, but in some cases the new property owner is cleaning up the property. The advantage to the recipient in performing the cleanup is the ability to integrate cleanup and redevelopment activities, thus saving time and costs and gaining greater control for both activities. While DOD has made progress and has established numerous initiatives to expedite environmental cleanups, many cleanup activities remain. As of September 30, 2000, 99 of 204 BRAC installations requiring cleanup had cleanups under way or completed. DOD estimates that 80 additional installations will have cleanups under way or completed by fiscal year 2003, and the remaining 25 installations will have cleanups under way or completed during fiscal years 2004 through 2015. However, DOD projects that long-term monitoring will be required at some sites well after 2015 to ensure those cleanup actions are effective. Several factors have affected the progress of DOD’s environmental cleanup activities. According to DOD officials, changes in the anticipated use of an installation have occasionally created stricter cleanup requirements that have increased the cost and time needed to put remedies in place. For example, a site on Fort Ord, California, which was originally planned to have limited reuse, is now slated to become a residential area, necessitating more extensive environmental and unexploded ordnance inspection and cleanup. DOD also continues to complete investigations and conduct long-term monitoring at contaminated sites, which can reveal additional previously unknown contamination. For example, at a site on McClellan Air Force Base, California, the Air Force discovered traces of plutonium mixed in with radium-contaminated rags and brushes. The intensive procedures needed to deal with plutonium have increased the estimated cost from less than $10 million to $54 million and extended scheduled completion to 2034. Of the $22 billion estimated cost for implementing the BRAC program through fiscal year 2001, about $7 billion, or 32 percent, is associated with base closure environmental activities. Furthermore, DOD estimates that $3.4 billion will be required after fiscal year 2001 for environmental activities (see fig. 5). This is a $1 billion increase over the $2.4 billion environmental cost estimate DOD reported in fiscal year 1999. DOD officials attributed this increase primarily to the inclusion of cleanup costs for unexploded ordnance, delays in the program, the refinement of cleanup requirements and DOD’s cost estimates, and the use of more stringent cleanup standards due to changes in how closed installations will be used. As noted in our July 2001 report, DOD has reported that the vast majority of its BRAC environmental cleanup costs would have been incurred whether or not an installation is impacted by BRAC. DOD acknowledges, however, that environmental costs under the BRAC process may have accelerated in the shorter term. Others suggest that in some instances BRAC-related environmental cleanups may be done more stringently than would have been the case had the installation remained open. However, the marginal difference is not easily quantified and depends largely on the final use of the closed installation. The Air Force’s base closure environmental activities account for 52 percent of the total estimated costs after fiscal year 2001. About $417 million of the Air Force’s approximated costs of $1.8 billion is for the cleanup of the former McClellan Air Force Base. Navy officials indicated that they were revising the $808 million cost estimate for base closure environmental activities and believe that the estimate could increase by $142 million. Continuing negotiations with federal and state regulators is the major cost driver, as regulators have requested the Navy to apply more stringent standards for cleanups than originally planned. For example, during the closure of Dallas Naval Air Station, Texas, the state and local regulators asked the Navy to clean former industrial sites to residential levels, which required more extensive cleanup and increased cost. Army officials are also revising their $796 million cost estimate for base closure environmental activities due to better estimates for restoration of land with unexploded ordnance. They estimate that removal of unexploded ordnance may account for $308 million of the Army’s revised estimate, of which $254 million is estimated to remove unexploded ordnance from two locations—the former Fort Ord, California, and the former Camp Bonneville, Washington. Still, Army officials said that their cost estimates for base closure environmental activities beyond fiscal year 2001 could change based on the proposed land use. For example, the Army estimates that it will cost about $77 million to remove unexploded ordnance from the former Camp Bonneville so that it can be used as a park. However, officials said that if two-thirds of the land, which is heavily wooded, became a conservation area with institutional controls that limit public access, cleanup costs could be reduced significantly. DOD has implemented a Fast-Track Cleanup Program to speed the recovery of communities affected by the BRAC program. A key element of the cleanup program is the cooperative relationship between state and federal regulators and the installation environmental program manager. This team approach is intended to reduce the time to establish and execute cleanup plans. The program also seeks better integration of cleanup efforts with the community’s plan for using the properties, and it may also help to contain some environmental cleanup costs. The Congressional Budget Office reported in 1996 that DOD could reduce costs by delaying expensive cleanup projects if contamination poses no imminent threat and it lacks cost-effective cleanup technologies. The Office also stated that in the long run, new cleanup technologies represented the best hope of addressing environmental problems with available DOD funds. We have also reported that there are various options for reducing these costs. In 1996, we noted that cleanup costs at closing bases could be reduced by deferring or extending certain cleanup actions, adopting more cost-effective cleanup technologies, and sharing costs with the ultimate user of the property. We also reported that these options might adversely affect programmatic goals, thereby presenting decisionmakers with difficult choices in developing a cost-effective environmental program. - - - - - This concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further contacts regarding this statement, please contact Barry W. Holman at (202) 512-8412 or Mark Little at (202) 512-4673. Individuals making key contributions to this statement include Michael Kennedy, James Reifsnyder, Charles Perdue, Robert Poetta, Arnett Sanders, John Lee, Tom Mahalek, and John Buehler. Military Base Closures: DOD’s Updated Net Savings Estimate Remains Substantial (GAO-01-971, July 31, 2001). Environmental Liabilities: DOD Training Range Cleanup Cost Estimates Are Likely Understated (GAO-01-479, Apr. 11, 2001). Military Base Closures: Unexpended Funds Raise Questions About Fiscal Year 2001 Funding Needs (GAO/NSIAD-00-170, July 7, 2000). From Barracks to Business: The M.I.T. Report on Base Redevelopment, Economic Development Administration, Department of Commerce, March 2000. Military Base Closures: Potential to Offset Fiscal Year 2000 Budget Request (GAO/NSIAD-99-149, July 23, 1999). Military Bases: Status of Prior Base Realignment and Closure Rounds (GAO/NSIAD-99-36, Dec. 11, 1998). Military Bases: Review of DOD’s 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17, Nov. 13, 1998). Review of the Report of the Department of Defense on Base Realignment and Closure, Congressional Budget Office, July 1, 1998. Audit Report: Cost and Savings for 1993 Defense Base Realignments and Closures, Department of Defense Office of the Inspector General (Report No. 98-130, May 6, 1998). The Report of the Department of Defense on Base Realignment and Closure, Department of Defense, April 1998. Defense Infrastructure: Challenges Facing DOD in Implementing Reform Initiatives (GAO/T-NSIAD-98-115, Mar. 18, 1998). Base Realignment and Closure 1995 Savings Estimates, U.S. Army Audit Agency (Audit Report AA97-225, July 31, 1997). Military Bases: Lessons Learned From Prior Base Closure Rounds (GAO/NSIAD-97-151, July 25, 1997). The Effects of Military Base Closures on Local Communities: A Short- Term Perspective, RAND National Defense Institute, 1996. Military Base Closures: Reducing High Costs of Environmental Cleanup Requires Difficult Choices (GAO/NSIAD-96-172, Sept. 5, 1996). Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). As shown in figure 6, 16 (67 percent) of the 24 BRAC-affected local locations west of the Mississippi River had unemployment rates less than or equal to the U.S. rate of 4 percent in 2000. The other eight locations had unemployment rates greater than the U.S. rate. As shown in figure 7, 27 (or 71 percent) of the 38 BRAC-affected local locations east of the Mississippi River had unemployment rates less than or equal to the U.S. rate of 4 percent in 2000. The other 11 locations had unemployment rates greater than the U.S. rate. As shown in figure 8, 12 (or half) of the 24 BRAC-affected local locations west of the Mississippi River had average annual per capita income growth rates that were greater than the U.S. average growth rate of 3.03 percent during 1996-99. The other 12 locations had rates below the U.S. average rate. As shown in figure 9, 21 (or 55 percent) of the 38 BRAC-affected local locations east of the Mississippi River had average annual per capita income growth rates that were greater than or equal to the U.S. average growth rate of 3.03 percent during 1996-99. The other 17 locations had rates below the U.S. average rate. In 1998, we reported that in general, the communities surrounding the six major base closure sites we visited suffered initial economic disruption, including decreased retail sales; declining residential real estate values; and social losses felt in local schools, churches, and organizations.However, we also reported that this initial period was followed by recovery. We recently revisited communities surrounding two of the major base closures—Beeville, Texas (Chase Field Naval Air Station), and Merced and Atwater, California (Castle Air Force Base), and found that both have continued their economic recovery from the base closures but still have some problems. Table 1 shows how the closure of Chase Field Naval Air Station in February 1993 affected the surrounding communities and activities, as indicated by local officials during our visits in 1998 and 2001. In March 1998, DOD’s Office of Economic Adjustment reported that 1,290 new jobs had been created from the community’s reuse of the former naval air station. However, by October 2000, the reported number of jobs created dropped to 1,169. At the time of our 2001 visit, the former air station had only one tenant, who maintains the facility instead of paying rent under a negotiated 10-year lease agreement. According to local officials, the most important factor contributing to economic recovery was the decision of the Texas Department of Criminal Justice to locate a prison complex on the former air base. The medium- security prison, completed in 1994, occupies less than a third of the former base and employs about 1,200 people. Without this prison and another prison complex built earlier adjacent to the former base, local officials believe Beeville would not have survived as a community. Table 2 shows how the closure of Castle Air Force Base in September 1995 affected the surrounding communities and activities, as indicated by local officials during our visits in 1998 and 2001. DOD’s Office of Economic Adjustment reported an increase of 325 new jobs as a result of the redevelopment of Castle Air Force Base from 1998 to 2000. At the time of our 2001 visit, Cingular Wireless—the largest tenant on the former air base—employed 1,200 people at its call center. However, on July 25, 2001, Cingular announced that it was cutting 400 jobs at its Castle site because the number of calls and the size of the workforce had outgrown the center’s space. In addition, 42 other tenants on the former air base employed about 310 individuals. | This testimony reviews the progress of the Department of Defense's (DOD) base realignments and closures (BRAC) in 1988, 1991, 1993, and 1995 and the implementation of the BRAC Commissions' recommendations. Although some communities surrounding closed base areas are faring better than others, most are recovering from the initial economic impact of base closures. The short-term impact can be very traumatic for BRAC-affected communities, but the long-term economic recovery of communities depends on several factors, including the strength of the national and regional economies and successful redevelopment of base property. Key economic indicators show that the majority of communities surrounding closed bases are faring well economically in relation to U.S. unemployment rates and show some improvement since the time closures began in 1988. Implementation of BRAC recommendations is essentially completed, but title to only 41 percent of unneeded base property has been transferred. As of August 20, 2001, DOD reported that it has essentially implemented all of the BRAC Commission's 451 recommendations. Although DOD has made progress and established numerous initiatives to expedite cleanup, many cleanup activities remain. Cleaning up environmental contamination on BRAC-affected installations has proven to be costly and challenging for DOD and can delay the transfer of the title of property to other users. DOD expects to continue its environmental efforts well beyond fiscal year 2001, the final year of the base closure implementation authority. |
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Congress passed the Klamath River Basin Fishery Resources Restoration Act (the Act) in October 1986 to assist in restoring the Klamath River’s fish resources. The Act authorized $21 million to be appropriated to the Department of the Interior, and it charged the Secretary of the Interior with implementing a 20-year program to designate and restore a conservation area within the Klamath River Basin. The Secretary, in turn, delegated responsibility for implementing the Klamath River Basin Conservation Area Restoration Program (Restoration Program) to the Director of the U.S. Fish and Wildlife Service (FWS), a bureau-level unit within the Department of the Interior. To facilitate implementation and management of the Restoration Program, FWS established under its Portland, Oregon, Regional Office a new field office in Yreka, California. The Act also established the Klamath Fishery Management Council (Management Council) to monitor the fish population and recommend annual fish harvest limits, and the Klamath River Basin Fisheries Task Force (Task Force) to advise and assist the Secretary regarding implementation of the Restoration Program. To implement these provisions in the Act, the Secretary chartered the Management Council and the Task Force as federal advisory committees. Neither the Management Council nor the Task Force receives or spends funds. Since their inception, the Fish and Wildlife Office (FWO) at Yreka, California, has provided the financial resources to cover the Management Council’s and the Task Force’s operational expenses. In addition, staff from the Yreka FWO, along with staff from the State of California’s Department of Fish and Game, have provided technical and administrative support to the Management Council and the Task Force as required by the Act. In accordance with its charter, the Klamath Fishery Management Council functions only in an advisory capacity and reports to the Secretary of the Interior. The Management Council is responsible for making recommendations to various federal, state, local, and Indian tribal authorities regarding fish-harvesting regulations. In addition, the Management Council was assigned responsibility to establish a comprehensive long-term plan and policy for the management of the in- river and ocean harvesting that affects or may affect Klamath and Trinity River Basin anadromous fish populations. The Management Council’s long-term plan, published in 1992, lays out goals and objectives for fish populations in the Conservation Area and strategic plans for meeting the goals and objectives. As prescribed by the Act, the Management Council is composed of 11 members, including representatives appointed by the Governors of California and Oregon, Hoopa Valley Business Council, non-Hoopa Indians, the Secretary of the Interior, and the Secretary of Commerce. The term of a member is 4 years. The Management Council usually meets three or four times a year (usually in February, March, April, and October) at various locations in California and Oregon. The Management Council publishes notices of meetings in the Federal Register, posts its meeting agenda on the Yreka FWO Internet Web page 2 to 3 weeks before each meeting, and invites the public to attend its meetings. From fiscal year 1987 through fiscal year 2004, the Management Council held 73 meetings. Each meeting lasts from 3 to 5 days. The members discuss ongoing fish population monitoring activities. They also discuss and make recommendations on the regulation of ocean harvesting, recreational harvesting, and harvesting in the Conservation Area by the Hoopa Valley Indian Tribe and by non-Hoopa Indians. The Management Council’s recommendations must be consistent with its long-term plan and policy and must pass the Management Council by unanimous vote. The public is invited to attend all Management Council meetings, and public comment periods are scheduled on the agenda throughout the meetings. Sometimes speakers are invited to the meetings to make presentations on fish population studies. The Management Council is provided with biological and statistical expertise by the Technical Advisory Team, a subgroup created by the Management Council, whose membership consists of individuals from entities represented on the Management Council. The Technical Advisory Team advises the Management Council on the status of anadromous fish stocks and the impacts of fishery management options. This includes the development of annual projections of fish stock size and development of fishery models for use in the management of fish populations. The Act provides for a 16-member Klamath River Basin Fisheries Task Force to advise and assist the Secretary of the Interior in the development and implementation of the Restoration Program. The Task Force consists of members who represent a broad range of stakeholder interests from throughout the Klamath River area. Members are appointed by, and represent, the Governors of California and Oregon; the Secretary of the Interior, the Secretary of Commerce, and the Secretary of Agriculture; the California counties of Del Norte, Humboldt, Siskiyou, and Trinity; Klamath County, Oregon; the Hoopa Valley, Karuk, Yurok, and Klamath Tribes; in- river sport anglers; and commercial salmon fishermen. According to its charter, the Task Force also functions only in an advisory capacity and reports to the Secretary of the Interior. The charter states that the Task Force has four objectives: (1) to assist the Secretary of the Interior in the formulation, coordination, and implementation of the Restoration Program; (2) to assist and coordinate its activities with federal, state, local government, and private anadromous fish restoration projects; (3) to conduct any other activity necessary to accomplish the objectives of the Restoration Program; and (4) to act as advisor to the Management Council. The Task Force works by consensus to coordinate restoration planning, recommend restoration project proposals for funding, and express opinions on issues affecting the Klamath River Basin. In 1991, in conjunction with an independent contractor, the Task Force developed the Long Range Plan for the Restoration Program. The Task Force usually meets three times per year (in February, June, and October) at various locations in California and Oregon. Like the Management Council, the Task Force publishes notices of meetings in the Federal Register, posts its meeting agenda at the Yreka FWO Internet Web page 2 to 3 weeks before each meeting, and invites the public to attend its meetings. Each meeting session lasts from 2 to 3 days. The members discuss needs for managing Klamath River fish, ongoing and proposed Klamath River Basin restoration projects, and the technical information needs of the Management Council. They also discuss and make recommendations regarding the funding of restoration projects. Each spring the Task Force, in conjunction with FWS, issues a Request for Proposals for restoration projects to be funded in the following fiscal year with Restoration Program funds. When the project proposals are received, they are evaluated for technical merit and scored by the Task Force’s Technical Work Group, using criteria published in the Request for Proposals. Then, using the amount of expected funding for the following year as a guide for determining how many new restoration projects can be funded, the Technical Work Group presents its analysis to the entire Task Force. At its June meeting, the Task Force considers the Technical Work Group’s analysis, and by unanimous vote, selects the project proposals it will recommend to the Secretary of the Interior for funding in the next fiscal year. Approximately 25 projects were funded annually for fiscal years 2000 through 2004. The Yreka FWO was established in fiscal year 1987 to facilitate implementation and management of the Restoration Program. The Yreka FWO is involved in administering several other FWS programs and activities, but the Restoration Program comprises about one-half of the office’s annual funding. The Yreka FWO has 1 full-time contract employee who performs administrative functions and 15 employees: a field supervisor, an assistant field supervisor, 2 supervisory biologists, 6 staff biologists, 1 administrative supervisor, 2 administrative staff, and 2 part- time staff biologists. Eight of these individuals provide technical and administrative services to the Management Council and the Task Force, perform restoration project management functions, or have Restoration Program administration duties. Two of the employees (a supervisory biologist and one part-time staff biologist) spend almost all of their time on Restoration Program activities. The Field Supervisor, three administrative employees, one staff biologist, and the contract employee spend part of their time on Restoration Program activities. The assistant field supervisor, a supervisory biologist, five staff biologists, and one part-time staff biologist do not spend any of their time on Restoration Program activities. Until fiscal year 2004, Yreka FWO was supervised by FWS’s Portland Regional Office, but it is now supervised by FWS’s California-Nevada Operations Office. There are a number of uncertainties in determining the amount of funds received by the Restoration Program for fiscal years 2000 through 2004. First, FWS’s appropriations do not contain a discrete line item for the Restoration Program. This prevented us from doing any independent verification of the appropriated amounts. Second, FWS’s restoration project database does not distinguish between cash and noncash contributions provided to the restoration project by project participants. The restoration project database shows a single amount, called the cost- share amount, which is the sum of all contributions made by the project participant to the project. For some projects, we could determine the amount of cost share that consisted of cash and the amount that consisted of noncash by looking in the contract file at the project agreement, or at supporting documents, or even at the final report if the project had been completed. However, for some restoration projects, even those documents did not contain adequate information for us to make a distinction between cash and noncash contributions. As a result, we were unable to determine how much of contributions made by project participants was cash and how much was noncash. Third, Restoration Program officials did not routinely perform independent analysis to determine the value that should be assigned to noncash contributions as called for by good financial management practices. Rather, according to FWS officials, they typically accepted the values assigned by the project participant as long as the values appeared reasonable. They did this for various reasons, including their lack of formal criteria for making such evaluations, and their uncertainty about their authority to question the values. Therefore, the composition and value of cost-share amounts maintained in FWS records are subject to question. For the 5 years from the beginning of fiscal year 2000 through the end of fiscal year 2004, according to FWS officials, the Klamath River Basin Conservation Area Restoration Program received about $9.8 million in cash and noncash contributions: almost $6.3 million from federal sources and almost $3.6 million from nonfederal sources. The federal funds included about $5.1 million in appropriations derived from FWS’s Resource Management appropriation account,which includes a lump-sum appropriation that FWS allocates to various program activities, including the Fisheries Program. FWS operates several subprograms within the Fisheries Program, including the Fish and Wildlife Management Program, which administers several subactivity program elements, including Anadromous Fish Management. During the 5 years under review, FWS allocated about $5 million in appropriations to the Klamath River Basin Conservation Area Restoration Program established under the Klamath River Basin Fishery Resources Restoration Act. In addition, according to FWS officials, FWS provided about $135,000 more to the Restoration Program during the 5-year period from appropriations FWS has allocated to support the Anadromous Fish Management subactivity of the Fisheries Program’s Fish and Wildlife Management Program. Also, according to FWS records, the Restoration Program benefited during that same time period from the almost $1.2 million in cash and noncash contributions from federal entities that participated in restoration projects. The almost $3.6 million from nonfederal sources came to the Restoration Program as cash and noncash contributions from nonfederal entities that participated in restoration projects, according to FWS records. See table 1 for a year-by-year breakdown of the Restoration Program funding, based on unaudited financial information provided by FWS officials. In addition to gathering financial information on the Restoration Program’s sources of funds for fiscal years 2000 through 2004, we gathered the same information going back to the passage of the Act in 1986. Specifically, from the beginning of fiscal year 1988 through June 2005, FWS records show that the Klamath River Basin Conservation Area Restoration Program received over $17.0 million in funding from the Resource Management appropriations that FWS has allocated for the Restoration Program established by the Klamath River Basin Fishery Resources Restoration Act and another $188,000 from FWS’s Resource Management appropriations that FWS allocated for other activities funded by the Fisheries Program. In addition, according to FWS officials, the Restoration Program benefited during that same time period from about $1.7 million in cash and noncash contributions from federal entities that participated in restoration projects and from $5.8 million in cash and noncash contributions from nonfederal entities that participated in restoration projects. Although the Act was passed on October 27, 1986, the Restoration Program did not receive designated appropriations for fiscal year 1987. However, some expenditures for the Restoration Program, amounting to about $57,000, were funded during fiscal year 1987 from appropriations available to FWS for Fisheries Program expenditures. According to FWS records, the Restoration Program funded 126 restoration projects during fiscal years 2000 through 2004, in addition to supporting the operations of the Management Council and the Task Force, providing for FWS project management services, paying for program administration expenses, and contributing to the operational costs of FWS’s Yreka field office, Portland regional office, and Washington, D.C. headquarters office. Of the about $5.1 million received by the Restoration Program from FWS’s fiscal years 2000 through 2004 Resource Management appropriations, FWS’s records show about $2.9 million, or 57 percent, went to restoration projects; about $615,000, or 12 percent, was used by FWS to manage restoration projects, including planning, contracting, tracking agreements, complying with environmental requirements, and providing technical assistance to projects; about $1.1 million, or 23 percent, was spent on program administration, including administrative and technical support provided by FWS to the two federal advisory committees created by the Act; and the remaining about $442,000, or 9 percent, was used for overhead expenses incurred at the FWS headquarters and regional office levels. In addition, the $4.7 million contributed to the Restoration Program by federal and nonfederal project participants that participated in restoration projects remained in the control of the project participants. The project participants used the $4.7 million of cash and noncash contributions on those restoration projects in which they participated. We were not able to obtain adequate information on the project participants’ contributions to describe the purposes for which those amounts were spent. See table 2 for a year-by-year breakdown of the purposes and amounts of Restoration Program expenditures paid from FWS appropriations. We used the expenditure categories in table 2 to report how FWS’s Resource Management appropriations were spent because they represent the major functions for which the Restoration Program spends funds and, with the exception of overhead, are the major categories FWS officials use to track the Restoration Program budget. However, to fulfill our engagement objectives, we also sought to provide information about what amounts of the FWS’s Resource Management appropriations received by and for the Restoration Program from the beginning of fiscal year 2000 through the end of fiscal year 2004 were spent for the purposes of restoration projects, travel reimbursements, administrative expenses, overhead, and technical support. Restoration projects. Table 2 shows that almost $2.9 million was committed to restoration projects from FWS’s Resource Management appropriations for fiscal years 2000 through 2004. Combining that amount with the $4.7 million in cash and noncash contributions provided to restoration projects by project participants brings the total invested by the Restoration Program directly to restoration projects during the 5-year period to a little over $7.6 million. Of the $2.9 million in project funding from FWS’s Resource Management appropriations, the Restoration Program provided almost $700,000 to three federal entities to help fund 26 restoration projects carried out by those federal entities, and provided almost $2.2 million to 18 nonfederal entities to help fund 100 restoration projects carried out by those nonfederal entities. The three federal entities that carried out the 26 restoration projects are the same ones that brought cash and noncash contributions totaling almost $1.2 million to the Restoration Program, and the 18 nonfederal entities that carried out the 100 restoration projects are the same ones that brought cash and noncash contributions totaling almost $3.6 million to the Restoration Program. Thus, according to FWS records, total investment from federal and nonfederal sources in restoration projects amounted to a little over $7.6 million that funded 126 restoration projects from the beginning of fiscal year 2000 through the end of fiscal year 2004. It should be recognized, however, that in addition to Restoration Program projects, other restoration projects are undertaken in the Klamath River Basin with funding from FWS through its other programs; and other restoration projects still are undertaken in the Klamath River Basin with funding from other federal entities, the states of California and Oregon, and other nonfederal entities. Travel reimbursement expenses. Travel reimbursement expenses are contained in each of three expenditure categories (project management, program administration, and support of federal advisory committees) shown in table 2, but they can be segregated. Specifically, total Restoration Program travel reimbursement expenses amounted to about $200,000 for the 5-year period, for an average of about $40,000 per year. This includes travel by members of the two federal advisory committees, federal staff who support the committees, and FWS officials who perform project management and program administration activities. Program administration expenses. Table 2 shows program administration expenses for the 5-year period of about $350,000. Table 2 also shows expenditures of about $800,000 in support of the two federal advisory committees. Based on our discussions with FWS officials, we consider the expenditures made in support of the federal advisory committees to also be administrative expenses for the Restoration Program. Summing the amounts for those two categories produces a total of about $1.1 million for Restoration Program administrative expenses during fiscal years 2000 through 2004. Overhead expenses. To provide information about what amounts of the funds received by and for the Restoration Program from the beginning of fiscal year 2000 through the end of fiscal year 2004 were spent for the purposes of overhead expenses, we examined the use of Restoration Program funds at the FWS Washington, D.C., office level, the FWS regional office level, and the Yreka FWO level. Each year during the 5-year period, the FWS headquarters in Washington, D.C., received varying amounts of the Restoration Program appropriations for “Cost Allocation Methodology,” a process through which rent and other FWS administrative costs are shared by the programs. As can be seen in table 2, we considered the amount received by FWS headquarters, about $216,000, to be Restoration Program overhead. The Portland Regional Office oversaw the operations of the Yreka FWO for most of fiscal years 2000 through 2004 and during the first 4 of those years it received a total of about $227,000 of Restoration Program appropriated funds. According to an FWS official, an 8 percent assessment is applied by the regional office to all Fisheries Program funds and used to pay for office management, staff expertise, and support costs, including data management; program oversight of the field office; budget and finance services; human resources, external affairs, and employee assistance services; as well as development and implementation of fisheries policies, operating plans, evaluation methods, and administrative procedures for field offices. Again, as seen in table 2, we considered the amount received by the FWS regional office, about $227,000, to be Restoration Program overhead. To identify any Restoration Program overhead expenses incurred at the Yreka FWO level, we analyzed the various cost categories maintained by Yreka FWO officials and the office expenses that are allocated to the Restoration Program. After discussing our analysis with the Yreka FWO officials, we decided that Restoration Program overhead incurred at the Yreka FWO level could best be represented by four categories of expenses. During fiscal years 2000 through 2004, the amounts of these expenses allocated to the Restoration Program by FWS totaled about $48,000. This amount is not shown separately in table 2 because, like the travel expenses category, components of this amount are contained in each of three expenditure categories (project management, program administration, and support of federal advisory committees). Adding together the Restoration Program overhead incurred at each of the three FWS organizational levels (almost $216,000 at the FWS Washington, D.C., office level; almost $227,000 at the FWS regional office level; and about $48,000 at the Yreka FWO level), we found that Restoration Program overhead was about $491,000 during fiscal years 2000 through 2004. Technical support expense. We also attempted to provide information about what amounts of the funds received by and for the Restoration Program from the beginning of fiscal year 2000 through the end of fiscal year 2004 were spent for technical support. As provided for in the Act, staff from the Yreka FWO, along with staff from the State of California’s Department of Fish and Game, provide technical and administrative support to the Management Council and the Task Force. The technical support from FWS comes primarily from three staff: the supervisory biologist and the part-time staff biologist in the Yreka FWO, who spend almost all of their time on Restoration Program activities, and the staff biologist in the Yreka FWO, who spends part of his time on Restoration Program activities. FWS is reimbursed from Restoration Program funds for the portion of FWS staff salaries that is attributable to providing administrative and technical support services to the two federal advisory committees. The State of California is not reimbursed for its employees’ salaries for the time they spend providing administrative and technical support to the committees. Neither FWS officials nor the Restoration Program’s representatives from the State of California could provide us with estimates of the value of technical support they provide. In addition to the support provided by FWS and the State of California, both the Task Force, through its Technical Work Group, and the Management Council, through its Technical Assistance Team, receive technical assistance from many of the entities represented by the Task Force members and the Management Council members, but information was not available on the value of those technical services either. According to FWS officials, about $800,000 has been used to pay for the committees’ operating costs from the beginning of fiscal year 2000 through the end of fiscal year 2004, a yearly average of about $160,000. The two committees’ operating costs are funded from FWS’s Resource Management appropriations. Officials in FWS’s Yreka, California, field office, who administer the Restoration Program, receive and expend the funds that pay for the committees’ operating costs. They provided us with information that shows that the approximately $800,000 expended for the committees’ operating costs was spent for salaries of federal staff (about $520,000); travel for committee members and federal staff (about $120,000); and office costs, including vehicles, supplies, copies, and meeting rooms (about $150,000). Neither of the advisory committees makes expenditures for restoration projects, and as mentioned earlier, we consider all expenditures for the operations of the advisory committees to represent Restoration Program administrative expenses. The Task Force and the Management Council submit Federal Advisory Committee Act (FACA) reports each year showing expenditures related to their operations. We obtained FACA reports produced by FWS officials for the Task Force and the Management Council for fiscal years 2000 through 2004 for purposes of determining the types and amounts of expenditures made by the Task Force and the Management Council. However, after conducting some analytical testing procedures, and discussing the FACA report financial information with the Designated Federal Officers for the two federal advisory committees, we concluded that due to changes in interpretations of the reporting instructions, the FACA data were not reported on a consistent basis during the 5-year period. For example, some amounts contained in the FACA reports for fiscal years 2001 and 2002, but not for the other years, likely included some Restoration Program-related expenses incurred and paid by the Department of Commerce and the Department of Agriculture. The Klamath River Basin Fishery Resources Restoration Act imposes several requirements upon the Secretary of the Interior as part of the Secretary’s responsibility for implementing the Restoration Program. It also places certain limitations on the use of funds appropriated under the Act’s authorization. We considered whether the Secretary and the Restoration Program administrators have complied with the Act’s financial- related requirements and limitations. We found that more complete and timely action in complying with the Act’s requirements would better assure that the requirements are fulfilled and that compliance with the Act’s limitations can be reasonably assured only by implementing control mechanisms and record-keeping practices which are not yet in place. In 1987, FWS officials drafted proposed regulations to address the nonfederal match and noncash contribution provisions contained in the Act, but the draft regulations were never formally promulgated. The Act requires that 50 percent of the cost of the development and implementation of the Restoration Program be provided, on a basis considered by the Secretary of the Interior to be timely and appropriate, by one or more nonfederal sources. The Act specifies that for purposes of determining whether 50 percent of the cost is being provided by nonfederal sources, the Secretary of the Interior should include the contributions of state and local governments as long as such contributions do not entail the expenditure of federal monies received by the state or local government. The Act also directs the Secretary to consider as financial contributions by nonfederal sources the value of noncash contributions (that is, services, including volunteer services, and real and personal property) provided by the nonfederal sources for the purposes of implementing the Restoration Program. The Act further requires the Secretary to establish by regulation (1) the training, experience, and other qualifications that volunteers must have in order for their services to be considered as noncash contributions; and (2) the standards under which the Secretary will determine the value of noncash contributions, that is, services, and real and personal property. We found evidence that the Task Force, which is responsible for assisting and advising the Secretary on the development and implementation of the Restoration Program, had extensive discussions regarding the nonfederal match and noncash contribution provisions of the Act, and the need for regulations, during its public meetings in 1987, 1988, and 1989. We also found that FWS officials drafted proposed regulations to address the nonfederal match and noncash contribution provisions during that same time period and that the Task Force reviewed and approved of the draft regulations. However, according to Interior officials, the draft regulations were never formally promulgated because Interior decided it was not necessary to issue separate regulations regarding qualifications for volunteer services and the standards for valuing noncash contributions. The Department of the Interior based this decision, according to the Interior officials, on its determination that existing Interior grants management regulations, which prescribe rules Interior must follow to meet cost-share requirements in federal grants and other federal awards, provided sufficient guidance. Because of Interior’s interpretation, new regulations specific to the Restoration Program were not issued, and FWS officials maintain that it is not necessary to issue any. However, inadequate internal controls impair FWS officials’ abilities to be reasonably assured of compliance with these existing Interior regulations. For example, FWS officials told us that they have not rejected any restoration project proposal due to the proposal’s lack of information on the values assigned or the methods for valuing the proposed noncash contributions, even though our review of project files identified several approved projects whose project documents lacked such information. In addition, FWS officials told us that they typically accept the values assigned to noncash contributions by those who propose projects as long as the values appear reasonable, and that they do not have formal criteria for making this reasonableness evaluation. This lack of reasonable assurance of compliance prevents both congressional overseers, who may seek information about program funding, and Restoration Program administrators from being able to make consistent, reliable decisions about when volunteers’ services should count as noncash contributions and how to value all types of noncash contributions to the Restoration Program. In addition to the potential problems associated with FWS’s current practices related to acceptance of volunteer services as noncash contributions and valuation of noncash contributions, FWS officials have not developed a methodology, or mechanism, for measuring whether 50 percent of the cost of the development and implementation of the Restoration Program is being provided by nonfederal sources. In our discussions with FWS officials, they expressed uncertainty about whether certain nonfederal financial initiatives should be counted toward the cost- share requirement. For example, if the State of California provides funding for restoration projects that have the same goals as the Restoration Program’s projects, but that do not involve any FWS participation, FWS officials are unsure of whether the funding for those projects should be counted toward meeting the nonfederal cost-share requirement. Furthermore, even though expenditures of federal money by a state or local government to carry out the Restoration Program do not qualify for meeting the Act’s criteria that 50 percent of costs be provided from nonfederal sources, FWS officials have not developed a methodology for determining whether state or local government contributions to the Restoration Program actually constitute expenditure of federal money for purposes of the Act’s cost-share provision. Without having established such methodologies, FWS officials cannot determine whether the Restoration Program is in compliance with the nonfederal cost-share provision of the Act. FWS officials have requested and collected limited financial data on each restoration project funded by the Restoration Program. For example, FWS’s Request For Proposals (RFP) for restoration projects to be funded during fiscal year 2004 states: “The Klamath Act recognizes in-kind contributions by volunteers as contributions to the Klamath Restoration Program.” However, our review of documents in FWS’s project files, including project proposals, proposed budgets, project agreements, and final reports, showed that the documents often do not contain detailed information needed to determine (1) the amount of cash contribution, (2) the type of noncash contribution, (3) the value of the noncash contribution, and (4) the method of valuing the noncash contribution. In addition, we found no indication in the project files that the data are routinely analyzed and recorded concerning (1) the amount of a state or local government’s contribution that should be counted as nonfederal, (2) whether the services of volunteers qualify as a noncash contribution, and (3) whether the noncash contributions are properly valued. FWS officials told us that they typically accept the values assigned to nonfederal contributions by project participants. In their project records, FWS officials record a single “cost-share” amount for each project, which they extract from the project proposals submitted by project participants. The cost- share amount represents total contributions brought to the project by project participants, but it does not distinguish between monetary contributions and noncash contributions in the combined amount. In addition, FWS officials do not maintain records on the value of any nonfederal contributions to the Restoration Program that are not project related, such as the State of California’s contribution of technical services to the Management Council and the Task Force. As a result, FWS officials are not able to demonstrate that the Restoration Program is in compliance with the Act’s nonfederal match provision. Although FWS officials told us they believe they are in compliance with other provisions of the Act that restrict reimbursing certain travel expenses, such compliance cannot be assured or demonstrated because the FWS accounting system does not distinguish between Resource Management appropriations allocated for the Restoration Program and funds from the same lump-sum appropriation allocated for related purposes. The Act places some limitations on the purposes for which the money it authorizes to be appropriated can be spent. For example, the funds appropriated for the Restoration Program may not be used to reimburse any agency or governmental unit whose employees are Management Council members or Task Force members for time spent by any such employee performing Management Council or Task Force duties. Likewise, the Act precludes the funds’ use for reimbursing travel expenses to federal employees who travel as members of the Management Council or Task Force. Both the Management Council and the Task Force have members who are federal employees, and each has at least one member who is a FWS employee. Our work did not find any instance of noncompliance with the above restrictions. However, FWS offices that receive Restoration Program funds also receive some funds FWS has allocated to the Anadromous Fish Management activity of the Fisheries Program which are designated by the same account code (1331) as the Restoration Program funds. Although, as mentioned above, the Restoration Program funds may not be used for certain purposes, the Anadromous Fish Management funds can be and are used for those purposes. Since neither the Restoration Program funds nor the Anadromous Fish Management funds are designated by an additional subactivity or project code that would distinguish between the two types of funds, the source of funds that have been used for specific expenditures cannot be determined or verified from the accounting records. As a result, FWS’s accounting records do not provide the detailed information needed to assure that the restrictions on the use of Restoration Program appropriated funds are being complied with. Since passage of the Klamath River Basin Fishery Resources Restoration Act in 1986, the Restoration Program established to carry out the Act has received about $24.7 million in cash and noncash contributions. Of the $24.7 million, the Restoration Program received about $9.8 million during fiscal years 2000 through 2004. The Secretary of the Interior and the Director of FWS have taken a number of actions to formulate, establish, and implement the Restoration Program, including designating a conservation area, establishing the Management Council and the Task Force, formulating a long-term plan, and funding over 350 restoration projects in the Klamath River Basin. Regarding the financial requirements of the Act, FWS officials have correctly identified the need to fund some Restoration Program expenditures, such as certain travel and salary expenses for FWS officials who are members of the Management Council or the Task Force, from monies that are not subject to the Act’s restrictions. However, they have not yet incorporated into their accounting procedures and record-keeping practices sufficient controls to provide reasonable assurance of compliance with those provisions of the Act. In addition, concerning the Act’s requirement that 50 percent of the Restoration Program’s costs be provided by nonfederal sources, FWS officials do collect some information regarding nonfederal contributions to restoration projects, but they do not distinguish between cash and noncash contributions in project documents, document their valuation decisions regarding the noncash contributions, or take steps to verify that nonfederal contributions meet the Act’s criteria. Incorporating these additional controls into the Restoration Program’s operations would not be difficult or costly, and would provide reasonable assurance of compliance with those provisions of the Act. In order to enhance compliance with the Act, we recommend that the Secretary of the Interior direct the Director of the Fish and Wildlife Service to modify the standard project agreement language to distinguish between cash and noncash contributions from the project participant; include a requirement in the standard project agreement that if any contributor to the project is a state or local government, that contributor must attest to how much, if any, of the contribution is from federal monies received by that state or local government; develop standard operating procedures for reviewing and validating contributor-supplied information regarding the determination and valuation of noncash contributions and determination of nonfederal sources of funds; track Restoration Program funds requested and received through the appropriations process by specifically identifying Klamath Restoration Program funds; and track Restoration Program funds expenditures through FWS’s Federal Financial System by assigning a project code to the Klamath Restoration Program funds. Interior generally agreed with the report’s findings and recommendations and stated that implementation of some recommendations has already begun. Interior pointed out, however, that incorporating some of the Act’s requirements into the Restoration Program will likely require increased staff involvement in negotiation and verification of noncash values, which would cause increased diversion of restoration project funds to administrative work. We agree that some increased staff involvement will likely be necessary to determine the values of noncash contributions in order to fully comply with the Act’s key funding requirement that 50 percent of the cost of the development and implementation of the program be provided by nonfederal sources. We encourage Interior to closely monitor the costs associated with implementing the Act’s requirements so that it will be in a position to provide this information to Congress when Congress considers reauthorization of appropriations for, or an extension of, the 20-year Restoration Program. Interior’s comments are included as appendix III to this report. Interior officials also provided some technical suggestions to our draft report, which we did not reprint. We incorporated those technical suggestions as appropriate. We are sending copies of this report to the Secretary of the Interior, the Director of the Fish and Wildlife Service, and other interested parties. We will also make copies available to others upon request. In addition, the report is available to others at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-6906 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are acknowledged in appendix IV. The objectives of this engagement were to provide information about (1) sources and amounts of funding received by and for the Restoration Program for fiscal years 2000 through 2004; (2) amounts of funds received by and for the Restoration Program for fiscal years 2000 through 2004 spent for restoration projects, travel reimbursements, administrative expenses, overhead, and technical support; (3) amounts of funding received by the Task Force and Management Council for fiscal years 2000 through 2004 spent for the purposes of restoration projects, travel reimbursements, administrative expenses, overhead, and technical support; and (4) whether the Secretary of the Interior has complied with specific requirements contained in certain provisions of the Klamath River Basin Fishery Resources Restoration Act. For the most part, we limited the scope of our work to fiscal years 2000 through 2004; however, some compliance information and some historical financial information we gathered included earlier years, going back to the passage of the Act in 1986. We performed our work primarily at the headquarters offices of the Department of the Interior, and the U.S. Fish and Wildlife Service (FWS) in Washington, D.C. We also traveled to FWS’s Yreka, California, field office, which administers the Restoration Program, to inspect files and gather information. We gathered additional information from other locations through telephone contacts with FWS officials in FWS’s Portland Regional Office and its California-Nevada Operations Office. We also interviewed by telephone Task Force and Management Council members who represent various entities in California and Oregon. To provide information about what total amount of funding was received by and for the Restoration Program from the beginning of fiscal year 2000 through the end of fiscal year 2004, and what were the sources of that funding, we first defined the boundaries of the Restoration Program because there were numerous restoration-type activities undertaken by federal and nonfederal entities in the Klamath River Basin during the 5-year period we reviewed. After reviewing the provisions of the Act, having preliminary discussions with FWS officials, and visiting the Klamath River area, we defined the Restoration Program, for purposes of our work, as consisting of all activities and projects that are at least partially funded by appropriations FWS allocated for the Restoration Program pursuant to the Act. Under the definition we adopted, the Restoration Program funding also includes any cash or noncash contributions provided by federal or nonfederal sources to those same activities and projects. Having defined the Restoration Program, we interviewed FWS headquarters, regional office, and field office officials to determine the types of Restoration Program funding and expenditure information routinely collected and the location and accessibility of that information. To obtain information on the amount of Resource Management appropriations that FWS allocated to the Restoration Program established pursuant to the Act, we reviewed budget request documents and appropriations act documents for FWS and the Department of the Interior, but did not find information on funding specifically for the Restoration Program in those documents. We discussed this with FWS headquarters, regional office, and field office budget officials and were told by them that the appropriations for FWS do not contain a discrete line item for the Restoration Program. Instead, funding for the Restoration Program is combined with other funding within the “General Program Activities” sub- element of the “Anadromous Fish Management” program element, which can be found under the “Fish and Wildlife Management Program” activity of FWS’s Fisheries Program account, which is funded through an allocation from FWS’s Resource Management appropriation. A Portland Regional Office budget official, who oversaw funding for the Yreka Fish and Wildlife Office (FWO), told us that FWS considers there to be an appropriation for the Restoration Program for each of the 5 years of $1 million, less a rescission each year that varied between 0.38 percent and 1.82 percent. We obtained Office Fund Target documents from the Yreka FWO that supported those amounts. To provide information about the amounts and sources of other funding contributed by federal and nonfederal sources to activities and projects that are at least partially funded by those appropriations allocated by FWS to the Restoration Program, we obtained from FWS officials an electronic copy of their Restoration Projects Database, maintained in FWS’s Yreka, California, office. That database contains information on only those restoration projects that are at least partially funded by appropriations FWS allocated for the Restoration Program pursuant to the Act. It also contains, among other things, information on the cost-share contributions provided to those restoration projects by federal and nonfederal entities. We also obtained and reviewed for some funded restoration projects the project proposals and project completion reports that had been prepared by the cooperators to determine if the amounts of cost share reported in those documents are consistent with the information in FWS’s Restoration Projects Database. To provide information about whether other amounts of monetary funding or noncash contributions are provided to any of the Restoration Program’s nonproject activities, we obtained FWS budget and expenditure information to identify the other activities and interviewed Yreka FWO officials, Task Force members, and Management Council members to learn of any other funding. We were told that no other cash contributions are received by the Restoration Program’s nonproject activities but noncash contributions, in the form of technical services, are provided by some federal and nonfederal sources to the Task Force and the Management Council. However, FWS officials do not maintain records on the value of those technical services. To provide information about what amounts of the funds received by and for the Restoration Program from the beginning of fiscal year 2000 through the end of fiscal year 2004 were spent for the purposes of restoration projects, travel reimbursements, administrative expenses, overhead, and technical support, we obtained budget and expenditure documents from the Yreka FWO. We had several discussions with Yreka FWO officials to gain an understanding of how the various financial amounts are derived and the availability of source documents that support the amounts. Through analysis of the financial information, we identified which items on the financial documents represent the Restoration Program’s restoration projects, and which items represent travel reimbursements, administrative expenses, and overhead. Through discussions with Yreka FWO officials, we confirmed our interpretations of these amounts and confirmed Yreka FWO officials do not maintain records on the value of technical services. To provide information about what amounts of funding received by the Task Force and Management Council from the beginning of fiscal year 2000 through the end of fiscal year 2004 were spent for the purposes of restoration projects, travel reimbursements, administrative expenses, overhead, and technical support, we obtained through the Internet, from a Web site maintained by the General Services Administration, Federal Advisory Committee Act (FACA) reports produced by the Task Force and the Management Council showing expenditures related to those two federal advisory committees for fiscal years 2000 through 2004. We considered using the FACA report financial information for determining the amounts of Restoration Program funds that were spent by the Management Council and the Task Force for the purposes of restoration projects, travel reimbursements, administrative expenses, overhead, and technical support. However, after conducting some analytical testing procedures and discussing the FACA report financial information with the Designated Federal Officers for the two federal advisory committees, we concluded that the FACA report data would present a misleading picture of Restoration Program expenditures. Our discussions with the Designated Federal Officers for the two federal advisory committees, Management Council members, Task Force members, and Yreka FWO officials, coupled with our review of Management Council and Task Force meeting minutes, charters, and operating procedures, showed that the Management Council and the Task Force do not actually receive or expend any federal or nonfederal funding. The funding that covers the Management Council’s and the Task Force’s operational expenses comes from FWS appropriations, and FWS officials in the Yreka FWO retain control of that funding and pay those expenses. To determine whether the Secretary of the Interior, the Management Council, and the Task Force complied with specific duties and limitations contained in the Act, we reviewed the Klamath River Basin Fishery Resources Restoration Act and all of its amendments and identified the provisions that require or prohibit specific actions or activities. We then analyzed those provisions that contain mandates and restrictions to identify the financial-related requirements and limitations contained in the Act. For each provision that contains a financial-related requirement, such as the issuance of regulations to establish qualifications which volunteers must have in order for their services to be considered as noncash contributions, we asked FWS officials whether the required action had been taken, and if so, for evidence of the action. For each provision that contains a financial-related restriction, such as the limitations on the purposes for which money appropriated pursuant to the Act’s authorization can be spent (for example, restricted money may not be used to reimburse any agency or governmental unit whose employees are Management Council members or Task Force members for time spent by any such employee performing Management Council or Task Force duties), we asked FWS officials and the Chairmen of the Task Force and Management Council whether they are aware of the legal restrictions and whether they believe the restrictions have been complied with. To find corroborating or contradicting evidence regarding compliance with the Act’s financial-related provisions, we reviewed Federal Register notices and existing Interior grants management regulations related to cost-share requirements to determine if the necessary regulations had been issued. We also inspected the Management Council’s and Task Force’s charters, operating procedures, and minutes of meetings to identify any discussions of the Act’s provisions and any indications of an activity that indicates compliance or noncompliance with the provisions. Where we identified any indications of noncompliance, we discussed these indications with FWS, Management Council, and Task Force officials for their explanations. We also asked the Management Council’s and Task Force’s members if they are aware of any instances of noncompliance with the Act or of improper use of Restoration Program funds. We did not perform a financial audit on the financial information collected from FWS officials. In addition, we did not evaluate the efficiency or effectiveness of the Restoration Program, of individual restoration projects, or of actions taken by the Task Force or the Management Council. Finally, we did not test compliance with all laws and regulations applicable to this engagement but limited our tests of compliance to financial-related provisions contained in the Klamath River Basin Fishery Resources Restoration Act. We conducted our work from June 2004 through June 2005 in accordance with U.S. generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of the Interior, or her designee. Interior generally agreed with the report’s findings and recommendations and stated that implementation of some recommendations has already begun. Agency comments are included as appendix III to this report. Interior officials also provided some technical suggestions to our draft report, which we did not reprint in appendix III. We incorporated those technical suggestions as appropriate. In addition to the contact listed above, Polly Cheung, Cherry Clipper, Lisa Crye, Francis Dymond, Lauren Fassler, Michael Koury, Tarunkant Mithani, and Debra Rucker made important contributions to this report. | The Klamath River Basin Fishery Resources Restoration Act (Act), passed in October 1986, required the Secretary of the Interior to establish and restore a conservation area in that river basin, created a management council and a task force to assist and advise the Secretary, and authorized $21 million until September 30, 2006. The restoration program reports that it had been appropriated over $17 million by September 2005. In anticipation of the authorization's expiration, GAO was asked to provide information for fiscal years 2000 through 2004, the most recent 5-year period for which complete information is available, about (1) funding for the program; (2) expenditures by the program for restoration projects, travel expenses, administrative expenses, overhead, and technical support; (3) expenditures by the management council and the task force; and (4) whether the Secretary complied with certain requirements of the Act. GAO obtained funding and expenditure information from FWS but did not audit that financial information. The Secretary of the Interior and the U.S. Fish and Wildlife Service (FWS) have taken a number of actions to formulate, establish, and implement the Klamath River Basin Conservation Area Restoration Program, including designating a conservation area, establishing the management council and the task force, formulating a long-term plan, and funding restoration projects in the Klamath River Basin. The restoration program reports receiving a little over $9.8 million in cash and noncash contributions during fiscal years 2000 through 2004 from federal and nonfederal sources. The federal portion totaled almost $6.3 million and consisted of about $5.1 million from FWS's lump-sum resource management appropriation account, and almost $1.2 million in cash and noncash contributions from federal entities that participated in restoration projects with FWS, according to FWS records. FWS records also show that the nonfederal portion consisted of almost $3.6 million in cash and noncash contributions from nonfederal entities that participated in restoration projects. During the same 5-year period, the restoration program spent about $7.6 million in cash and noncash contributions for restoration projects, about $200,000 for travel reimbursements, about $1.1 million for administrative expenses, and about $491,000 for overhead, according to information provided by FWS officials. Information was not available on technical support expenses incurred by the restoration program. The management council and the task force serve solely in an advisory capacity and do not directly select or manage projects. FWS officials told GAO that they paid about $800,000 to cover operating costs of the management council and the task force for the 5-year period. Regarding the financial requirements of the Act, FWS officials have correctly identified the need to fund some Restoration Program expenditures from monies that are not subject to the Act's restrictions, and FWS officials told GAO they believe they are in compliance with these provisions. However, FWS has not yet incorporated into their accounting procedures and record-keeping sufficient controls to provide reasonable assurance of compliance with those provisions of the Act. In addition, the Act requires that half of the restoration program's costs be funded by nonfederal sources. FWS officials collect some information on restoration projects regarding any nonfederal contributions, but they do not distinguish between cash and noncash contributions in project documents, document their valuation decisions regarding the noncash contributions, or take steps to verify that nonfederal contributions meet the Act's criteria. Incorporating these additional controls into the Restoration Program's operations would not be difficult or costly, and would provide reasonable assurance of compliance with those provisions of the Act. |
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An inherent right of sovereignty, eminent domain is a government’s power to take private property for a public use while compensating the property owner. Eminent domain is also referred to as “appropriation,” “condemnation,” and “taking.” The Fifth Amendment of the United States Constitution expressly restricts the federal government’s use of eminent domain; it requires that eminent domain be invoked only for a “public use” and “just compensation” be paid to those whose property has been taken. The Fourteenth Amendment extends the legal requirements of public use and just compensation to the states through its Due Process Clause. In addition, states have a number of constitutional provisions, statutes, and case law outlining the various permissible uses of eminent domain, recourse available to property owners, and procedures required to take or evaluate a property. State legislatures generally determine who may use eminent domain by delegating eminent domain authority to state or quasi- public entities, such as housing, transport, and urban renewal authorities, which may exercise that power only for the purpose for which it was established. States may also grant eminent domain authority to local governments, which may further delegate this authority to a designee, such as a development authority or community group. Finally, some states authorize private companies to exercise eminent domain—for example, for the provision of utility services. Courts have addressed the meaning and application of public use in numerous cases throughout the years. In 2005, the United States Supreme Court, in Kelo v. City of New London, upheld the City of New London’s authority to use eminent domain to condemn and acquire property located within an area designated as a “distressed municipality,” even though the condemned property was not blighted or otherwise in poor condition. This decision allowed for private-to-private transfers of property for economic development purposes, such as New London’s action in an area that had experienced decades of economic decline. According to some scholars, the use of eminent domain for such a purpose has been permitted since the “mill acts” of the colonial and pre-Revolutionary period that permitted the flooding of private property to allow the operation of mills downstream; mills were considered the main source of power and closely linked to economic development. The Supreme Court emphasized that the Kelo decision did not preclude states from placing further restrictions on the exercise of eminent domain. Many states have been reviewing the use of eminent domain and considering legislative changes or constitutional amendments to control its use. In addition to the Constitution, the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 sets the federal standard for acquisition of real property for public projects involving federal financial assistance, including prescribing specific benefits, treatment, and protections for those whose property is acquired. The act also contains requirements for property owner notification and property valuation, as well as prohibitions against offers to property owners being less than an approved appraisal value. In addition, the act addresses compensation and seeks to ensure the fair and equitable treatment and protection from disproportionate injury of persons displaced from their homes, businesses, or farms in all projects involving federal financial assistance. The act requires that certain relocation funding be provided when a resident’s property is acquired, such as reasonable out-of-pocket moving expenses and relocation advisory services. The relocation funding also includes payments to cover rent increases or downpayments on home purchases in order to assist tenants and owners in relocating to comparable housing, which, at a minimum, is decent, safe, and sanitary. A number of federal government agencies have acquisition programs where the federal government acquires title to the land through proceedings in federal courts. However, this report focuses on land acquisitions by state or local governments, or their designees. Officials from national organizations, states, and cities with whom we spoke cited various common public purposes for which eminent domain can be or has been used, but the lack of data precludes a determination of the extent to which eminent domain has been used across the nation. Purposes for which we received examples include the building or expansion of roads and other transportation-related projects; construction of state and municipal facilities; and the elimination and prevention of blight. In addition, officials from some of the national organizations we contacted, which represent state and local governments, property rights groups, urban planning, and home builders, also cited remediation of environmental contamination and economic development. Although we were able to identify some purposes for which eminent domain can be and has been used by certain authorities, we were unable to determine the number of times and the purposes for which eminent domain has been used across the nation because of a lack of centralized or aggregate data. According to representatives from some national organizations representing state and local governments, property rights groups, farmers, and planning professionals, and state departments of transportation (DOT) and city officials, eminent domain could be and has been used for various purposes. In particular, many of these representatives and officials said that eminent domain was sometimes needed for the completion of transportation-related projects, such as the building or expansion of roads and highways. As an example, according to Texas DOT officials, from November 1996 through March 2005, the department invoked eminent domain to acquire 6 of the 26 properties needed to assemble land for the construction of an interchange that connected two major highways in central Texas. These officials explained that most of these acquisitions involved the taking of a small portion of the property (partial takings). Furthermore, Texas DOT officials said that because they were making improvements to existing highway facilities, the location of such improvements was limited to properties adjacent to the highway. In addition, Florida DOT officials told us that the department used eminent domain in 1998 and 1999 to acquire 23 of 51 properties, most of which were partial takings, needed to reconstruct and widen an existing roadway from two to four lanes. City officials we contacted also provided examples of transportation-related projects in which eminent domain was used. For example, an official from a city in Texas told us that the city, in collaboration with the city’s transit authority, used eminent domain to acquire 2 of the 9 commercial properties needed to assemble land for the expansion of the city’s light rail system in October 1998. According to this official, the city’s transit authority was seeking to extend its existing light rail system to provide a low-cost and energy-efficient means of mass transit for commuters. Another purpose for which eminent domain can be or has been used is the construction or maintenance of state and municipal infrastructure, such as state and municipal buildings. For example, in January 2002, Los Angeles used eminent domain to acquire 2 of the 7 properties needed to assemble land for the construction of a public building that eventually accommodated state and city departments of transportation. In addition, officials from some of the national organizations we contacted said that eminent domain is also used for public utilities. For example, New York City used eminent domain to assemble land for the construction of a tunnel for the city’s water system. To complete one phase of the project, the city used eminent domain to acquire 3 of the 10 properties needed to construct support facilities for the operation and maintenance of the water tunnel. Furthermore, the city condemned subsurface rights on more than 1,100 properties for the construction of the Manhattan portion of the tunnel and approximately 640 additional subsurface rights for the Brooklyn and Queens portions. According to a New York City Department of Environmental Protection report, the tunnel is expected to enhance and improve the city’s water system and allow for inspection and repair of the city’s existing tunnels. In addition, an official from a county in California provided information about the condemnation of 40 parcels of property in June 2001 to assemble land for a flood control and protection project, most of which were partial takings. According to this official, the flood control and protection improvements were intended for public safety and public infrastructure protection. Eminent domain also can be and has been used to eliminate or prevent blight. For example, according to an official from a community redevelopment agency in Florida, the agency used eminent domain in March 1998 to acquire 3 of the 39 parcels needed to eliminate slum and blighted conditions, stimulate private investment in the area, provide commercial opportunities, and enhance the area’s tax base. This agency official said that the redevelopment of the area consists of commercial space and residential housing and was the first significant private investment made in the area in decades. In addition, New York City officials provided an example in which the city condemned property through eminent domain to eliminate blight. According to city officials, the city acquired 407 parcels to eliminate blight by constructing a major housing development. The city’s plan for the project indicated that the project was intended to accomplish several things, including providing new and rehabilitated housing for low-, moderate-, and middle-income residents and strengthening the tax base of the city by encouraging development. Furthermore, officials of some national organizations representing state and local governments, property rights groups, planners, and home builders said that eminent domain can be used for brownfield remediation, which is the environmental cleanup of property that is or may be contaminated. According to officials from an organization representing local government environmental professionals, oftentimes development of certain brownfield properties only occurs with the use of eminent domain because of the owners’ unwillingness to transfer property or allow access for site inspections for fear of later being held liable for clean-up costs. Although the officials from the national organizations mentioned above also cited brownfield remediation as a purpose for which eminent domain could be used, we were unable to obtain sufficient project information to conduct any further analysis or provide examples in this report. Finally, officials from some of the national organizations with whom we met cited economic development as a purpose for which eminent domain can be and has been used. However, according to an official from a national organization representing city governments, the use of eminent domain solely for economic development purposes is minimal compared with the use of eminent domain for other purposes, such as transportation-related projects. Officials from some authorities that have the power to use eminent domain said that some of their projects might be linked to economic development, but that economic development was not the primary purpose of the projects. In addition, all of the projects we reviewed in which eminent domain was used to eliminate blight were associated with projects intended to improve the economic condition of the area. For example, as we have previously described, the redevelopment agency in Florida used eminent domain to acquire three parcels of property to eliminate slum and blighted conditions by stimulating private investment in the area, providing commercial opportunities, and enhancing the area’s tax base. Officials from an organization representing state legislatures said that economic development is closely related to blight removal because authorities with eminent domain power may claim that blight removal will stimulate the community’s economic conditions. In addition, representatives from some national organizations representing state and local governments, planning professionals, and officials from some cities we visited said that transportation-related projects might lead to an area’s economic development. For example, New York City officials said that even acquisitions of property by eminent domain that are not primarily intended for economic development, such as the construction of a road or highway, would likely improve the economic condition in the area because of the improved access to businesses in the area, potentially increasing the profitability of the businesses. City officials from Chicago and Los Angeles told us that the construction of state buildings in their downtowns had positive economic impact on their cities because the projects attracted private development. Finally, an official from Denver Urban Renewal Authority described the Authority’s use of eminent domain to assist a developer complete refurbishing of a downtown property of architectural and historical significance, thus preventing the property from becoming vacant and potentially having a negative impact on its surrounding area. We also obtained data on the use of eminent domain from selected state DOTs and local authorities. The data reflect that the amount of eminent domain activity and purposes for which eminent domain was invoked varied by states and localities. Officials from 9 state DOTs we contacted estimated that the number of individual properties they used eminent domain to acquire in the last 5 years for transportation-related projects ranged from approximately 200 to 7,800. As we previously discussed, according to the state DOT officials, because most of their projects involve improvements on existing transportation systems, the majority of the private properties they assembled for the projects consisted of partial acquisitions. In addition, according to information provided by Baltimore and Los Angeles city officials, Baltimore invoked its eminent domain power most commonly to assemble land for urban redevelopment projects that involved blight removal, while Los Angeles invoked its eminent domain power most often for street improvements projects. Similarly, according to New York City officials, the city invoked its eminent domain power most commonly to assemble land for parks and street widening. Officials from Chicago and Denver told us that they do not have complete data on the number and purposes for which they used their eminent domain authority, but provided us with some information on their use of eminent domain. Specifically, City of Chicago officials estimated that they acquired 2,000 parcels through eminent domain in the last 10 years. In addition, officials from Denver told us that the city used its eminent domain authority mostly for street improvement projects. The lack of state or national data precluded objective statewide or national assessments on the use of eminent domain, including (1) how frequently eminent domain is used, (2) how often private-to-public or private-to-private transfer of property occurs, or (3) the purposes for which eminent domain has been used by state and local governments. Although we were able to collect limited data on the purposes and number of instances in which eminent domain was used, officials from some of the national organizations we contacted told us that state or national aggregate data on the use of eminent domain do not exist. At least two major factors account for the lack of aggregate data. First, officials from the U.S. Departments of Transportation and Housing and Urban Development, as well as the Environmental Protection Agency, told us that the federal agencies generally do not acquire private property through eminent domain directly, but may be indirectly involved through the different programs or agencies they administer or fund. Furthermore, officials from these Federal agencies told us that they do not formally track whether program participants use eminent domain. Second, the lack of state data on the use of eminent domain may result from multiple authorities in a state having the power to invoke eminent domain and states not having central repositories to collect such data. As we have previously discussed, since states grant eminent domain authorities to local governments, which may further delegate this authority to a designee, such as a development authority, many entities have the power to invoke eminent domain. Of the 10 state legislative research offices we contacted, 5 provided us with information on the authorities that have eminent domain power within their states. For instance, according to information provided by the Virginia legislative research office, at least 40 different types of authorities can invoke eminent domain, including school board districts that can use it to acquire any property necessary for public school purposes. The legislative research office of Massachusetts listed 8 different types of authorities with eminent domain power. For example, the Armory Commission can use eminent domain to acquire land suitable for target practice ranges for the armed forces of Massachusetts, subject to the governor’s approval. In addition to the 8 authorities, the information provided by the Massachusetts legislative research office states that Massachusetts’ general statutes also grant the power to, among others, the governor and state council, county commissioners, and city aldermen. Furthermore, according to a Texas Legislative Council report, at least 90 different types of authorities have been granted the power of eminent domain in Texas, including agricultural development districts, railroad companies, and sports facilities districts. Finally, the legislative research offices of Illinois and Washington provided us with information on statutes that described the authorities that were granted eminent domain power. In particular, in Illinois, at least 168 types of authorities, including those dealing with transportation, such as the Chicago Transit Authority and the Kankakee River Valley Area Airport Authority, have the power to acquire property through eminent domain, and, in Washington, at least 78 types of authorities were granted this power. Public authorities at the state and local levels acquire property, including by eminent domain, through processes set forth in various federal, state, and local land acquisition laws and implementing regulations. Federal and state laws, such as the URA, outline how much compensation authorities need to pay property owners whose land is being acquired and also direct authorities on what type of relocation assistance to provide to residents and businesses. However, local and state officials we met expressed some concerns about certain limits that the URA places on the amount and type of relocation payments to displaced residents and businesses. In addition to local laws and regulations, federal and state laws establish procedures for how authorities must undertake land acquisition, including the use of eminent domain. Although multiple laws address land acquisition, authorities we interviewed follow broadly similar steps. When acquiring land, which may involve the use of eminent domain, authorities generally follow a four-step process: (1) project planning; (2) property valuation; (3) property acquisition; and (4) relocation of displaced property owners, residents, and businesses. Sometimes these steps overlap. Land acquisition laws generally require compensation be paid to the owner of a property that a public authority has acquired, including acquisitions by eminent domain. All 50 state constitutions require that just or fair compensation be paid to those whose property has been taken through eminent domain. Just compensation is a payment by the government for property it has taken under eminent domain, usually the fair market value, so that the owner theoretically is no worse off after the taking. As mentioned earlier, the United States Constitution stipulates that eminent domain use by a government authority must include just compensation to the property owner. Some state constitutions, including Georgia and Montana, provide for payment of expenses above the fair market value of the property such as, in certain circumstances, attorney’s fees or litigation expenses incurred in determining adequate compensation. The land acquisition process often includes relocation of either the property owner or residents and businesses located in the property acquired by the authority; federal and state laws also address the costs involved in relocation. Requirements in the URA, the federal law governing the provision of relocation benefits to displaced parties, are applicable to all acquisitions—including voluntary acquisitions achieved through negotiated settlements and acquisitions through eminent domain—of real property for federal or federally assisted programs or projects. The URA provides benefits to displaced individuals, families, businesses, and nonprofit organizations. The types of benefits provided depend on factors such as ownership, tenancy, and use of property (commercial versus residential use). Local officials told us that they have provided benefits under the URA such as: actual moving costs for residents and businesses; comparable replacement housing; rental assistance for tenants; cost of personal property loss for businesses; expenses in finding a replacement site for businesses; and reestablishment costs for businesses up to $10,000. In addition, some city and state officials with whom we spoke explained that their states have adopted legislation or policies with requirements similar to the URA, providing some or all of the same benefits to residents and owners displaced through nonfederally funded projects. However, local officials, and redevelopment agency officials from four of the five cities we visited believed that payment amounts allowable under the URA might not be adequate to cover costs. For example, we were told that a $10,000 cap on reestablishment costs for business relocation, unchanged since 1987, was too low. Most officials noted that reestablishments costs exceed this cap. For example, Chicago officials described high reestablishment costs such as, replacing specialized fixtures, licensing and permitting, and differential payments for increased rent, insurance, and other needs. Furthermore, a Los Angeles city official noted that the URA requires lump sum payments to remain under a $20,000 cap. Los Angeles officials use these settlements frequently, but one official stated that the URA cap was too low. Officials from 6 of the 10 state DOTs that we contacted remarked that various benefit limits in the URA are too low to properly compensate for business reestablishment costs. According to the U.S. Department of Transportation, the agency responsible for issuing regulations to implement the URA, the agency’s Federal Highway Administration (FHWA) has received comments about the inadequacy of business reestablishment payments under the URA from states, other federal agencies, and affected businesses. In response to these comments, FHWA undertook multiple activities to identify needed programmatic change in the URA, according to FHWA officials. In particular, in 2002 FHWA conducted a study to assess the adequacy of current URA provisions for business relocations and found that reestablishment payments were largely considered inadequate. In 2005 FHWA made some revisions to the URA regulations, but the revisions did not raise the cap on reestablishment payments. Such an increase requires a statutory change. State and local laws further condition how land may be acquired, including through eminent domain (see fig. 1). Among the states that we reviewed, some states enacted additional laws concerning land acquisition, such as requirements for environmental assessments. For instance, according to City of Los Angeles officials, the California Environmental Quality Act requires that the environmental impacts of discretionary projects proposed to be carried out by public agencies, including in general publicly funded projects in the state involving land acquisition, be assessed at the earliest possible time in the environmental review process. In New York, according to city officials, when a significant adverse environmental impact is likely to result from a project, the State Environmental Quality Review Act requires an assessment in the form of an environmental impact statement of short and long term impacts, adverse environmental impacts, and mitigation measures. In addition, according to officials, residential and business displacement from a project is generally analyzed in the review conducted under New York State and New York City law. Some states have laws outlining how authorities granted eminent domain authority within their state can invoke this power to assemble land for public projects. For example, in Illinois, Article VII of the Code of Civil Procedure sets forth procedures for use of the power of eminent domain by state and local governments including provisions regarding the determination of property value, negotiation with property owners, and the initiation of condemnation. Provisions in the Illinois Municipal Code authorize municipalities to take property for redevelopment based on a blight designation. In New York, the Eminent Domain Procedure Law sets forth the procedure by which property is acquired and property owners are compensated. This law also establishes the opportunity for public participation in the planning of redevelopment projects, which may necessitate eminent domain use. Through these procedures, the state acknowledges that the need for public land acquisition should be balanced against the rights of private property owners and local communities, encourages the settlement of claims for compensation, and reduces related litigation. California’s Eminent Domain and Relocation Assistance Laws implemented by the Relocation Assistance and Real Property Acquisition Guidelines governs private property acquisition by a public authority not involving federal funds. The guidelines are designed to ensure equitable treatment for persons displaced from a home or business, reduce related litigation, and require comparable replacement dwellings. The Colorado Urban Renewal and Eminent Domain Laws contain procedures for using eminent domain to eliminate or prevent blight or slum conditions. To govern the relocation of displaced residents, Maryland, New York, and Washington, like California, have established laws that provide certain state relocation benefits. Therefore, a mixture of federal and state laws directs how local authorities use their eminent domain power, provide compensation, and other required benefits. In addition to the federal and state laws that authorities must follow when invoking eminent domain, some of the cities that we visited had additional local laws or city agency regulations that governed urban redevelopment, as well as relocation of displaced residents and businesses (see fig. 1). For example, in New York City, the Uniform Land Use Review Procedure Charter, approved in 1975, standardizes how applications affecting land use in New York City, including projects involving eminent domain, are publicly reviewed. Another law sets forth the rights of residential and commercial tenants displaced by urban redevelopment in New York City. The Los Angeles redevelopment agency has also established an appeals procedure for relocation decisions which is supplementary to federal and state law, according to information provided by Los Angeles city officials. The complexities associated with land assembly have led to numerous approaches for acquiring land and providing just compensation. However, when state and local authorities acquire land, either through negotiated purchase or eminent domain, they follow some common procedural practices. The land acquisition process generally occurs in four stages, including (1) project planning; (2) property valuation, during which appraisals are conducted; (3) property acquisition; and (4) relocation, during which authorities may provide residents and businesses replacement housing or commercial property (see fig. 2). Sometimes these stages are concurrent, with some variation across the localities we visited. The views that property owners and property rights organizations we interviewed have on these stages are discussed in a later section of this report. The project planning stage may begin by identifying the need for a project. Depending on the type of project, city departments of engineering or planning, city redevelopment or renewal authorities, or state departments of transportation with whom we spoke, conduct work at this stage. For example, 23 U.S.C. § 135 (section 135), as amended by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, mandates that states carry out a statewide transportation planning process that involves both a long-range statewide transportation plan, which identifies transportation needs over roughly a 20-year horizon, and a Statewide Transportation Improvement Program (STIP), which is a listing of potential projects to be constructed in the near term, covering a 4-year period. FHWA and the Federal Transit Administration jointly administer the statewide planning program. During these planning processes, according to FHWA officials, state DOTs work with other state agencies and local authorities within a cooperative, continuous, and comprehensive framework to make decisions on the need for new state highways or interchanges, among other transportation-related public improvements. Section 135 requires public notice during the planning process, which for the long-term plan includes public meetings at convenient and accessible locations at convenient times, use of visualization techniques to describe plans, and provision of public information in an electronically accessible format, such as the Internet. The STIP also requires states to provide interested parties with a reasonable opportunity to comment on the proposed program. According to state DOT officials in New York, project managers will attend local board or council meetings before a design for a new transportation project is proposed. After the project proposal, New York officials hold informational meetings for property owners and allow time for individual question and answer sessions. New York officials consider alternative site selections proposed by the property owners, although the state DOT eventually selects the least intrusive and safest alternative by weighing social, economic, safety, and technical considerations. Other states that we contacted, including Missouri, Illinois, California, Colorado, and Texas, also described their adherence to the federal requirements in conducting their statewide transportation improvement plans and providing public notice of the project design process. In cities or localities, the project planning stage may generally involve developing, publicly vetting, and approving a project plan by a public body, such as a city council. Redevelopment where eminent domain may be used in the five cities we visited may involve the creation and approval of an urban renewal or redevelopment plan, which establishes such things as the need for the project, lists the parcels required to complete the project, and creates a timeline. In some localities, such planning processes may involve the completion of impact studies of the potential effects from the proposed redevelopment project on the neighborhood and the environment. Multiple public hearings or meetings may occur when localities are vetting a redevelopment plan. Chicago officials told us that the public may attend hearings or meetings held by the city’s planning department, city council, and an appointed body known as the Community Development Commission, at which redevelopment plans and takings are approved. In addition, local alderman may also sponsor public meetings on proposed redevelopment plans. In New York City, the Uniform Land Use Procedure Law provides for review before four city entities: the local community board, borough president, city planning commission, and the city council. Property owners and the community, in New York, Chicago and in other localities, are notified about hearings through letters sent to their mailing addresses. This planning process often ends with the approval of a project plan by a public body. In all five cities we visited, officials told us that the city council approves the redevelopment or urban renewal plan, at times granting the appropriate public authority the specific power to acquire properties necessary to complete the project. Sometimes the development of these plans involves organizations outside the local or state government, such as community groups or developers. Officials from some of the cities we visited explained that the city may work with the developer by exercising its power of eminent domain to complete the site assemblage necessary for a developer’s project. This collaboration typically occurs after the developer has acquired as many parcels in a redevelopment site as it can through private market transactions. During project planning, city authorities often may have to demonstrate blight or slum conditions in the area slated for redevelopment. States allowing the use of eminent domain for blight removal generally establish criteria to determine blight. These criteria may consider conditions of blight that impose a physical or economic burden on a community. Examples of physical blight in some state laws include buildings in which it is unsafe or unhealthy for persons to live or work. Indications of physical blight may include building code violations, structural dilapidation and deterioration, defective building design or physical construction, or faulty or inadequate utilities. Blight also may include neighboring or nearby property uses that are incompatible with one another and prevent the economic development of the respective parcels, such as the existence of irregularly sized lots. Depreciated or stagnant property values, high vacancy or turnover rates of commercial property, or increased abandonment of buildings and lots can be indications of economic blight, as can high crime rates or residential overcrowding. While state laws often determine blight factors, authorities may have some latitude in applying them to properties and areas. The City of Chicago, following Illinois law, must apply a 13-factor test to determine blight for a redevelopment project area. To classify an entire area, such as a city block, as blighted, five or more of the factors must be clearly present and reasonably distributed throughout a project area. City officials explained that this standard means that at least a third to one half of the properties in a designated area meet at least 5 of the 13 blight factors. Officials in Los Angeles informed us that in order to adopt a redevelopment plan an area must generally be characterized by one condition of physical blight and one condition of economic blight. According to officials at the Denver Urban Renewal Authority, in order to undertake any redevelopment project, a blight designation must precede any redevelopment action. In addition, the officials explained to us that early in the project development stage, the authority conducts a study, pursuant to Colorado state statute, to determine that a minimum of 4 of the 11 blight characteristics in state law are present in the designated area. These criteria include unsanitary or unsafe conditions, deteriorated or deteriorating structures, environmental contamination, and the existence of conditions that endanger life or property. The property valuation stage may involve title studies and property appraisals that city, state, or contract appraisers often conduct. Several state and city officials with whom we met or spoke described the need to conduct title studies to determine legal ownership of a property and ascertain any lien holders. To determine the fair market value of the property, which is generally the amount of the first offer made by public authorities, city officials described using an independent, certified appraiser. According to officials in New York City, fair market value is determined by valuing the highest and best use of the property on the date of acquisition. In Los Angeles, city officials explained that state law defines fair market value as the highest price that a willing buyer and willing seller would agree to, neither being compelled to buy or sell and each having full knowledge of all of the uses, and restrictions on use, to which the property may be put. In other words, officials from the Los Angeles authority are required to pay owners not less than the amount for which their property would sell privately on the open market if it were unaffected by a possible eminent domain action. Massachusetts Highway Department officials described having all appraisals exceeding $175,000 in value reviewed by a real estate review board appointed by the state’s transportation commissioner for accuracy and then submitted for final approval to the transportation commissioner. Some transportation authority officials also described using in-house appraisers at their agencies. During this stage, owners also may obtain appraisals of the fair market value on their property, although sometimes at their own expense. The property acquisition stage may involve a formal offer, negotiation by the city, state, or redevelopment authority officials, and at times, an impasse leading to an eminent domain filing by an authority’s legal counsel. Multiple authority officials described using eminent domain after many attempts at a negotiated settlement had been unsuccessful. If the owner does not agree with an authority’s initial offer, then some authorities may provide additional offers above the appraised value. In some localities, this sort of negotiation involves the owner identifying special circumstances that justify a higher level of compensation. Denver authorities told us that their initial offer to purchase is typically based on an appraisal. Any settlement that can be reached at the midpoint between the city’s appraisal and the property owner’s appraisal when the latter is higher is considered an appropriate settlement. The Denver official stated that it is the city’s practice to pay more than the fair market value on the property to compensate for inconvenience or intangible difficulties caused by condemnation. When seeking a negotiated settlement, the authorities we contacted had different limits on the percentage amount over the appraised value that they could offer prior to invoking their power of eminent domain. For example, the Community Redevelopment Agency of Los Angeles cannot make an offer of over 120 percent of the appraised value of the property without agency board approval. A higher offer by the redevelopment agency may be considered a gift of public funds, which the agency, by law, cannot make, according to officials. In New York City, based on agency protocols, the Department of Citywide Administrative Services may pay no more than 110 percent of the original appraisal prior to the use of eminent domain. Similarly, the city’s Department of Housing Preservation and Development has established rules to pay no more than 120 percent of the original appraisal prior to the use of eminent domain. In Chicago, a city official estimated that within 1 year, 75 percent of owners settle at an amount between 100 and 150 percent of the original offer. Once authorities are certain that the owner will not settle or that the legal owner cannot be located, they may file to condemn the property with eminent domain in the appropriate court. However, the manner in which authorities can invoke eminent domain differs. For example, two state DOTs we contacted have established policies to invoke eminent domain for each acquisition undertaken, including acquisitions involving willing sellers, to ensure that the authority is the sole legal title holder on the property. Multiple cities and state departments of transportation told us they also had the statutory authority to use a procedure known as “quick- take,” which refers to the ability to petition a court for immediate vesting of a property’s title. If the petition is granted, the court transfers the property to the authority and the final compensation is determined at a later date. The authority must deposit the estimated compensation with the court, which owners may withdraw without relinquishing their ability to argue for more compensation. Local officials have noted that for most eminent domain filings, the authority and the owner come to a settlement without the need for a trial. For instance, officials from three authorities we contacted estimated that 90 percent of all eminent domain filings were settled prior to trial. Although few eminent domain cases go to jury trial, authority officials stated that eminent domain is the most effective tool they have to acquire needed property from owners who hold out for a higher purchase price or refuse to sell. Officials in one city explained that they also use eminent domain to void leases on property while other officials explained that they use it to obtain abandoned property when no owner can be located. For example, city officials with whom we spoke stated that eminent domain is needed to acquire properties from owners that purchase and hold on to property after an area is slated for redevelopment. Officials stated that they generally believe these owners are speculating that land values will increase because of the expected public investment in the redevelopment project. The relocation stage may involve outreach by the condemning authority and the provision of relocation benefits by agency or contracted relocation specialists to displaced residential or commercial owners or tenants. For instance, New York City defines displaced party as any family, individual, partnership, corporation, or association that is displaced or moves from real property, or who moved his or her personal property from such real property, on or after the date of acquisition of the real property for a public improvement or urban renewal site or project. The URA’s definition of a “displaced person” covers anyone who moves because they received a written notice that a program or project undertaken by a federal agency or with federal financial assistance intends to acquire his or her property (including a rental property). Some authorities, such as the cities of Los Angeles and Chicago, have dedicated offices within the condemning agency to manage the provision of relocation benefits. Other localities, including New York City, sometimes contract out this responsibility to private relocation firms, for example when undertaking larger projects involving multiple displaced parties. Multiple relocation specialists with whom we spoke, whether they were authority officials or contracted specialists, reported contacting the property owner as soon as the public entity received the authority to take the owner’s specific property or soon thereafter and providing relocation support for the duration of the settlement or condemnation. For example, Chicago officials told us that within five days of the city’s first offer letter, relocation specialists will contact the property owner and tenant to set-up a face-to-face interview to determine their needs. Relocation specialists may meet with displaced residents at numerous steps of the land acquisition process. They may explain the residents’ rights, benefits, and obligations and may interpret legal notices received from the authority. According to some relocation specialists, residential tenants and owners are to be relocated to comparable replacement housing that is decent, safe, sanitary, and functionally equivalent to the displaced dwelling. Relocation specialists from two localities described making every effort to house residents in neighborhoods of their choice, including their current neighborhood if possible, and finding rental housing for residents who were renters. City officials from four of five cities we visited showed us new residential apartment buildings, one of which included services, such as child care and computer centers, into which they moved displaced residents. For business occupants, relocation specialists may conduct comprehensive analyses of the business’ location requirements, fixtures, moving costs, and other relevant considerations to find a comparable site for business relocation. In one city we were told that relocation specialists work with the business owners to address all commercial issues, including negotiating all comparable square footage costs and rent and getting the same phone number transferred to a new location. Some relocation specialists are associated with local retail and office landlords and attempt to negotiate a price which, combined with relocation funding under the URA, initially can keep the rental costs similar to the previous location. According to all of the relocation specialists who we interviewed, relocated commercial occupants generally have done better financially in other, more economically stable neighborhoods. Relocation benefits under the URA and many local and state laws include some or all of the following payments to residential and commercial tenants: Actual moving expenses, which may include packing and moving expenses, storage of personal property, the cost of dismantling, disconnecting, and reconnecting machinery and utilities, loss of personal property caused by the move, the expense of searching for a substitute business site, moving insurance, advertising related to the move, or other related expenses (or a fixed moving allowance in some locations); Compensation over the acquisition cost of the property for an owner to purchase a comparable replacement home, pay increased mortgage costs, or pay closing costs; For tenants, a monthly rental subsidy to rent a comparable dwelling for a period of 42 months that is equal to the differential between what the tenant was paying at the displaced dwelling and the payment at the comparable dwelling (many localities also allow this payment to be made in a lump sum so that renters may use it as a down payment to purchase a home); and A payment in lieu of moving and related expenses in nonresidential moves, which may be made to a commercial owner when relocation would result in substantial loss of business. For selected projects where eminent domain was used that we reviewed or visited, authorities described the previous conditions of the selected areas and they told us or we observed some of the benefits realized by communities after the projects were completed. Examples of benefits to the community included increased job opportunities and modernized or safer infrastructure. Property rights groups told us about the negative effects that the use of eminent domain could have on property owners, community residents, and businesses, such as the loss of small businesses or the dispersal of residents who relied upon each other in informal networks. In addition to the losses to the community, the property rights groups noted that the manner in which authorities implement procedures for using eminent domain also affects property owners. For example, national and local property rights groups identified problems with how some authorities communicate with property owners, designate areas as blighted, and value property. The use of eminent domain generates benefits and costs that could affect various parties—such as property owners, businesses, authorities, and city officials—whose interests may diverge. The great variety in benefits and costs makes it difficult to establish objective measures to examine the overall impact of projects involving eminent domain. In addition, the lack of aggregated data on the purpose and frequency of eminent domain use further limits this effort. However, for selected projects where eminent domain was used that we reviewed or visited, authorities described the previous conditions of the selected areas and they told us, or in some instances we observed, some of the benefits realized by communities after the projects were completed. Prior to condemnation, according to local and state officials, a variety of conditions existed in selected areas in which eminent domain was used. For example, according to city officials, some of the urban areas slated for redevelopment included buildings in substandard condition. Many buildings were vacant or abandoned with few or no improvements made for multiple years; some properties had missing window glass, collapsed roofs, accumulated debris on the parcel, and other conditions that created a public health hazard. However, in some cases that we reviewed, authorities acquired occupied residences and operating businesses to redevelop an area. In one area, a building occupied by long-standing businesses providing retail services to the neighborhood was under threat of condemnation by eminent domain. Although this building was not unusually dilapidated, it was within a redevelopment area designated as blighted, and thus subject to acquisition by eminent domain. According to local and state officials, road conditions in some projects reviewed included inadequately sized or dilapidated streets, sidewalks, or curbs. Traffic flow and access in some neighborhoods were poorly planned. For example, industrial traffic reportedly moved through residential areas in one project we reviewed. In other road or highway projects, according to state transportation officials, conditions included operable, but older roads requiring modernization, such as new interchanges to better handle traffic. Other roads required new safety features, such as turning or deceleration lanes, or straightening of tight curves in the road. We also reviewed other types of infrastructure projects, such as the New York City water tunnel previously discussed. According to city officials, the condition of the original water tunnels servicing the metropolitan area was questionable because they had not been inspected since being built in the early twentieth century. Condemned property is often redeveloped as part of a larger redevelopment or improvement project. City officials considered outcomes of these projects as benefits to the community, and emphasized that they could not have completed the projects without the use of eminent domain. However, authorities told us they often obtain much of the land for projects, including urban redevelopment projects, transportation projects, utility projects and others, through negotiated purchases and condemn a small number of the needed properties. Therefore, benefits to the community cannot be attributed solely to the use of eminent domain and are more likely the result of the redevelopment projects for which eminent domain was used. According to local and state officials and based on some of the projects we observed, the redeveloped areas have a variety of characteristics. In urban areas, redevelopment led to additional housing stock (including affordable housing set asides), new commercial centers with additional local job opportunities, reduced crime in some areas, and modernized infrastructure. For example, in Chicago, the downtown redevelopment of a sparsely occupied block produced a 27-story municipal building, which city officials described as fully leased with retail stores and office space, including a parking garage and a mass transit station serving many parts of the city, including both airports. In New York City, the Department of Housing Preservation and Development used eminent domain to assemble land for the Melrose Commons project in the South Bronx. The agency is working with several private and nonprofit developers to construct over 3,200 affordable housing units to turn what a high-level official characterized as one of the most blighted areas in the city into a thriving neighborhood. Officials cited benefits from transportation projects that include safer, more efficient roadways and traffic patterns. In Los Angeles, the widening of a street from two lanes to four lanes with center left turn lanes alleviated what officials described as perennial congestion, provided additional parking, and reduced accidents on a major artery in the western part of the city. Additional improvements resulting from this project included new curbs, gutters, street lighting, traffic signals, sewers, and storm drains. City officials cited other types of improvements resulting from redevelopment, such as less contaminated land and new public green space or parks. According to Baltimore officials, sometimes vacant lots are acquired and provided to community groups for gardens. New York City officials explained that eminent domain could be an important tool to acquire brownfields in the city for remediation, although authorities there have yet to do so. Much of the 581 miles of waterfront in New York City has been contaminated in the past. According to officials, many developers are not interested in developing contaminated waterfront properties because they do not want to be liable for cleaning up the contamination. Property owners also may be unable or unwilling to sell properties that are or may be contaminated; thus, the city could acquire the properties through eminent domain, decontaminate them, and put the land to public use. Property owners, property rights groups, and national community-based organizations described a number of negative effects from using eminent domain. For example, properties acquired through eminent domain may remain unused for some time, according to city officials and a property rights group. As an example, in downtown Chicago in 1989, the city condemned 16 improved, occupied buildings (one with historic landmark status the city had removed prior to condemnation) for a two-tower office and retail development. Because of a downturn in the local real estate market, the proposed project did not begin. However, according to Chicago officials, a $500 million development is now under construction on the long vacant land. In another example, Los Angeles acquired an industrially zoned parcel through eminent domain to build an animal shelter. According to city officials, to preserve the parcel for commercial use, the city is considering an alternate site for the animal shelter. As a result, the condemned property remains unused to date. In both of these instances, the cities expended public funds acquiring the land, including legal costs associated with invoking eminent domain. Property rights groups and one national community organization further noted that certain costs to communities may not be compensated when eminent domain is used. These issues include the dispersal of residents in low-income communities to other neighborhoods or cities. The residents of low-income neighborhoods may rely on one another for day-to-day needs such as child care, according to the community organization. If these residents lose their homes through eminent domain and are relocated to new areas, then some of the resources upon which they depend also can be lost. Property rights and community groups added that owners also suffer emotional costs when losing a home. Making people leave their homes can be destabilizing to individuals or families even when relocation costs are provided. Property rights groups also noted other community impacts, such as rent destabilization in neighborhoods affected by eminent domain and a reduction in an area’s affordable housing stock when units are acquired and replaced by commercial developments. Other potential costs to the community that the groups mentioned include reductions in homeownership and the number of small businesses in an area. Furthermore, according to one property rights group, there is a tendency for cities to use eminent domain to remove manufacturing companies and replace them with retail businesses to collect increased sales revenue. However, removing manufacturing companies may have a negative effect on the community because it decreases the number of manufacturing jobs that are available. The procedural requirements we previously described could provide some safeguards for property owners, such as ensuring that they receive timely public notice and just compensation. However, the effectiveness of the procedures depends on how well they are implemented by the authority invoking eminent domain. Property owners and property rights advocates we interviewed identified problems with how some authorities communicate with property owners, designate areas as blighted, and value property. Property rights advocates also expressed concern that owners may not fully comprehend the benefits available to them when an authority acquires their property. Multiple owners and property rights groups with whom we met reported receiving little advanced, misleading, or no notice of public hearings or proposed condemnation actions by the relevant authority. These problems may prevent owners from voicing concerns about the proposed acquisition of their properties. For example, property rights groups in Los Angeles told us that many owners do not receive the statement of interest-owner participation letter that the authorities told us they send to all owners during the planning stage of each project. Property rights groups in Denver and New York said that notice was posted on signage, but not sent in a letter. According to the Denver group, the method of posting a notice at one site would not disseminate information about public hearings to most owners in a community. In another locality, the public notice that property owners received was reportedly not clear. For example, one authority sent a notice informing the owners of the redevelopment project and their responsibilities in a format that some owners confused with junk mail; it did not resemble an official letter. Finally, in Denver, property rights advocates told us that owners need notice earlier in the process. They said that owners learn about the condemnation after the initial planning has occurred and the urban renewal area has been designated. However, authorities in cities we visited consistently said that they always sent notice to owners of hearings—which give affected property owners multiple opportunities to voice concerns about the proposed plan and potential property acquisition—and sent notice of acquisition activities as required in all applicable laws and regulations. Even when notice is received, owners may not have the financial or technical ability to fully comprehend what actions an authority is taking, what recourse they may have, or where to go to for assistance in understanding the proceedings or terms mentioned in the notice. For instance, one authority sent a statement of interest-owner participation letter to property owners stating that a redevelopment project was proposed for their area. The letter states that owners may, within 30 days, propose their own alternative plan for redevelopment of the area. However, property rights groups explained that most owners do not have the money or skills needed to develop and execute a redevelopment plan. On the other hand, officials in this locality explained that multiple public funds and technical assistance were available to help owners formulate alternative business development plans. The letter of intent, officials said, provided the owners needed information about how to access these public benefits, remain in the community during redevelopment, and ultimately benefit from the project. One local organization involved in urban redevelopment explained that local public hearings and the voting on proposed project plans (which may provide authorities the power to take property) by governmental bodies, such as city councils, occurred on different dates. Of concern was that the votes would happen without public attendance, thereby reducing the transparency of the process. Furthermore, a concern was raised about the time owners had to speak at hearings. In one locality, each owner was reportedly allowed only three minutes to address the elected body that would decide to approve or deny the project plan in which eminent domain might be used. To facilitate better communication between property owners and government authorities looking to assemble land, some states, such as Utah, have established a Property Rights Ombudsman’s office. According to the current official in Utah, the ombudsman is an attorney hired by the state as an independent source of information and assistance for property owners and others involved in the acquisition of property for public projects. The ombudsman, who provides services free of charge to owners, can mediate disputes, arrange for arbitration, order appraisals, and provide information to property owners and governmental authorities acquiring land. Connecticut and Missouri reportedly have recently adopted statutes creating property rights ombudsman-type offices. Many property rights groups and owners with whom we spoke were critical of blight designation processes in their localities. They said that nonblighted property parcels may be designated blighted because of factors such as design flaws, high density, turnover of occupants, and irregularly shaped parcels. According to some property rights groups, by these criteria almost any property or area in question may be considered blighted. They felt that blight should be defined narrowly based mainly on public health and safety risks from a specific property. According to officials from one national organization, farmland may be wrongly designated as blighted. Many farms have older and what may appear to be dilapidated homes and barns, or old storage sheds and tractors, which makes the property especially susceptible to a blight designation. The officials added, however, that these buildings and machines are often fully functional or operable, meet housing or farm needs, and pose no public danger. In the projects we reviewed where eminent domain was used to remove blight, blight was almost always designated by area (such as a city block) rather than by parcel. Owners and property rights groups opposed to this practice stated that nonblighted property can then be taken based on this area-wide designation. During the project planning stage, usually for projects that are considered urban redevelopment or blight removal, authorities designate the physical boundaries of areas selected for redevelopment and determine the presence of blight in the area. This designation is often then applied to all parcels in the area which, in turn, allows authorities to acquire any property in the designated area. Property owners and community groups argue that not all property in such areas is blighted; rather, many properties are improved and occupied. Furthermore, we were told that the planning stage and blight designation can occur years before an authority is able to commence acquisition and construction in the area. For example, one area we reviewed initially was deemed blighted in 1986. The blight designation, and with it the threat of eminent domain, destabilized property values in the neighborhood for nearly 20 years, according to one owner. Although the area has been an official redevelopment area since 1986, local officials told us that state redevelopment law limits a blight designation to 12 years. The authority is then required by law to return to the deciding elected body to again prove blight before the authority is able to move forward with the project. Property rights groups also expressed concerns that blight may be exacerbated by the redevelopment activity and has been termed “developer blight”—that is, the physical decline of a parcel or area, such as a city block, once a redevelopment project has been announced. For example, in Denver, a property rights group told us that it is difficult to isolate the causes and effects of blight in their area because once an area is designated as blighted its decline might hasten. The public knowledge of the impending redevelopment and related property acquisition, according to one concerned group, can cause property values to fluctuate and discourage property owners from maintaining their dwellings or businesses or, in other words, cause an area to become blighted. In one neighborhood, according to a local property rights group, improved residential buildings were largely occupied and multiple businesses were open prior to the announcement of a redevelopment project. However, once the project was announced and the authority began the project design and planning stage, the developer purchased many of the properties and over time, failed to maintain them properly. This activity, according to the property rights group, constituted developer-initiated blight in the neighborhood. Remaining owners are concerned that “developer blight” has reduced their property values and that they will not receive what they consider just compensation from the authority as the project proceeds. Another group suggested that redevelopment plans and blight designations may prevent new businesses from relocating to a neighborhood that was revitalizing on its own because of the public’s awareness that authorities will have the power to use eminent domain in the area. Authority officials told us that areas they seek for redevelopment are not revitalizing on their own, but rather declining and becoming further blighted. While property valuation is intended to provide property owners compensation at fair market value for their property, property rights groups and owners expressed concern about the reasonableness of property appraisals. Multiple property rights groups believed that localities undervalue property and make offers lower than owners would receive on the market. One group cited large differentials between final jury awards and first appraisal amounts in cases in which owners challenged a condemnation. Owners in this property rights organization who challenged initial offers reported receiving an average of 40 percent more in compensation than the initial offer. Conversely, officials of the local authority claim that it would be to their detriment to make an unreasonably low offer at any stage in the negotiation process because an offer not in good faith might enable a jury to award additional damages to a prevailing owner. Some believe that property is undervalued because of when appraisals take place. In New York, one owner, attempting to remain in his home, stated that if he were eventually required to sell his property, it would be appraised long after all other neighborhood owners had settled and moved away. With most of the neighborhood acquired, the owner believed that, should he lose his bid to keep his property, the value of his property would be lower than when the neighborhood was fully occupied. One state mediator of property disputes explained that an approved redevelopment area creates a hardship for owners, which is exacerbated when the project construction date is unknown. Owners in this case may have a more difficult time selling their property on the open market because it is within a redevelopment zone and subject to eminent domain. On the other hand, in one city we reviewed, buyers actively sought property in areas slated for redevelopment because the prospect of an authority acquiring the property was high. Property rights groups also noted that property and business owners may be uninformed about the benefits provided to them once their property is taken by eminent domain. In Denver, a property rights group stated that owners did not always realize that money was available for relocation benefits. In other localities, property rights groups noted that owners might have known that some financial support was available, but might not have been aware of the range of benefits. However, property rights groups also stated that acquisition and eminent domain can cost business owners more than the amount compensated for under the URA or state and local relocation regulations. For example, the URA may often only partially cover expenses related to either lost inventory or transferring inventory to the new location. Moreover, businesses are not compensated for lost goodwill or for loss of business attributable to the new location under the URA. Multiple property rights groups further explained that owners often are unable to fight a condemnation action if they want to retain their homes or businesses or seek additional compensation because costs related to hiring an appraiser or attorney, as well as court costs, are too high. Property rights groups believe that many owners sell their property under the threat of condemnation when they otherwise would not do so because they cannot afford to fight the action, something which can take several years. In New York City, a contested condemnation can take more than 10 years to settle, according to city officials we interviewed. Authorities counter that, under certain circumstances, there is money available to owners to fight eminent domain. In some localities, authorities can use quick take, in which the authority obtains the title of the property and deposits the estimated compensation with the court. Owners, authorities note, can withdraw these funds to challenge the authority’s valuation of their property. However, a property rights group and a state mediator emphasized that the owners cannot use these funds to dispute the authority’s right to take the property. Challenges to the right to take must typically be made and heard prior to quick take procedures. According to one national organization, partial condemnations of farmland do not always result in just compensation. If authorities were to take only a portion of a farm and that portion ran directly through the middle of the property, the owner’s business could be negatively affected. For example, one state reportedly developed a toll road that ran through the middle of a farm property. The farmer was paid the value of the land taken by the authority, but according to this organization, the damage done to the farm’s business was not compensated. The road reduced the farm’s crop yield, forced the farmer to maintain equipment on both sides of the walled toll road, and necessitated the costly alteration of an irrigation system. Numerous states have adopted at least one of three general types of changes to their eminent domain laws since June 2005. In particular, some states amended their eminent domain laws and placed restrictions on the use of eminent domain for economic development, increasing tax revenues, or transferring condemned property from one private entity to another. Other states revised their eminent domain procedures or added requirements. Finally, some states defined or redefined key terms related to the use of eminent domain, such as blight or blighted property, public use, and economic development. Several states had ballot initiatives on constitutional amendments to restrict current eminent domain laws. In addition, some states, including those that did and did not enact any changes, commissioned studies on their state’s eminent domain laws. After the Supreme Court’s Kelo decision, 29 states enacted at least one of three general types of changes to their eminent domain laws from June 23, 2005, through July 31, 2006. These changes include placing certain restrictions on the use of eminent domain, revising procedural requirements, and defining or redefining key eminent domain terms. While at least 3 of the 29 states specifically made reference to the Kelo decision in connection with their legislation, other states stated that the legislation was enacted to protect property rights and limit eminent domain use. Figure 3 identifies the states that enacted changes and the types of changes they enacted to their eminent domain laws. According to our analysis, 23 of the 29 states enacted changes that placed restrictions, with certain exceptions, on the use of eminent domain for economic development, increasing tax revenues, or transferring condemned property to a private entity (see fig. 3). Specifically, some of these states prohibited the use of eminent domain to transfer private property to a private entity for economic development unless the primary purpose of the use was to eliminate blight. For example, both Alabama and Maine now prohibit condemning authorities from taking property in a nonblighted area for purposes of private retail, office, commercial, residential, or industrial development or use. In addition, Ohio imposed a moratorium, through December 31, 2006, on the use of eminent domain to take land within a nonblighted area when the purpose is economic development that leads to ownership of the property being vested in another private person. Furthermore, Florida prohibits the use of eminent domain to take private property for the purpose of preventing or eliminating slum or blight conditions. However, most of the states that enacted changes restricting the use of eminent domain for economic development, increasing tax revenues, or transferring condemned property to a private entity did make an allowance for the transfer of private property to a private entity for public rights of way and public utilities. Some states included other exceptions. For example, Alabama, Kansas, and Nebraska allow the use of eminent domain to clear a defective title under certain circumstances. Twenty-four of the 29 states changed their eminent domain procedures or added new requirements (see also fig. 3). Some states placed the burden of proof on the condemning authority to show that the use is public, the taking is necessary to remove blight, or both. For example, Colorado law states that the condemning authorities must prove by a preponderance of evidence that the eminent domain taking is for a public use. Furthermore, Colorado law sets a higher standard if the purpose is to eliminate blight— requiring condemning authorities to show by clear and convincing evidence that the taking is necessary for the elimination of blight. In addition, some of these states require condemning authorities to provide improved or additional public notice and hearings prior to condemning a property. Utah law requires that written notice be provided to the property owner of each public meeting at which a vote on the proposed taking is expected to occur and that the property owner must be given an opportunity to be heard on the proposed taking. West Virginia redefined the requirement for public notice to require a certified letter be sent to the property owner informing the owner about the public hearing and the right to an inspection to determine if the property is blighted. Some states also passed changes requiring condemning authorities to negotiate in good faith and increase the level of compensation to be paid to owners prior to invoking eminent domain. For example, in Missouri condemning authorities are required to establish requirements for the amount of compensation, which may be more than the fair market value. Missouri law also requires condemning authorities to pay, in addition to the fair market value, a “heritage” value for certain property owned by the same family for more than 50 years, which is equal to 50 percent of the fair market value of the property. Other procedural changes enacted by some of the states include providing the former owner of a condemned property the opportunity to purchase the property if it was not used within certain period of time or for the stated purpose and requiring the use of eminent domain to be approved by a governing body. Twenty-one of the 29 states defined or redefined key terms related to the use of eminent domain, including blight or blighted property, public use, and economic development (see also fig. 3). In particular, some states redefined blight or blighted property to include several explicit factors, generally emphasizing factors that are detrimental to public health and safety and removing aesthetic factors, such as irregular lot size. For example, California’s statutes require that for an area to be qualified for redevelopment it must be predominantly urbanized with a combination of physical and economic conditions of blight so prevalent and substantial that they can cause a serious physical and economic burden that cannot be reversed or alleviated by private enterprise or governmental action alone, or in combination with each other, without redevelopment powers and financing mechanisms. Prior California law would have allowed, as an exception to its general rule, that property subdivided into parcels with irregular shapes and inadequate sizes for proper development could also to be considered as qualifying an areas as blighted for redevelopment purposes. California amended its definition to remove this exception. In addition, some states redefined public use to include the possession, occupation, or use of the public or government entity, public utilities, roads, and the addressing of blight conditions. For instance, Iowa defined public use to include acquisition by a public or private utility, common carrier, or airport or airport system necessary to its function. Indiana included highways, bridges, airports, ports, certified technology parks, and public utilities as public uses. Finally, some states also established that economic development—which was defined by those states to include activities to increase tax revenue, the tax base, employment, or general economic health—does not constitute public use or purpose. At least six state legislatures approved constitutional amendments on restricting current eminent domain laws, which were placed on the ballot for voter consideration. For example, the Louisiana legislature approved two proposed constitutional amendments that were passed on September 30, 2006, by the voters in that state. These two amendments, among other things, (1) prohibit the taking of private property for use by or transfer to a private person; (2) limit public purposes to a list of factors, which includes such purposes as the removal of a threat to public health and safety; (3) exclude economic development, enhancement of tax revenue, and incidental benefits to the public from being considered in the determination of a public purpose; and (4) provide an option for the former owner to purchase condemned property or a portion of it should the property go unused by the authority that originally acquired the property. In addition, citizen-initiated proposals to amend the state constitution obtained the requisite number of signatures and were placed on a ballot in California, Nevada, and North Dakota. For example, the Nevada Property Owners Bill of Rights initiative to amend the state constitution in regards to eminent domain qualified for the Nevada 2006 general election ballot. The amendment would, among other things, establish just compensation as the amount necessary to place owners in the same position monetarily as if property had not been taken and prohibit the direct or indirect transfer of property from one private party to another. Several states and state associations also commissioned studies to determine if any changes were needed to their eminent domain laws. For example, in November 2005, the president of the New York State Bar Association appointed a special task force on eminent domain to provide legal analysis and recommendations about appropriate legislative and regulatory considerations in the practice of eminent domain law in the aftermath of the Kelo decision. According to a report issued by the task force, little state-specific research and data exist to accurately assess both the need for, and the impact of, changes to the state’s eminent domain laws. The task force suggested that the state legislature begin the collection and analysis of such data before deciding on appropriate substantive modifications to the law. For example, the report lists several questions that could be answered through empirical research, including how often condemnation proceedings are instituted and how many times eminent domain is used for economic development. Consequently, the task force recommended that a Temporary State Commission on Eminent Domain be established to further study the use of eminent domain in New York. In June 2005, the Governor of Missouri established by executive order a task force to study the use of eminent domain, including when the property being acquired by eminent domain would not be directly owned or primarily used by the general public. The task force recommended three categories of actions: redefining the scope of eminent domain, improving the procedures and process required for exercising eminent domain, and providing penalties for condemning authorities that abuse the eminent domain process. As a result, the state enacted changes to its eminent domain laws in July 2006. The governor of New Mexico also issued an executive order in which he stated that the most effective method of examining Kelo’s impact on the state’s eminent domain laws and practices was by convening a task force of the state’s eminent domain experts to determine what steps should be taken to ensure that condemnation would be used responsibly. Therefore, he appointed a state commission to make recommendations on eminent domain reform. Finally, in November 2005, Ohio enacted legislation that created a task force to study the use and application of eminent domain in the state and how the Kelo decision affects state law governing the use of eminent domain. On August 1, 2006, the task force issued its report, which, among other things, recommended that the state retain the use of eminent domain as a tool for the elimination of blight, even if the property that is taken is converted to another private use; rewrite and tighten the definition of blight; and require that a majority of the properties in an area be blighted to designate it as such. The report also recommended (1) prohibiting eminent domain takings solely for the purpose of generating added tax revenue, (2) prohibiting declaring blight solely on the basis of additional revenue that could be generated, and (3) compensating the property owner for actual moving and relocation expenses, and, when appropriate, loss of business, goodwill, and attorney’s fees. An inherent right of sovereignty, eminent domain is a government’s power to take private property for a public use while fairly compensating the property owner. Despite its fundamental significance, little is known about the practice or extent of the use of eminent domain in the United States. The matter of eminent domain remains largely at the level of state and local governments that, in turn, delegate this power to their agencies or designated authorities. Since multiple authorities have the power to take private property within the same jurisdiction without any centralized tracking of eminent domain use, data such as the purpose for which eminent domain is used or the number of times eminent domain is used in a given locality are not readily available. The testimonial evidence we obtained from state and local authorities on the purposes for which eminent domain can be and was used generally pointed to long-established uses, such as taking land for infrastructure, particularly transportation- related projects; uses that addressed economic and social conditions, such as blight; relatively more recent uses such as environmental remediation; and initiatives aimed at promoting economic activity or community redevelopment. Recently, popular attention has concentrated on cases where the condemned land was ultimately used for economic development projects and appeared to benefit private entities. In the absence of statewide or nationwide data, it is difficult to quantify the usage of eminent domain; for example, there are no data on how frequently private-to-public or private-to-private transfer of property occurs or with what frequency eminent domain has been used by state and local governments, their agencies, or designated authorities. Concerns and debates on the use of eminent domain for economic development purposes, as well as the Kelo decision, have played a role in recent state legislative activity. Many state legislatures have acted to prohibit certain eminent domain practices, such as preventing property from being transferred from one private party to another for specific purposes—for purely economic development projects, as an example. Many states changed their eminent domain laws to permit a private-to- private transfer only if it meets certain conditions, such as the property having been determined to be blighted. Since these recent modifications to state laws have not been tested and historical data on eminent domain use are not available for comparison purposes, how these laws may affect property rights or state and local government use of eminent domain is unclear. Our discussions with authorities and property rights groups suggest that the impact of eminent domain often depends on the nature of the project, the parties involved, costs related to legal proceedings and relocation, and the administration of procedural requirements. On the one hand, local and state government officials generally have described eminent domain as one of several tools necessary for land acquisition and explained that most of the properties assembled for projects are obtained through negotiated settlements with owners. Representatives from the authorities in cities we visited provided examples of how projects where land was assembled using eminent domain have yielded benefits to the public, including increased housing stock and new commercial centers that offer local job opportunities. On the other hand, property rights advocates described the high costs property owners faced in challenging property valuations and the intangible effects on neighborhoods when residents are involuntarily dispersed. Although we observed some of the benefits derived from the projects we visited and heard of instances in which property owners reportedly were misled by authorities about condemnation proceedings or appraisals, a lack of measures and aggregated data do not allow us to make any comment on the overall impact eminent domain has had on property owners and communities. Regardless of their stance in the debate on eminent domain, government officials and property rights groups we interviewed identified a few concerns related to the procedures on invoking eminent domain, including the adequacy of compensation amounts and the timeliness of notification about public hearings. First, many government officials we spoke with said that certain benefits provided under the URA, such as actual moving costs and expenses in finding a replacement site for businesses, to displaced individuals and businesses may not offer adequate compensation under certain circumstances. For example, the URA places a $10,000 cap— an amount left unchanged since 1987—on reestablishment expenses for businesses that have to relocate. A 2002 FHWA study confirmed the inadequacy of the reestablishment payments. Second, property owners and organizations advocating for property rights repeatedly told us that property owners may have limited opportunity or are unaware of the need to attend public hearings at a project’s planning stage to voice their opinions about the proposed acquisition of their property. For example, some property owners and property rights groups explained that property owners may not receive public notice on a timely basis or that they may lack sufficient understanding of the legal process to be fully engaged in the hearing discussions. To address the latter issue, at least one state has created an ombudsman office to provide information and assistance for property owners and others involved in the acquisition of property for public projects. Nevertheless, these two concerns may deserve continued attention given that just compensation and public hearings are two important safeguards designed to protect property owners. We provided a draft of this report to the Departments of Justice, Transportation and Housing and Urban Development for their review. The Department of Transportation provided technical comments, which have been incorporated where appropriate. The Departments of Justice and Housing and Urban Development did not have any comments. We will send copies of this report to the Chairman and Ranking Member, Subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development, and Related Agencies, Senate Committee on Appropriations; and the Chairman and Ranking Member, Subcommittee on Transportation, Treasury, Housing and Urban Development, the Judiciary, District of Columbia, and Independent Agencies, House Committee on Appropriations. We also will send copies to the Secretary of Housing and Urban Development, Secretary of Transportation, and the Attorney General. 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) 512-8678 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 II. Congress, in the Transportation, Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, and Independent Agencies Appropriations Act, 2006, mandated that we conduct a nationwide study on the use of eminent domain. Our objectives were to provide information on (1) the purposes and extent for which eminent domain can be and has been used; (2) the process states and select localities across the country use to acquire land, including by eminent domain; (3) how the use of eminent domain has affected individuals and communities in select localities; and (4) the changes state legislatures made to laws governing the use of eminent domain from June 2005 through July 2006. To report on the purposes for which eminent domain has been and can be used, including the extent of its use, we reviewed pertinent sections of each state’s constitution to determine whether there is a general limitation on use of eminent domain in the state for public use only. We also reviewed specific blight definitions for 10 states we selected: California, Colorado, Florida, Illinois, Massachusetts, Missouri, New York, Texas, Virginia, and Washington. In addition, we interviewed multiple national associations of local and state government officials and planning professionals, national public interest groups, national property rights groups, and the National Academy of Public Administration to gain their perspective on past, current, and potential uses of eminent domain. We also interviewed federal officials from the Departments of Transportation, Housing and Urban Development, and Justice, as well as the Environmental Protection Agency, to learn about how federal programs or funding may be involved in eminent domain proceedings that state and local governments undertake. Finally, we requested information from state legislative research offices on information related to which authorities within the selected state have the authority to use eminent domain. To learn about specific instances in which eminent domain was used, we collected project information from multiple sources. We solicited project information from 10 different national organizations that had either testified before Congress on eminent domain matters or who met the criteria laid out in our mandate for types of organizations we were expected to consult during our study. We provided these 10 organizations with a formal request for project information. Our request included basic criteria that each submitted project should meet. The criteria were: eminent domain having been used (rather than only threatened), the project being substantially completed by December 2004, the project not being primarily related to transportation, the project being located within the 10 states we selected, and preferably, that the project be funded with some federal financial assistance. In addition, we explained to the organizations that we would accept projects that did not involve federal funds, as long as the other four criteria were met. We requested that each organization provide at least 5 different projects within each of the 10 states we selected for review. In total, the 10 national organizations provided 134 projects. Based on the criteria outlined above, the desire to have at least one project in each of the selected states, and to provide a diversity of examples, we selected a total of 40 projects from the 134 for further review. To obtain further information on the projects, we made at least three attempts to contact each local authority responsible for completing or overseeing the project. We completed contact with 36 of the 40 local authorities and learned that 9 of the projects did not meet our criteria because eminent domain was not used, the project was not yet complete, or the project was located in a state not included in our 10 selected states. Of the 27 remaining projects for which we were able to confirm basic project information, such as the use of eminent domain or year of completion, we sent a detailed e-mail request for project information to individuals we contacted from the local authority. Based on our conversations with the authorities responsible for the 27 projects, we scaled back the amount of information we were requesting and extended deadlines for providing the requested information. We received detailed project information for only 11 out of the 27 projects. In addition to efforts described above, we interviewed officials from state departments of transportation of the 10 selected states. We decided to speak with these officials because interviews with national organizations and federal agencies and our literature research indicated that transportation-related projects often rely on eminent domain to assemble land. From these officials we also solicited detailed project information on transportation-related projects, mostly dealing with road improvements, construction, or expansion, in which eminent domain was used. From the state departments of transportation we received 6 projects in which eminent domain was used that also met the same criteria used to select projects provided by the 10 national organizations. We also contacted several state agencies responsible for brownfield remediation, but were unable to receive any additional projects from these agencies. To describe how state agencies and select localities invoke eminent domain, we relied on our interviews with the 10 state departments mentioned above. We discussed the state departments of transportation’s authority to invoke eminent domain, the planning phases they undertake, and their land acquisition and relocation processes. In addition, we interviewed officials from the 5 cities we visited: Baltimore, Maryland; Chicago, Illinois; Denver, Colorado; Los Angeles, California; and New York, New York. During our site visits, we learned about specific projects in which eminent domain was used according to the city officials, 14 of which we toured. City officials also provided written documentation related to the selected projects that included detailed project plans, court documents, applicable state statutes and municipal codes, and relocation services provided to property owners and residents displaced due to eminent domain proceedings. Finally, we reviewed pertinent sections of each state’s constitution to determine whether there is a requirement for the payment of fair or just compensation paid to the owner whose property is taken by eminent domain. To convey how eminent domain has affected property owners and communities in select localities, we interviewed national and local organizations that advocate for property rights, in addition to property owners who claimed to have been involved in eminent domain proceedings. In accordance with long-standing GAO policy, we excluded eminent domain takings currently under litigation and, therefore, only focused on past instances involving eminent domain use. We discussed how eminent domain impacts property owners, businesses, and residents with affected owners and organizations that advocate for property rights. To report on the changes state legislatures had made to laws governing the use of eminent domain, we reviewed legal databases and various Web- published information, such as the text or status of a bill, from state legislatures from all 50 states to determine in which states changes occurred. We then analyzed the state laws identified and grouped states based on our interpretation of those laws into three broad categories in order to more easily describe which states enacted certain types of provisions to their eminent domain laws. The three categories were: (1) states that placed restrictions on the use of eminent domain, such as prohibiting its use to increase property tax revenues, transfer condemned property to a private entity, or to assemble land for projects that are solely for economic development; (2) states that established additional procedural requirements, such as providing further public notice prior to condemnation; and (3) states that modified definitions for terms related to eminent domain use, such as blight or blighted property, public use, and economic development. We only reviewed those changes to state law that state legislatures passed and governors signed into law between June 23, 2005, and July 31, 2006. Related to other state and local laws referenced in the report, we did not undertake any independent legal review of them or how those laws affect the use of eminent domain. To identify state requirements regarding eminent domain procedures, we relied on the state and local officials we interviewed and the information they provided. In the time frame allotted for our study, we could not review all pertinent state requirements regarding eminent domain authorities and procedures. In addition to the work outlined above, we conducted an extensive literature search to assist us in meeting our objectives. Primarily, we searched for other reports, studies, and academic papers that may have tallied or assembled data sets on eminent domain use, or developed measures to assess the impact of eminent domain. To refer to or analyze data collected by others, we had to satisfy our criteria for identifying reliable and valid data, which include testing the methods and procedures others used in collecting the data. Although we identified some studies that were useful in providing us context and outlining barriers to collecting and analyzing data related to eminent domain use, we did not find any with data that met our criteria. Our literature review did provide many articles, reports, and reviews of matters related to eminent domain. However, none provided an analysis of detailed data related to eminent domain use. We conducted our work in accordance with generally accepted government auditing standards from January through November 2006 in Baltimore, Maryland; Chicago, Illinois; Denver, Colorado; Los Angeles, California; New York, New York; and Washington, D.C. In addition to the individual named above, Karen Tremba (Assistant Director), Alexander Galuten, Alison Martin, Marc Molino, Josephine Perez, Linda Rego, Barbara Roesmann, Julie Trinder, Mijo Vodopic, Kristen Waters, and Nicolas Zitelli made key contributions to this report. | In the Transportation, Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, and Independent Agencies Appropriations Act, 2006, Congress mandated that GAO conduct a nationwide study on the use of eminent domain by state and local governments. This report provides information on (1) the purposes for and extent to which eminent domain can be and has been used; (2) the process states and select localities across the country use to acquire land, including by eminent domain; (3) how the use of eminent domain has affected individuals and communities in select localities; and (4) the changes state legislatures made to laws governing the use of eminent domain from June 2005 through July 2006. To address these objectives, GAO reviewed relevant provisions in federal, state, and local laws; conducted site visits to various redevelopment projects where eminent domain was used; and interviewed multiple national associations of local and state government officials and planning professionals, national public interest groups, and national property rights groups to gain their perspectives on the use of eminent domain and its effect on communities and property owners. The Department of Transportation provided technical comments on a draft of this report, which have been incorporated where appropriate. Officials from national organizations and state and local governments cited various purposes for which eminent domain can be or has been used, including the building or expansion of transportation-related projects; the elimination and prevention of conditions that are detrimental to the physical, social, and economic well-being of an area; remediation of environmental contamination; and economic development. However, no centralized or aggregate national or state data exist on the use of eminent domain, thereby precluding GAO from any national or statewide assessments of, among other things, how frequently eminent domain is used for private-to-public or private-to-private transfer of property and purposes of these transfers. Multiple laws promulgated from federal, state, and local governments set forth how authorities can acquire land--including by eminent domain--and how compensation for property owners is determined. Some believe payment limits are too low. The initial step in a project that involves land acquisition is the public review and approval by a public body of a project plan, which is followed by a land valuation process during which title studies and appraisals are completed. During the land acquisition stage, authorities often make a formal offer to the owner and attempt to negotiate the purchase of the property. If the authority cannot locate the owner or the parties cannot agree to a price, among other circumstances, the authorities then begin the formal legal proceedings to acquire the property by eminent domain. Finally, once the property is acquired, authorities may provide relocation assistance that may include monetary payments to cover moving expenses. Redevelopment projects for which eminent domain is used affect individuals and communities in a range of ways that cannot be quantified due to a lack of measures and aggregate data. According to authorities, areas selected for redevelopment could have been vacant and abandoned land or those that included residents and operating businesses. Local officials both described and showed us community benefits resulting from redevelopment projects, including additional employment opportunities and housing in an area. Also, property rights groups told us some of the negative effects of eminent domain, such as the dispersal of long-standing communities. Finally, these groups expressed concerns about how authorities implement procedures for using eminent domain, particularly the provision of public notice to owners about the risk of condemnation, and the process for designating an area as blighted. From June 23, 2005, through July 31, 2006, 29 states enacted at least one of the following three general types of changes to their eminent domain laws: (1) restrictions on the use of eminent domain under certain circumstances, (2) additional procedural requirements, and (3) changes that defined or redefined key terms related to eminent domain including public use. |
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USDOT established a minority and women’s business enterprise program for its highway, airport, and transit programs by regulation in 1980. The Surface Transportation Assistance Act of 1982 contained the first statutory DBE provision for federal highway and transit programs, requiring that a minimum of 10 percent of the funds provided by the act be expended with small businesses owned and controlled by socially and economically disadvantaged individuals, unless the Secretary of Transportation determined otherwise. Nonminority women were not included as socially and economically disadvantaged individuals. The Surface Transportation and Uniform Relocation Assistance Act of 1987 continued the program and included nonminority women in the statutory definition of socially and economically disadvantaged individuals, thereby allowing states to use contracts with both minority- and women-owned businesses to meet their DBE goals. The Intermodal Surface Transportation Efficiency Act of 1991 and TEA-21 (1998) reauthorized the program, continuing the combined 10- percent provision for participation by minority-owned and nonminority- women-owned DBEs. The percentage of federal funds expended through USDOT-assisted highway and transit contracts with DBEs increased from 9.9 percent in 1983 to 12.8 percent in 1999. TEA-21 and USDOT’s regulations establish the basic eligibility requirements for participation in the DBE program. The program is limited to small businesses owned and controlled by socially and economically disadvantaged individuals. Women and members of certain minority populations, such as African-, Hispanic-, and Native-Americans and other minorities found to be disadvantaged by the Small Business Administration (SBA), are presumed to be socially and economically disadvantaged unless proved otherwise. These individuals must own at least 51 percent of thefirm and actually control its operations. To qualify as a small business, a firm must have average annual gross receipts over a 3-year period that do not exceed either (1) the applicable SBA small business size standards or (2) a USDOT-specific cap ($17.4 million). There is no legislative or administrative requirement limiting the length of time firms can participate in the program. However, DBEs become ineligible, or “graduate,” when their average annual gross receipts over a 3-year period exceed the applicable SBA small business size standards or the USDOT-specific cap. According to our survey results, most of the states and transit authorities did not have any DBEs graduate in 2000. In addition, about one-quarter of the states and transit authorities we surveyed could not provide this information. States and transit authorities are not required to track this information, and graduation is not a goal of the DBE program. Moreover, as we reported in 1994, because average annual gross receipts do not reliably indicate DBEs’ success, graduation is not a useful measure of the success of the program as a whole. USDOT administers the DBE program through the Office of the Secretary and the Department’s operating administrations, including the Federal Transit Administration (FTA) and the Federal Highway Administration (FHWA). USDOT develops program policies, instructions, and procedures; reviews and approves states’ and transit authorities’ DBE program plans; and provides technical assistance, among other things. States and transit authorities must certify that program applicants meet the eligibility criteria, reassess annually the eligibility of certified businesses, and establish overall annual goals for the participation of DBEs in their USDOT-assisted contracts. DBE participation goals are expressed as a percentage of all federal highway and transit funds expended on USDOT-assisted contracts in a fiscal year. One of the sources states and transit authorities may use to help set their overall federal DBE participation goals is data derived from disparity studies, which measure the availability of minority- and women-owned businesses compared with their utilization in contracting. States and transit authorities also use disparity studies to support state and local minority business contracting programs. The significance of disparity studies as evidence of discrimination in this context was discussed in a 1989 Supreme Court decision. In City of Richmond v. J.A. Croson Co., the Court held that state and local programs that use race or ethnicity as a factor in apportioning public contracting opportunities are subject to strict scrutiny. This means that the programs must serve a compelling governmental interest and be narrowly tailored—that is, designed to be no broader than necessary—to meet that interest. The Court found that combating racial discrimination is a compelling interest. However, it held that the city had not presented sufficient evidence of discrimination to justify its minority contracting plan. In evaluating the city’s evidence, the Court found, among other things, that the city had inappropriately relied on the disparity between the number of prime contracts awarded to minority firms and the minority population of Richmond. It stated that an appropriate disparity evaluation would compare the percentage of qualified minority contractors with the percentage of dollars actually awarded to minority businesses. While courts have favorably cited disparity studies in some cases, many courts have rejected the studies’ findings, often because of methodological weaknesses, when considering whether a compelling interest exists for state or local minority contracting programs. These decisions provide varying degrees of guidance on the data and methodology that need to be used in disparity studies to produce reliable evidence of discrimination. A 1995 Supreme Court decision had a significant impact on the federal DBE program, as well as other federal programs that use race or ethnicity as factors in decision-making. Adarand Constructors, Inc. v. Pena involved FHWA’s use of a subcontracting compensation clause in direct federal contracting to implement the DBE provision and provisions of the Small Business Act. Adarand Constructors, a nondisadvantaged contractor, initiated the litigation in 1990 after it was denied a subcontract on a federal lands highway project. In 1992, the district court held that the programs at issue were constitutional, and in 1994 the Tenth Circuit Court of Appeals affirmed that decision. In 1995, the Supreme Court set aside the Court of Appeals’ decision and sent the case back to the lower courts, directing them to apply the strict scrutiny standard and thus determine whether the programs were narrowly tailored to further a compelling governmental interest. Applying this standard, the district court held that the subcontracting compensation clause and related statutory provisions were unconstitutional in 1997. This decision was the subject of considerable discussion during the congressional debate over the reauthorization of the DBE program as part of TEA-21, which was enacted in 1998. Responding largely to the Supreme Court’s 1995 decision and congressional debate over the DBE program, USDOT issued regulations in 1999 to ensure that the DBE program is narrowly tailored. In addition, the regulations are designed to ensure nondiscrimination in the award and administration of USDOT-assisted contracts, remove barriers to the participation of DBEs in such contracts, and provide appropriate flexibility to the recipients of federal funds in establishing and providing opportunities to DBEs, among other things. In September 2000, the Tenth Circuit Court of Appeals upheld the constitutionality of the current DBE program because it found that the program served a compelling governmental interest and was narrowly tailored, largely because of structural changes in the program resulting from USDOT’s new regulations. Adarand Constructors requested that the Supreme Court review the Court of Appeals’ decision in November 2000. In March 2001, the Supreme Court agreed to hear the case. USDOT’s 1999 DBE regulations made significant changes to the DBE program. For example, the new regulations overhauled the program’s goal- setting process, including the use of race-neutral measures (e.g., technical assistance) and revised its eligibility requirements. In addition, the new regulations required that states and transit authorities develop bidders lists and unified certification programs, among other things, to make the DBE program more streamlined and efficient. However, 72 percent of the states and transit authorities responding to our survey indicated that the new regulations have made it more difficult for them to administer the program. In addition, over half of the states and transit authorities indicated that the new regulations have made it more difficult for DBEs to apply to the program. The new goal-setting process shifted the focus of the program from achieving the maximum feasible extent of DBE participation in USDOT- assisted contracting to achieving a “level playing field”—that is, the amount of participation DBEs would be expected to achieve in the absence of discrimination. For example, under the prior regulations, states and transit authorities were required to justify goals lower than 10 percent—the amount identified in the statutory DBE provision. The regulations established a direct link between the amount of participation identified in the statute and the goals set by states and transit authorities. In contrast, the new regulations require states and transit authorities to base their DBE participation goals on demonstrable evidence of the number of “ready, willing, and able” DBEs available in local markets relative to the number of all businesses “ready, willing, and able” to participate in USDOT-assisted contracts in such markets—representing the level of DBE participation expected in the absence of discrimination. The regulations outline a two-step process for goal-setting. First, states and transit authorities must establish a base figure that represents the “ready, willing, and able” DBEs in the state or transit authority’s market relative to all “ready, willing, and able” firms in that market (i.e., relative availability of DBEs). To determine the relative availability of DBEs, the new regulations require that states and transit authorities use the best available data and suggest that states and transit authorities use DBE directories and Census Bureau data, bidders lists, disparity studies, or the goal of another recipient. Second, states and transit authorities must adjust their base figure to account for other factors affecting DBEs, such as the capacity of DBEs to perform work in USDOT-assisted contracts and findings from disparity studies. According to our survey results, the most common sources used to set states’ and transit authorities’ fiscal year 2000 participation goals were DBE directories, historical utilization patterns, Census Bureau data, and bidders lists. Under the new goal-setting process, the average DBE participation goal decreased from 14.6 percent in fiscal year 1999 to 13.5 percent in fiscal year 2000. The new regulations also require that states and transit authorities meet the maximum feasible portion of their overall DBE goals using race-neutral measures rather than race-conscious measures. The prior regulations did not require the use of race-neutral measures (e.g., outreach and technical assistance), which are designed to increase contracting opportunities for all small businesses, and do not involve setting specific goals for the use of DBEs on individual contracts. A race-conscious measure is one that is focused solely on assisting DBEs. An example of a race-conscious measure is a contract goal—that is, a DBE participation goal set for a specific contract or project. While quotas are prohibited and set-asides are allowed only in the most extreme cases of discrimination, states and transit authorities must use contract goals to meet any portion of their overall goals they do not expect to meet using race-neutral measures. States and transit authorities must submit their overall DBE participation goals, including the methodology used to set the goals and the projected use of race-neutral and race-conscious measures, to USDOT for approval on an annual basis. The states and transit authorities we surveyed indicated that, on average, they used race-neutral measures to achieve slightly over one- third of their overall DBE participation goals in fiscal year 2000. The new regulations established a personal net worth cap for individuals whose ownership and control of a business determines DBE eligibility. According to USDOT, this new eligibility requirement is designed to ensure that the program is limited to firms owned and controlled by genuinely disadvantaged individuals. Prior to the new regulations, the absence of a limit on personal net worth led to criticism that wealthy individuals could benefit from the program. Under the new regulations, to qualify as economically disadvantaged, individuals who own and control DBEs must have a personal net worth that does not exceed $750,000. USDOT chose the $750,000 cap because it is a well-established standard for the SBA’s programs. According to our survey results, the number of firms that exceeded this limit and became ineligible for the DBE program in fiscal year 2000 ranged from 0 in 14 states and transit authorities to 39 in 1 state. Twenty-two percent of the states and transit authorities we surveyed reported that this information was not available. The new regulations include other changes designed to improve the effectiveness and efficiency of the DBE program. For example, states and transit authorities are now required to create and maintain a bidders list, which is a record of all firms that bid on prime and subcontracts for USDOT-assisted projects. The list must include each firm’s name, its status as a DBE or non-DBE, its years in operation, and its annual gross receipts. The list is intended to count all firms that are participating, or attempting to participate in USDOT-assisted contracts; however the regulations do not specify how often the bidders list must be updated, for example, to ensure that firms no longer available are removed from the list. USDOT believes that the bidders list is a promising tool for states and transit authorities to accurately measure the relative availability of “ready, willing, and able” DBEs when setting their DBE goals. Sixty percent of the states and transit authorities we surveyed reported that they are in the process of developing or implementing their bidders lists while 27 percent indicated that their lists are fully implemented. Eight percent of the states and transit authorities reported that they had not yet started developing their bidders lists. The remaining 5 percent of the states and transit authorities reported that their bidders lists were in some other stage of development. Another change designed to improve the efficiency of the DBE program is the requirement that states and transit authorities develop and participate in a unified certification program (UCP). A UCP provides “one-stop shopping” for DBEs because it makes all DBE certification decisions within a state. All recipients within a state must honor the certification decisions of the UCP. Prior to the new regulations, DBEs often had to obtain separate certifications from multiple recipients within one state. For example, in California there were about 60 certifying agencies throughout the state. Under the new regulations, DBEs will have to be certified by only one agency to participate in the DBE programs administered by all recipients in that state. By March 2002, the state DOT and all transit authorities within each state must sign an agreement establishing the UCP for that state and submit an implementation plan to USDOT for approval. The UCP must be fully operational no later than 18 months after USDOT approves the plan. The majority of the states and transit authorities (72 percent) we surveyed indicated that their UCPs were in some stage of development or implementation while 7 percent indicated that their UCPs were fully implemented; 14 percent reported that they had not yet started to develop their UCPs; and the remaining 6 percent noted that their UCPs were in some other stage of development. Fifty-four percent of the states and transit authorities we surveyed indicated that the new regulations had made it somewhat or much more difficult for DBEs to apply to the DBE program. This view could be attributable to the requirement for additional documentation that DBEs must now submit—specifically, documentation of the personal net worth of the individuals who own and control the firms. Furthermore, when states and transit authorities were asked to identify barriers to firms’ participation in the DBE program, the two most common barriers cited were (1) reluctance to provide personal information and (2) the time required for certification paperwork. Despite these problems, most states and transit authorities (58 percent) indicated that they believe the benefits to firms participating in the DBE program outweigh any costs. In addition, states and transit authorities reported that the new regulations made it more difficult to administer the program. For example, 59 of 82 states and transit authorities we surveyed reported that the new regulations had made it somewhat or much more difficult to administer the DBE program while 9 states and transit authorities indicated that the new regulations had made it easier to administer the program. Fourteen states and transit authorities reported that there was no change or they had no basis to judge. It is not surprising that most states and transit authorities reported that the new regulations made it more difficult to administer the DBE program, since the new regulations required that they completely overhaul their DBE goal-setting process and collect more information from DBEs and non-DBEs. One source of frustration for states and transit authorities appears to be the process for developing and approving the new DBE program plans. The new regulations required that states and transit authorities develop and submit plans for fiscal year 2000 that reflected the requirements and changes under the new regulations to USDOT by August 31, 1999—about 6 months after the effective date of the new regulations. During the approval process, USDOT sometimes sent the DBE plans back to states and transit authorities multiple times for revisions and clarifications. One state noted that even after it had worked closely with USDOT’s local office to develop its plan, USDOT headquarters twice rejected the plan. On average, it took USDOT 8 months to approve the 2000 DBE plans. According to our survey results, one state and seven transit authorities reported that their 2000 DBE plans had yet to be approved. A lack of key information prevents anyone from gaining a clear understanding of firms that participate in the DBE program and how they compare with the rest of the transportation contracting community. For example, we cannot use the information provided by the states and transit authorities we surveyed to calculate the total number of certified DBEs nationwide because of duplication in the states’ and transit authorities’ DBE directories. In addition, almost two-thirds of our survey respondents could not provide information on the annual gross receipts of DBEs or the personal net worth of the individuals who own and control DBEs— information that is used to determine firms’ eligibility for the program but is not reported to USDOT and was not readily available. Furthermore, almost 95 percent of the states and transit authorities we surveyed could not provide information on the annual gross receipts of non-DBEs and none could provide information on the personal net worth of the individuals who own and control non-DBEs. While financial information on DBEs and non-DBEs is lacking, most states and transit authorities could provide some other type of information on DBEs, such as the total number of prime contracts awarded to DBEs—information that is regularly reported to USDOT. These data indicate, among other things, that DBEs received about 7 percent of the prime contracts awarded and 2 percent of the federal dollars awarded for prime contracts in fiscal year 2000. We cannot calculate the total number of certified DBEs nationwide because of duplication in states’ and transit authorities’ DBE directories. States and transit authorities are required to maintain DBE directories that list all the DBEs they have certified. However, DBEs can be certified in multiple locations. For example, a DBE may be certified by Virginia, Maryland, Pennsylvania, and the District of Columbia. Unlike the SBA’s Small and Disadvantaged Business program, which gives a unique identification number to each certified small and disadvantaged business, the DBE regulations do not require states and transit authorities to assign unique identifiers to certified DBEs. As a result, a DBE certified with four states would be listed in four different DBE directories. Because of this duplication, aggregating the number of certified DBEs listed in states’ and transit authorities’ DBE directories would significantly overstate the number of firms certified. While we cannot provide the total number of certified DBEs nationwide, our survey results indicate that the number of certified DBEs per state and transit authority varies greatly. For example, in fiscal year 2000, the number of certified DBEs per state or transit authority ranged from 39 in the state of Maine to 3,350 in the Metropolitan Atlanta Rapid Transit Authority, with an average of 551 per state and transit authority. Although FHWA could provide information on the demographics of DBEs that obtain highway contracts, FTA could not provide comparable data. As a result, the demographics of the entire DBE community are unknown. FHWA’s data on DBE participation indicate that nonminority-women- owned businesses obtain a significant portion of contracts. Prior to 1987, states and transit authorities could not generally count contracts with nonminority-owned businesses toward DBE goals. The Surface Transportation and Uniform Relocation Assistance Act of 1987 included nonminority-women-owned businesses in the statutory definition of socially and economically disadvantaged individuals and thus allowed states and transit authorities to use contracts with both minority- and nonminority-women owned businesses to meet their DBE goals. According to FHWA’s data, nonminority-women-owned businesses have become one of the most competitive groups in the DBE community since 1987. For example, in 1999 (the latest year for which these data are available), nonminority-women-owned businesses accounted for about 48 percent of all federal highway contract dollars awarded to DBEs; minority-owned businesses (those owned by both men and women) combined accounted for about 52 percent. (See fig. 1.) FTA was unable to provide reliable data on the demographics of the DBEs that were awarded federal transit contracts, even though transit authorities must provide this information to FTA on a quarterly basis. According to FTA, it does not centrally compile this information. The majority of the states and transit authorities we surveyed (78 percent) provided sufficient data—that is, the number and value of prime contracts awarded to DBEs and non-DBEs—to determine DBEs’ participation rates in prime contracts. According to the data we obtained from these states and transit authorities, DBEs received about 7 percent of the prime contracts awarded and 2 percent of the federal dollars awarded for prime contracts in fiscal year 2000. In comparison, about 70 percent of the states and transit authorities could not provide both the number and value of subcontracts awarded to DBEs and non-DBEs—information necessary to calculate DBEs’ participation rates in subcontracts. Because DBEs are small businesses and are more likely to compete for subcontracts, which generally require fewer resources (e.g., capital, equipment, and employees) than prime contracts, the lack of subcontracting data prevents anyone from gaining a complete understanding of DBEs’ participation in transportation contracting. The data provided from about one-third of the states and transit authorities indicate that DBEs received about 33 percent of all subcontracts awarded and 26 percent of the federal dollars awarded through subcontracts in fiscal year 2000. However, because this information is based on a small number of states and transit authorities, it may not be representative and therefore should not be generalized to the entire DBE community. The participation rates of DBEs in both prime and subcontracts in fiscal year 2000 indicate that they received a relatively small percentage of federal prime and subcontracts and dollars when compared with non- DBEs. However, we do not know whether the percentage is disproportionately low. Such a determination cannot be made without an accurate measure of the availability of DBEs—that is, the number of DBEs “ready, willing, and able” to participate in prime and subcontracts compared with the number of non-DBEs. The majority of states and transit authorities responding to our survey could not provide information on the annual gross receipts of DBEs. Specifically, 60 percent of these states and transit authorities could not provide information on the annual gross receipts of the DBEs that were awarded prime or subcontracts in fiscal year 2000. Furthermore, 75 percent of the states and transit authorities could not provide information on the annual gross receipts of the DBEs that were not awarded prime or subcontracts in fiscal year 2000. While the annual gross receipts of a DBE are required to determine the firm’s eligibility for the program, this information is not reported to USDOT. The primary reason survey respondents cited for not being able to provide the information was that the information is not in an electronic database and therefore would be difficult and time-consuming to compile. The information that was provided from a limited number of states and transit authorities indicates that most DBEs’ annual gross receipts are below $5 million—well below the current USDOT-specific cap of $17.4 million. Furthermore, 85 percent of the DBEs awarded contracts in fiscal year 2000 had annual gross receipts of less than $5 million. In comparison, 94 percent of the DBEs that did not receive a contract in fiscal year 2000 had annual gross receipts of less than $5 million. However, because this information is based on only a small percentage of the states and transit authorities we surveyed, it may not be representative and therefore should not be generalized to the entire DBE community. (For more detailed information see app. II.) The majority of the states and transit authorities we surveyed could not provide information on the personal net worth of the individuals who own and control DBEs. Specifically, about 65 percent of the states and transit authorities indicated that they could not provide information on the personal net worth of the owners of DBEs that were awarded prime contracts in fiscal year 2000. Sixty-seven percent of the states and transit authorities reported that they could not provide information on the personal net worth of the owners of DBEs that were awarded subcontracts in fiscal year 2000. In addition, 81 percent of the states and transit authorities indicated that they could not provide information on the personal net worth of the owners of DBEs that were not awarded prime contracts in fiscal year 2000. Seventy-eight percent of the states and transit authorities indicated that they could not provide information on the personal net worth of the owners of DBEs that were not awarded subcontracts in fiscal year 2000. Similar to the information on a firm’s annual gross receipts, personal net worth information is required to determine a firm’s eligibility for the program but is not reported to USDOT. Since this eligibility requirement was introduced in the new regulations, states and transit authorities are just starting to collect this information. Over 60 percent of the states and transit authorities indicated that they could not provide this information because it is not electronically maintained and therefore would be difficult and time-consuming to compile and report. The information that was provided from a limited number of states and transit authorities indicates that over half of the DBEs that received prime and subcontracts in fiscal year 2000 had owners whose personal net worth was less than $250,000. Additionally, the data indicate that the personal net worth of the owners of DBEs receiving prime contracts was higher than the personal net worth of the owners of DBEs receiving subcontracts. However, because this information is based on the responses of a small percentage of all states and transit authorities, it may not be representative and therefore should not be generalized to the entire DBE community. (For more detailed information see app. II.) Currently, the financial status of DBEs cannot be compared with that of the transportation contracting community as a whole because most states and transit authorities do not collect or maintain financial information on non- DBEs. For instance, over 90 percent of the states and transit authorities responding to our survey could not provide information on the annual gross receipts of non-DBEs. The primary reason for not being able to report the information was not having it in an electronic database. The new regulations require states and transit authorities to collect information on the annual gross receipts of the non-DBEs that bid on their USDOT-assisted contracts. This information is to be included in the states’ and transit authorities’ bidders lists. According to USDOT, states and transit authorities have expressed concern about their ability to collect this information because non-DBEs have been reluctant to share this information. No survey respondent could provide information on the personal net worth of the owners of non-DBEs that were awarded prime or subcontracts in fiscal year 2000. The majority of the states and transit authorities (61 percent) indicated that they do not currently collect this information or plan to do so in the future. Only 8 percent reported that they plan to collect this information in the future. States and transit authorities are not required to collect information on the personal net worth of the owners of non- DBEs. There are numerous sources that could contain information relevant to whether discrimination limits the ability of DBEs to compete for USDOT- assisted contracts, including studies of lending, bonding, and business practices affecting the formation and competition of minority firms; state and local disparity studies; discrimination complaints; and relevant court cases. We focused our review on court cases involving the federal DBE program since the Supreme Court’s 1995 decision in Adarand Constructors, Inc. v. Pena, transportation-specific disparity studies published between 1996 and 2000; and written complaints of discrimination filed by DBEs with states, transit authorities, and USDOT. We focused on these sources because they are directly related to transportation contracting and the federal DBE program. However, we did not address whether the DBE program satisfies the requirements of strict scrutiny and is therefore constitutional. In our review, we found the following: The courts that have considered the constitutionality of the federal DBE program under the standard articulated in the Supreme Court’s 1995 decision in the Adarand case have concluded that discrimination adversely affects DBEs. All 14 studies we reviewed found that there were disparities between the availability and utilization of minority- and women-owned business enterprises (MBE/WBEs) in transportation contracts. Taken as a whole, these studies suggest that disparities exist. However, none provide reliable evidence of disparity because the limited data used to calculate disparities, compounded by methodological weaknesses, create significant uncertainties about the studies’ findings—that is, they could result in either an overstatement or an understatement of MBE/WBEs’ availability and utilization. USDOT does not systematically track information on the discrimination complaints filed by DBEs—information that could shed light on the existence of discrimination against DBEs. In addition, a number of factors are often cited by agency officials and representatives from both industry and minority associations as limiting DBEs’ ability to compete for contracts. These factors include a lack of working capital and limited access to bonding. However, there was little agreement among the officials we contacted about whether these factors are attributable to discrimination or are barriers that all small businesses face. In order to uphold a program, such as the federal DBE program, that uses race or ethnicity as a criterion for decision-making, a court must find sufficient evidence of discrimination to conclude that the program serves a compelling governmental interest. Therefore, cases considering the constitutionality of the federal DBE program can indicate whether discrimination adversely affects DBEs’ participation in transportation contracting. The courts that have addressed the DBE program under the standard articulated by the Supreme Court’s 1995 decision in Adarand Constructors, Inc. v. Pena (discussed on page 13 of this report) have found that the evidence of discrimination presented was sufficient for them to conclude that the program serves a compelling governmental interest, specifically, remedying the effects of discrimination against DBEs. Most recently, in its review of the DBE program in Adarand, the Tenth Circuit Court of Appeals concluded that discrimination adversely affects both the formation of qualified minority subcontracting businesses and their ability to successfully compete for highway construction subcontracts. On the basis of the evidence presented, the court found that discrimination by prime contractors, unions, and lenders impedes the formation of qualified minority businesses in the subcontracting market nationwide. The court also acknowledged the causal link between the availability of capital and the ability to implement public works construction projects and found that the studies cited by the government strongly supported a finding of discrimination in lending. For example, it cited a survey of 407 business owners in the Denver area that found significant differences in the loan denial rate for white, African-American, and Hispanic business owners, even after controlling for other factors like size and net worth. The court also addressed barriers to competition by existing minority businesses. Citing congressional hearings and statistical evidence, among other things, the court found that minority businesses are often excluded by business networks of prime and subcontractors from opportunities to bid on construction projects. The court also discussed bonding requirements, finding another barrier to competition. For example, it cited a Louisiana study finding that minority firms were nearly twice as likely to be rejected for bonding; three times more likely to be rejected for bonding in amounts over $1 million; and, on average, charged higher rates for the same bonding policies than white firms with the same experience. Similarly, the court accepted evidence of suppliers’ withholding price discounts from minority subcontractors, thus driving up their bids. In light of this evidence, the court rejected Adarand Constructors’ argument that minority businesses face the same problems as all new businesses, regardless of the race of the owners. Finally, the court considered disparity studies conducted by state and local governments. In doing so, the court accepted the government’s finding, based on a review of disparity studies, that minority construction subcontracting firms received 87 cents for every dollar that they would be expected to receive given their availability. The court also acknowledged the potential for weaknesses in the data and methodology used in disparity studies and stated that particular evidence undermining the reliability of specific studies would be relevant to a determination regarding discrimination. However, it noted that Adarand Constructors had not provided it with evidence undermining the studies’ reliability. Furthermore, the court found that Adarand Constructors had failed to introduce credible, specific evidence to refute the government’s showing of a compelling interest. As a result, it held that there was sufficient evidence of discrimination to justify the use of racial and ethnic criteria in transportation contracting. Fourteen recent, transportation-specific disparity studies concluded that disparities existed between the utilization of MBE/WBEs in transportation contracts and availability of these firms in the marketplace. Numerous state and local governments have used disparity studies to support their minority contracting programs and in setting their federal DBE goals. For example, about 30 percent of the states and transit authorities we surveyed reported that they used a disparity study to help set their fiscal year 2000 DBE participation goals. However, our review of the 14 disparity studies found that the limited data used to calculate disparities, compounded by methodological weaknesses, create uncertainties about the studies’ findings. Rather than discuss the limitations of each study specifically, we have chosen to discuss some of the more common problems we found. While not all studies suffered from every problem, each suffered from enough problems to make its findings questionable. We recognize that there are difficulties inherent in conducting disparity studies and that such limitations are common to social science research; however, the disparity studies we reviewed did not sufficiently address such problems or disclose their limitations. It is not clear what conclusions a court would draw about the studies’ findings. The studies we reviewed relied on a disparity ratio—that is, a comparison of the availability of MBE/WBEs to their utilization in contracts—as an indicator of discrimination. However, the data necessary to properly calculate such ratios—complete and accurate lists of MBE/WBEs’ availability and utilization—are often lacking. An availability list should include all qualified, willing, and able firms in the relevant market area, grouped by industry subspecialties and by MBE/WBE or non-MBE/WBE status. A utilization list should include all firms in the relevant market area that were awarded prime and subcontracts, grouped by industry subspecialty and MBE/WBE or non-MBE/WBE status. Because these data are often lacking, some proxies (i.e., substitute information) have been used to calculate disparity ratios. To develop proxies of availability, the disparity studies we reviewed used sources including Census Bureau data, directories or other listings of firms, prequalification lists, and/or bidders lists. These could be useful data sources. However, all of these data sources have shortcomings, whether used separately or in combination, that must be taken into account when using them as proxies for availability. Such shortcomings would result in availability lists that could either under- or overstate the number of firms available for transportation contracting. The limitations of using these data sources as proxies for availability include the following: Census Bureau data cannot adequately indicate whether a firm is truly available, that is, whether it has the qualifications, willingness, or ability to complete contracts. However, in using Census Bureau data, the studies depicted all operational firms as available for contracting. Some studies attempted to account for the qualifications of firms by including only firms in the relevant two-digit Standard Industry Classification (SIC) codes in their availability lists. Using a finer degree of distinction (e.g., classification by the four-digit SIC code level) would help to ensure that firms are similar enough for comparison. For example, some studies used the two-digit SIC code for heavy construction, a category that includes firms as diverse as general contractors for highway construction and general contractors for radio tower construction. Directories and other listings do not contain information on firms’ qualifications, willingness, or abilities. This could result in an overstatement of how many firms are available for transportation contracting. In addition, some of the data obtained from directories and listings were inaccurate. For example, some of the disparity studies we reviewed indicated that as many as 16 percent of the firms included in the directories and listings were unreachable because of such problems as disconnected telephones, wrong telephone numbers, incorrect addresses, or dissolution of the firms. Prequalification and bidders lists may be better sources of availability than Census Bureau data or directories because they better approximate firms’ qualifications, willingness, and ability to compete for contracts. However, the mechanisms used by states and transit authorities to compile them may limit their reliability. In the studies we reviewed, we found four problems. First, some studies we reviewed used bidders and prequalification lists that were updated infrequently or had no mechanism to ensure that firms no longer available were removed from the list. For example, one study used a list that never removed firms, increasing the risk that it contained firms no longer in business in the relevant market area. Second, some studies we reviewed used bidders or prequalification lists that were maintained for multiple city agencies, ranging from school districts to port authorities. Businesses qualified to perform school district work may not be qualified to perform port authority work. Third, the lists grouped all potential firms together, failing to take into account their industry subspecialty and capacity. Because of these problems, availability lists based on this information would overstate the number of firms that were qualified, willing, and able to perform transportation contracts. Finally, prequalification and bidders lists could under represent capable firms. Firms may refrain from participating because of perceived or actual barriers. For example, one study we reviewed surveyed firms and found that only 22 percent of those firms that expressed an interest in contracting with the transit agency had actually attempted to obtain such work in the past. The disparity studies we reviewed made few efforts to mitigate the problems with using these data sources as proxies for availability, nor did they disclose the limitations of their use. For example, the disparity studies did not sufficiently account for the lack of information on firms’ qualifications when the availability lists were developed. One aspect of a firm’s qualifications is its capability to handle transportation contracting. Some studies used average yearly revenue as a proxy for capability. However, revenue does not adequately explain the differences in firms’ capability. For example, two firms could have similar yearly revenues, but one firm might have performed 100 small contracts throughout the year because it did not have the capacity to perform large contracts, whereas the second firm might have performed two very large contracts. If revenue were used as a proxy for capability, these two firms would be considered equivalent. In addition to determining the availability of firms, disparity studies must measure the utilization of MBE/WBEs to determine if disparities in contracting exist. This requires an analysis of both the number and dollar amount of contracts awarded to MBE/WBEs and non-MBE/WBEs. Such measurement is difficult because some states and transit authorities have incomplete records of the prime and subcontracts they have awarded. For example, several studies we reviewed did not include any analyses of subcontracting and therefore may understate the utilization of firms. Because MBE/WBEs are more likely to be awarded subcontracts than prime contracts, MBE/WBEs in particular may appear underutilized when the focus remains on prime contractor data. Furthermore, although some studies did include calculations based on the number of contracts, all but two based their determination of disparities on only the dollar amounts of contracts. Because MBE/WBEs tend to be smaller than non-MBE/WBEs, they are often unable to perform larger contracts. Therefore, it would appear that they were awarded a disproportionately smaller amount of contract dollars. A more complete indicator of utilization would consider both the dollar amount and the number of contracts awarded or to control for differences in contract dollar amounts. In March 2001, USDOT advised states and transit authorities that disparity studies used to set their DBE participation goals should be reliable. While pointing out that all or part of a disparity study pertaining to a local market area could provide a rich source of information for the goal-setting process, USDOT did not explain how states and transit authorities could evaluate the reliability of such studies. USDOT’s guidance does not, for instance, caution against using studies that contain the types of data and methodological problems that we identified above. Without explicit guidance on what makes a disparity study reliable, states and transit authorities risk using studies that may not provide accurate information in setting their DBE goals. USDOT receives written complaints of discrimination from DBEs but does not systematically track or analyze information on these complaints. As a result, this information is not readily available to shed light on the absence or presence of discrimination against DBEs. USDOT could not provide the total number of written complaints filed by DBEs for two reasons. First, while USDOT’s Office of Civil Rights (DOCR) records the complaints and assigns identification numbers before routing them to FTA or FHWA for investigation, DOCR’s records may not include complaints filed directly with those agencies. Second, DBEs may file complaints of discrimination under the DBE regulations or regulations issued under title VI of the Civil Rights Act of 1964; however, DOCR does not record which title VI complaints are filed by DBEs. Similarly, FTA does not separately track the title VI complaints filed by DBEs. Because of these two problems, information provided by USDOT would likely understate the number of complaints of discrimination filed by DBEs. In addition, USDOT could not provide the total number of investigations launched as a result of the written discrimination complaints filed by DBEs or information on the outcomes of these investigations. In order to determine whether the discrimination complaints filed by DBEs have merit, the number of investigations launched and the outcomes of the investigations are critical pieces of information. USDOT officials stated they do not track the number of investigations of written discrimination complaints filed by DBEs or the number of times discrimination was found through their investigations. To gather this type of information, USDOT officials stated one would need to go through each case file individually— nearly 100 over the last several years, not including title VI complaints. We also asked the states and transit authorities we surveyed about written discrimination complaints filed by DBEs in fiscal years 1999 and 2000. Eighty-one percent of the respondents reported that they had not received any written discrimination complaints filed by DBEs during this period. Nineteen percent of the states and transit authorities reported that they had received a total of 31 written discrimination complaints filed by DBEs in 1999 and 2000. Of the 31 complaints filed, 29 had been investigated. Four of these investigations resulted in findings of discrimination. While the number of complaints filed by DBEs with states and transit authorities may seem low, it is important to note that DBEs that believe they have been the victims of discrimination have several options and may have elected to pursue action elsewhere. For example, a DBE could file a complaint with the responsible state or transit authority, USDOT, and/or the courts. In addition, USDOT officials stated that the number of written discrimination complaints filed (at any level) probably understates the level of discrimination for two reasons. Specifically, DBEs may choose not to file complaints because they believe the process is too time-consuming or burdensome or because they fear retribution (i.e., they would be denied future work). Other factors may also limit the ability of DBEs to compete for USDOT- assisted contracts. However, there was little agreement among the officials we spoke with as to whether these factors are due to discrimination or the nature of small businesses. According to our survey results, 80 percent of the states and transit authorities responding had not conducted any type of analysis on this subject. In addition, neither USDOT, nor SBA, nor the industry groups we contacted had conducted any type of study on factors that may limit the ability of DBEs to obtain contracts. The industry officials we spoke with often cited such factors as contract bundling; limited access to bonding, working capital, and credit; and prequalification requirements. The most common factors cited as limiting DBEs’ ability to compete for contracts are a lack of working capital and limited access to credit and bonding. For example, according to an association representing small minority-owned businesses, DBEs frequently lack the capital needed to finance jobs without drawing on credit and are denied credit because they lack sufficient cash flow. Since these factors are widely perceived as limiting the ability of DBEs to compete for contracts, USDOT has established a number of services, including short-term lending and bonding assistance, to help overcome these barriers. Another factor often cited as a barrier to DBEs’ ability to compete for contracts is contract bundling. Contract bundling is the consolidation of two or more procurement requirements previously provided or performed under separate, smaller contracts into a solicitation of offers for a single contract. The resulting contract is likely to be unsuitable for award to small businesses, such as DBEs, because of (1) the diversity, size, or specialized nature of the elements of the performance specified; (2) the aggregate dollar value of the anticipated award; (3) the geographic dispersion of contract performance sites; or (4) any combination of these three factors. USDOT officials stated that they believe contract bundling is one of the largest barriers for DBEs in competing for transportation contracts. GAO recently reported that there is limited government-wide data on the extent of contract bundling and its effect on small businesses. Prequalification requirements are also cited as a barrier for DBEs. Most states require that firms competing for prime contracts be prequalified, meaning they must prove to the state that they are capable of performing contracts. For example, firms must show that they have an adequate line of credit and are bonded. According to USDOT officials, these requirements can hurt DBEs because the firms may not have the working capital and access to credit required for prequalification. Several measures could be used to help determine the impact of the DBE program. TEA-21 directed us to analyze: the impact of the DBE program on costs, including the costs of the impact of the DBE program on competition and the creation of jobs; the impact of discontinuing federal or non-federal DBE programs on DBEs. USDOT, states and transit authorities incur costs in implementing and administering the DBE program. USDOT estimates that it incurred about $6 million in costs (including salaries and training expenses) to administer the DBE program for highways and transit authorities in fiscal year 2000. Sixty-nine percent of the states and transit authorities responding to our survey estimated that they incurred a total of about $44 million in costs, including certification costs, to administer the DBE program in fiscal year 2000. The costs incurred ranged from a high of $4.5 million to a low of about $10,000. In addition, 13 states and transit authorities incurred a total of about $250,000 in litigation costs in fiscal year 2000 that they attributed to the federal DBE program. Although it has been asserted that the DBE program increases the costs of contracting (referred to as additional construction costs), 99 percent of the states and transit authorities we surveyed had not conducted a study or analysis to determine whether the DBE program has an impact on their contract costs. USDOT has also not conducted such an analysis. Almost none of the states and transit authorities responding to our survey have analyzed the impact of the DBE program on competition and the creation of jobs. Nor has USDOT conducted this type of analysis. According to USDOT officials and representatives from transportation associations, the DBE program does not create jobs; rather it shifts jobs to individuals who might not receive the jobs otherwise. As USDOT officials noted, USDOT-assisted contracts will be let regardless of the DBE program, and the program encourages greater racial and gender diversity within transportation contracting. However, there is less agreement about the effects of the program on competition. Officials from USDOT and a minority business group stated that the DBE program does not hurt competition, noting that the DBE program does not use quotas and that DBEs must compete with non-DBEs to receive USDOT-assisted contracts. Moreover, these officials commented that the DBE program enhances competition because it encourages greater participation by more firms. In contrast, representatives from transportation associations believe that the DBE program stifles competition in certain subcontracting areas (e.g., guardrail work) where there is an overconcentration of DBEs. Because of this overconcentration of DBEs, according to the transportation associations, non-DBEs do not have an opportunity to work in those fields. Although USDOT does not have data indicating that overconcentration is a serious, nationwide problem, the new regulations authorized states and transit authorities to remedy situations in which an overconcentration of DBEs is limiting non-DBEs’ ability to compete for contracts, such as varying the use of contract goals in these areas. Limited data prevent a thorough assessment of the impact of suspending or repealing (discontinuing) federal or nonfederal DBE programs on DBEs’ participation in transportation contracting. As evidence that the DBE program is needed, supporters often cite statistics on DBEs’ participation in transportation contracting after minority- and women-owned business contracting programs are discontinued. An example used during the congressional debate preceding the passage of TEA-21 was the effect of discontinuing the state of Michigan’s minority business contracting program in 1989. According to evidence cited during the debate, within 9 months of the suspension, the proportion of state highway dollars awarded to minority-owned businesses had dropped from 5 percent to 0 percent, while the proportion of state highway dollars awarded to women-owned businesses had declined from about 10 percent to 1 percent. Moreover, these new low rates of participation in state transportation contracting by minority-and women-owned businesses were contrasted with these firms’ participation rates in USDOT-assisted contracts, which were significantly higher. USDOT has not conducted studies or analyses measuring the impact of discontinuing federal or nonfederal DBE programs. Most states and transit authorities that participated in federal DBE programs or nonfederal minority business enterprise and women business enterprise (MBE/WBE) contracting programs that were discontinued could not provide data that would allow us to thoroughly evaluate the impact of that action. For example, we identified one state and one transit authority that had discontinued their federal DBE programs as a result of a court order. However, only the state could provide participation data that would allow us to evaluate the impact of discontinuing the federal DBE program. We also identified 10 states and transit authorities that had participated in nonfederal MBE/WBE programs that were discontinued prior to 2000. Only one state could provide sufficient data for us to evaluate the impact of the action. Conversely, officials from six states and transit authorities, including Michigan, told us that participation data for minorities and women in state transportation contracting for the years immediately before and after the discontinuance of their nonfederal MBE/WBE programs were not available. In addition, few of the states and transit authorities could provide equivalent data on non-MBE/WBEs. This information is important to determine whether changes in MBE/WBEs’ participation rates in state transportation contracting were similar to the changes in the participation rates of non-MBE/WBEs or unique to the MBE/WBE community. Consequently, we could not evaluate the impact of discontinuing these programs. Two states—Minnesota and Louisiana—were able to provide sufficient data to assess the impact of discontinuing a federal and nonfederal program, respectively. We measured DBEs’ and MBE/WBEs’ participation using two indicators—(1) the number of transportation contracts awarded and (2) the dollar amounts awarded through those contracts. The participation data from these states suggest that discontinuing these programs had a negative impact on DBEs’ and MBE/WBEs’ participation in transportation contracting. For example, in Minnesota, DBEs’ participation in federal transportation contracting remained relatively stable from 1995 to 1998. However, after the discontinuance of Minnesota’s federal DBE program in 1998, DBEs’ participation in federal transportation contracting dramatically declined. (See fig. 2.) Similarly, the data provided by Louisiana indicate that MBE/WBEs’ participation in transportation contracting declined after Louisiana’s nonfederal program was discontinued. As shown in figure 3, MBE/WBEs’ participation in state transportation contracting increased from 1992 to 1995. In 1996, the year the nonfederal program was discontinued, the participation rate of MBE/WBEs in state transportation contracting dropped and continued to decline over the next 4 years. An official from Louisiana attributed the decline in MBE/WBEs’ participation in state transportation contracting to the removal of affirmative action requirements on state funded projects and the realization by contractors that efforts to include MBE/WBEs were no longer necessary. The Congress identified and directed us to collect information that would shed light on the impact of the DBE program across the nation—including information on who benefits from the program, the financial status of the DBE community compared with that of the non-DBE community, and degree to which DBEs participate in transportation contracting. However, much of this information is not readily available from USDOT, states and transit authorities, and industry groups. Without this information it is impossible to define the universe of DBEs, compare them with the transportation contracting community as a whole or gain a clear understanding of the overall impact of the DBE program. In some cases, USDOT has mechanisms in place, such as its quarterly reporting requirement, that could be used to collect additional information, including the annual gross receipts of DBEs and non-DBEs as well as non-DBEs’ participation in subcontracting. In other cases, new mechanisms to collect or process the information are needed such as a method for determining the total number of certified DBEs nationwide. USDOT could also do more to analyze the information that is currently collected. By not systematically tracking and evaluating the total number of discrimination complaints filed by DBEs, the number of investigations launched, and the outcomes of the investigations, USDOT misses an opportunity to obtain information that could be used to identify trends and problem areas that may need attention. USDOT could also identify ways to improve the effectiveness of its own policies and guidance to states and transit authorities, and ultimately DBEs, by collecting and analyzing the information that the Congress has identified. Such information would help USDOT contribute to an informed congressional debate on the impact of the DBE program in connection with its reauthorization in 2003 and more effectively administer the program. USDOT could also look for ways to provide more guidance to the states and transit authorities that are implementing the DBE program. Specifically, USDOT’s new regulations put a mechanism in place for setting DBE goals and identified Census Bureau data and DBE directories, bidders lists, and disparity studies as data sources that states and transit authorities could use in setting these goals. However, in our review of disparity studies, we identified problems with these data sources that should be avoided or mitigated to help ensure that goals set by states and transit authorities are based on the level of DBE participation expected in the absence of discrimination—specifically, a level consistent with the availability of ready, willing, and able DBEs in the relevant market. USDOT provided examples of how to set DBE goals in its regulations, but has issued minimal guidance to the states and transit authorities on how to avoid the types of data and methodological problems we identified and ensure that the data sources used to set goals are as reliable as possible. USDOT could provide additional guidance to help states and transit authorities carry out the program. To assist USDOT in administering the DBE program and to help inform the Congress about the impact of the program, we recommend that the Secretary of Transportation take the following steps: Develop and implement a method for states and transit authorities to assign unique identification numbers to DBEs so that the total number of DBEs certified nationwide can be determined. Amend the quarterly reporting requirements for states and transit authorities to include information on the annual gross receipts of DBEs and non-DBEs and the number and dollar amount of the subcontracts awarded to non-DBEs. This information could be used to gain a more complete understanding of the participation rate of DBEs in subcontracting and of their financial status compared with other transportation contracting firms. Furthermore, USDOT should compile, analyze, and publish (in aggregate format) the information collected in the quarterly reports. Compile and analyze data on written complaints of discrimination filed by DBEs with USDOT in order to (1) determine trends in the number and types of complaints filed and (2) identify problem areas that require action. Periodically compile information on DBEs, through a survey or other appropriate mechanism, to better understand the types of programs needed to assist these firms. To better assist states and transit authorities in implementing the DBE program and help ensure that DBE participation goals reflect the availability of ready, willing, and able DBEs in the relevant market, we recommend that the Secretary of Transportation provide specific guidance to states and transit authorities on strategies to mitigate the potential problems associated with using Census Bureau data and DBE directories, disparity studies, and bidders lists to set their DBE goals. We recognize that the implementation of these recommendations may result in some additional costs for USDOT, states, and transit authorities. However, given existing data collection requirements and the benefits associated with these recommendations, we believe such costs are warranted. We provided USDOT with a draft of this report for review and comment. On May 1, 2001, the Assistant Secretary for Administration responded for USDOT. USDOT did not comment on our recommendations. Instead, USDOT offered comments to clarify the role of disparity studies in the DBE program, the evidentiary value of disparity studies, the need for states and transit authorities to use the best available data in DBE goal-setting, and the status of DBE and non-DBE participation data. During recent meetings and discussions, USDOT provided similar comments, which we considered and incorporated where appropriate. Therefore, we believe that the majority of USDOT’s comments are already reflected in the report. USDOT’s comments and our responses are located in Appendix IV. We conducted our review from August 2000 through April 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to congressional committees with responsibilities for the activities discussed in this report; the Honorable Norman Y. Mineta, Secretary of Transportation; the Honorable Mitchell Daniels, Director of the Office of Management and Budget; Hiram Walker, Acting Deputy Administrator, Federal Transit Administration; and Vincent F. Schimmoller, Deputy Executive Director, Federal Highway Administration. We will make copies available to others upon request. If you or your staff have any questions about this report, please call me at (202) 512-2834. Key contributors to this report are listed in appendix V. The following is the text of the section of the Transportation Equity Act for the 21st Century (1998) requiring GAO’s study. (K) the impact of the requirement of paragraph (1), and any program carried out to comply with paragraph (1), on competition and the creation of jobs, including the creation of jobs for socially and economically disadvantaged individuals. GAO’s Survey Instrument and Overall Results Survey of State DOTs and U.S. Department of Transportation Disadvantaged Business Enterprise Programs U.S. General Accounting Office 441 G Street, NW Washington, D.C. 20548-0001 The Transportation Equity Act for the 21st Century required the U.S. General Accounting Office (GAO) to examine the Department of Transportation’s Disadvantaged Business Enterprise (DBE) program. We would prefer to have data based on the federal fiscal year (FY) (October 1 to September 30). Please indicate the way the data from your agency will be provided: (N=83) As part of our study of the DBE program, we are surveying Departments of Transportation (DOTs) in each of the 50 states, the District of Columbia, and Puerto Rico and selected Transit Authorities. We recognize that there are great demands on your time; however, your cooperation is critical to our ability to provide current and complete information to the Congress. This questionnaire asks for information about the federal DBE program that your agency administers and the firms in the program. For definitions of terms used throughout this questionnaire, please see U.S. DOT’s regulations on the DBE program. Please complete and mail your questionnaire within three weeks of receipt. If the enclosed envelope is misplaced, the questionnaire should be returned to: Nikki Clowers U.S. General Accounting Office 441 G Street, NW, Mail Room 6K17R Washington, D.C. 20548 If you have any questions, please contact Nikki Clowers at [email protected] or (202) 512-4010. 1.What are your total DBE 3.What race-neutral programs did your participation goals for FY 1999 – FY 2001, and for FY 2000 and FY 2001, your goals to be achieved through race-conscious and race-neutral programs? (Please indicate the percentage to be achieved through each type of program and the total percentages.) 14.6% (avg.) (N=67) 8.6% (avg.) (N=70) 5.4% (avg.) (N=73) 13.5% (avg.) (N=80) 8.2% (avg.) (N=69) 5.2% (avg.) (N=73) 13.1% (avg.) (N=78) 2.Which of the following sources were 4.How many certified DBE firms were used to set your FY 2000 DBE participation goal? (Check all that apply.) N=82 available (i.e., in your database or directory) to your agency in FY 1999 and FY 2000? (Enter number. If none, enter 0.) FY 1999: 559.4 (avg.) (N=78) FY 2000: 551.5 (avg.) (N=81) 6.1% DBE goal(s) from another 26.8% Other Please specify: _____________________________ _____________________________ _____________________________ 5.Please indicate the number of DBE firms that were awarded prime contracts through your agency, the number of prime contracts that were awarded to these firms, and the total value of these prime contracts for FY 1999 and FY 2000. (Enter numbers and dollar amounts. If none, enter 0.) Total value of prime contracts awarded to these DBE firms # of Firms: 19.1 (avg.) # of Contracts: 40.4 (avg.) $ 8,203,394 (avg.) (N=70) (N=79) (N=78) # of Firms: 18.4 (avg.) # of Contracts: 37.4 (avg.) $ 6,585,338 (avg.) (N=71) (N=77) (N=76) agency, the number of subcontracts that were awarded to these firms, and the total value of these subcontracts for FY 1999 and FY 2000. (Enter numbers and dollar amounts. If none, enter 0.) Total value of subcontracts awarded to these DBE firms # of Firms: 66.9 (avg.) # of Subcontracts: 254.5 (avg.) $ 27,006,958 (avg.) (N=72) N=79) (N=79) # of Firms: 61.6 (avg.) # of Subcontracts: 235.1 (avg.) $ 24,427,942 (avg.) (N=71) (N=79) (N=79) provided information for Part 7b. Two agencies gave estimates for Part 7a. One agency did not answer question. 7a.What were the annual gross receipts of the DBE firms that were awarded prime and/or subcontracts through your agency in FY 1999? Use the DBE firms’ most recent certification or recertification to determine annual gross receipts. If you are not able to provide this information, please answer Question 7b. (Enter the number of firms for each category of annual gross receipts. If none, enter 0.) # of Firms: 17.5 (avg.) # of Firms: 16.1 (avg.) # of Firms: 4.8 (avg.) # of Firms: 1.2 (avg.) (N=29) (N=30) (N=30) (N=29) the above information, please indicate the reason(s). (Check all that apply.) 15.4% Information is not collected. 15.4% Information is being collected, but is not yet available. 11.5% Our agency relies on the certification of other jurisdictions. 7.7% Information is verified during certification and recertification, but it is not retained. 61.5% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 19.2% Other. Please explain: (60%) provided information for Part 8b. Two agencies gave estimates for Part 8a. 8a. What were the annual gross receipts of the DBE firms that were awarded prime and/or subcontracts through your agency in FY 2000? Use the DBE firms’ most recent certification or recertification to determine annual gross receipts. If you are not able to provide this information, please answer Question 8b. (Enter the number of firms for each category of annual gross receipts. If none, enter 0.) Annual Gross Receipts of DBE Firms That Were Awarded Prime Contracts and/or Subcontracts in FY 2000 $1,000,000 to $5,000,000 $5,000,001 to $10,000,000 $10,000,001 to $16,600,000 # of Firms: 15.6 (avg.) # of Firms: 14.7 (avg.) # of Firms: 4.3 (avg.) # of Firms: 1.2 (avg.) (N=33) (N=33) (N=33) (N=31) the above information, please indicate the reason(s). (Check all that apply.) 12.0% Information is not collected. 24.0% Information is being collected, but is not yet available. 12.0% Our agency relies on the certification of other jurisdictions. 6.0% Information is verified during certification and recertification, but it is not retained. 64.0% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 12.0% Other. Please explain: (76%) provided information for Part 9b. One agency did not answer question. 9a.What were the annual gross receipts of the DBE firms that were not awarded prime or subcontracts through your agency in FY 1999? Use the DBE firms’ most recent certification or recertification to determine annual gross receipts. If you are not able to provide this information, please answer Question 9b. (Enter the number of firms for each category of annual gross receipts. If none, enter 0.) Annual Gross Receipts of DBE Firms That Were Not Awarded Prime Contracts or Subcontracts in FY 1999 $1,000,000 to $5,000,000 $5,000,001 to $10,000,000 $10,000,001 to $16,600,000 # of Firms: 122.2 (avg.) # of Firms: 37.2 (avg.) # of Firms: 6.3 (avg.) # of Firms: 2.5 (avg.) (N=19) (N=19) (N=19) (N=19) the above information, please indicate the reason(s). (Check all that apply.) 22.2% Information is not collected. 14.3% Information is being collected, but is not yet available. 9.5% Our agency relies on the certification of other jurisdictions. 4.8% Information is verified during certification and recertification, but it is not retained. 54.0% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 15.9% Other. Please explain: (75%) provided information for Part 10b. One agency gave estimates for Part 10a. 10a. What were the annual gross receipts of the DBE firms that were not awarded prime or subcontracts through your agency in FY 2000? Use the DBE firms’ most recent certification or recertification to determine annual gross receipts. If you are not able to provide this information, please answer Question 10b. (Enter the number of firms for each category of annual gross receipts. If none, enter 0.) Annual Gross Receipts of DBE Firms That Were Not Awarded Prime Contracts or Subcontracts in FY 2000 $1,000,000 to $5,000,000 $5,000,001 to $10,000,000 $10,000,001 to $16,600,000 # of Firms: 102.3 (avg.) # of Firms: 33.2 (avg.) # of Firms: 5.9 (avg.) # of Firms: 2.5 (avg.) (N=21) (N=21) (N=20) (N=20) 21.0% Information is not collected. 17.4% Information is being collected, but is not yet available. 9.7% Our agency relies on the certification of other jurisdictions. 4.8% Information is verified during certification and recertification, but it is not retained. 54.8% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 12.9% Other. Please explain: agencies (65%) provided information for Part 11b. One agency did not answer question. 11a. What was the personal net worth of individuals who own and control DBE firms that were awarded prime contracts through your agency in FY 2000? Use the DBE firms’ most recent certification or recertification to determine personal net worth. We are aware that you may not have personal net worth information for all DBE firms; however, please provide the information that is available. If you cannot provide any personal net worth information, please answer Question 11b. (Enter the number of firms for each category of personal net worth. If none, enter 0.) Personal Net Worth of Individuals Who Own and Control DBE Firms That Were Awarded Prime Contracts in FY 2000 $100,000 to $250,000 $250,001 to $500,000 $500,001 to $750,000 # of Firms: 1.4 (avg.) # of Firms: 1.9 (avg.) # of Firms: 1.8 (avg.) # of Firms: 1.0 (avg.) (N=24) (N=24) (N=25) (N=24) 5.6% Information is not collected. 16.7% Information is being collected, but is not yet available. 13.0% Our agency relies on the certification of other jurisdictions. 9.3% Information is verified during certification and recertification, but it is not retained. 66.7% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 9.3% Other. Please explain: agencies (67%) provided information for Part 12b. 12a. What was the personal net worth of individuals who own and control DBE firms that were awarded subcontracts through your agency in FY 2000? Use the DBE firms’ most recent certification or recertification to determine personal net worth. We are aware that you may not have personal net worth information for all DBE firms; however, please provide the information that is available. If you cannot provide any personal net worth information, please answer Question 12b. (Enter the number of firms for each category of personal net worth. If none, enter 0.) Personal Net Worth of Individuals Who Own and Control DBE Firms That Were Awarded Subcontracts in FY 2000 $100,000 to $250,000 $250,001 to $500,000 $500,001 to $750,000 # of Firms: 11.9 (avg.) # of Firms: 8.8 (avg.) # of Firms: 6.1(avg.) # of Firms: 3.7 (avg.) (N=27) (N=26) (N=27) (N=26) 5.4% Information is not collected. 17.9% Information is being collected, but is not yet available. 12.5% Our agency relies on the certification of other jurisdictions. 8.9% Information is verified during certification and recertification, but it is not retained. 67.9% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 7.1% Other. Please explain: (81%) provided information for Part 13b. One agency did not answer question 13. 13a. What was the personal net worth of individuals who own and control DBE firms that were not awarded prime contracts through your agency in FY 2000? Use the DBE firms’ most recent certification or recertification to determine personal net worth. We are aware that you may not have personal net worth information for all DBE firms; however, please provide the information that is available. If you cannot provide any personal net worth information, please answer Question 13b. (Enter the number of firms for each category of personal net worth. If none, enter 0.) Personal Net Worth of Individuals Who Own and Control DBE Firms That Were Not Awarded Prime Contracts in FY 2000 $100,000 to $250,000 $250,001 to $500,000 $500,001 to $750,000 # of Firms: 60.2 (avg.) # of Firms: 35.6 (avg.) # of Firms: 26.0 (avg.) # of Firms: 12.9 (avg.) (N=14) (N=14) (N=15) (N=14) 10.5% Information is not collected. 16.4% Information is being collected, but is not yet available. 10.5% Our agency relies on the certification of other jurisdictions. 7.5% Information is verified during certification and recertification, but it is not retained. 64.2% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 6.0% Other. Please explain: (78%) provided information for Part 14b. 14a. What was the personal net worth of individuals who own and control DBE firms that were not awarded subcontracts through your agency in FY 2000? Use the DBE firms’ most recent certification or recertification to determine personal net worth. We are aware that you may not have personal net worth information for all DBE firms; however, please provide the information that is available. If you cannot provide any personal net worth information, please answer Question 14b. (Enter the number of firms for each category of personal net worth. If none, enter 0.) Personal Net Worth of Individuals Who Own and Control DBE Firms That Were Not Awarded Subcontracts in FY 2000 $100,000 to $250,000 $250,001 to $500,000 $500,001 to $750,000 # of Firms: 46.4 (avg.) # of Firms: 34.2 (avg.) # of Firms: 21.8 (avg.) # of Firms: 13.8 (avg.) (N=18) (N=17) (N=17) (N=17) 12.3% Information is not collected. 13.9% Information is being collected, but is not yet available. 10.8% Our agency relies on the certification of other jurisdictions. 7.7% Information is verified during certification and recertification, but it is not retained. 64.6% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 6.2% Other. Please explain: 15.How many DBE firms became ineligible for the DBE program in FY 1999 and FY 2000 because they exceeded the program’s statutory cap on annual gross receipts ($16.6 million)? (Enter number. If none, enter 0.) N=83 FY 1999: 0.5 (avg.) (N=60) Check here if information is not available. FY 2000: 0.3 (avg.) (N=60) Check here if information is not available. 16.How many DBE firms became ineligible for the DBE program in FY 1999 and FY 2000 because they exceeded applicable SBA small business size standards? (Enter number. If none, enter 0.) N=83 FY 1999: 1.1 (avg.) (N=62) Check here if information is not available. FY 2000: 1.7 (avg.) (N=63) Check here if information is not available. 17.How many DBE firms became ineligible for the DBE program in FY 2000 because individuals who own or control the firm exceeded the program’s cap on personal net worth ($750,000)? (Enter number. If none, enter 0.) N=83 FY 2000: 6.1 (avg.) (N=65) Check here if information is not available. 18.Please estimate the cost of administering the DBE program in your agency? (In your estimate include such things as salaries, certification costs, technical assistance, database development and maintenance, and contracted studies/analyses.) N=83 FY 1999: $633,124 (avg.) (N=55) Check here if information is not available. FY 2000: $772,160 (avg.) (N=57) Check here if information is not available. 19.Please indicate the number of non-DBE firms that were awarded prime contracts through your agency, the number of prime contracts that were awarded to these firms, and the total value of these contracts for FY 1999 and FY 2000. (Enter numbers and dollar amounts. If none, enter 0. If this information is not available, put a check in the appropriate box on the right side of the table below.) # of Firms: 202.6 (avg.) # of Contracts: 474.8 (avg.) $ 313,477,141 (avg.) (N=58) (N=67) (N=69) Check here if FY 1999 information is not available. # of Firms: 185.2 (avg.) # of Contracts: 454.2 (avg.) $ 308,620,950 (avg.) Check here if FY 2000 information is not available. (N=59) (N=68) (N=69) # of Firms: 180.1 (avg.) # of Subcontracts: 597.1 (avg.) $ 92,747,776 (avg.) Check here if FY 1999 information is not available (N=28) (N=27) (N=27) # of Firms: 190.3 (avg.) # of Subcontracts: 604.6 (avg.) $ 96,320,366 (avg.) Check here if FY 2000 information is not available (N=29) (N=28) (N=28) provided information for Part 21b. Two agencies gave estimates for Part 21a. 21a. What were the annual gross receipts of the non-DBE firms that were awarded prime and/or subcontracts through your agency in FY 1999? If you are not able to provide this information, please answer Question 21b. (Enter the number of firms for each category of annual gross receipts. If none, enter 0.) # of Firms: 21.3 (avg.) # of Firms: 36.0 (avg.) # of Firms: 11.7 (avg.) # of Firms: 11.7 (avg.) # of Firms: 17.7 (avg.) (N=3) (N=3) (N=3) (N=3) (N=3) the above information, please indicate the reason(s). (Check all that apply.) 32.5% Information is not collected, but will be in the future. 18.8% Information is not collected, and there are no plans to collect it in the future. 12.5% Information is being collected, but is not yet available. 31.3% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 11.3% Other. Please explain: 22a. What were the annual gross receipts of the non-DBE firms that were awarded prime and/or subcontracts through your agency in FY 2000. If you are not able to provide this information, please answer Question 22b. (Enter the number of firms for each category of annual gross receipts. If none, enter 0.) # of Firms: 16.8 (avg.) # of Firms: 20.6 (avg.) # of Firms: 9.0 (avg.) # of Firms: 7.8 (avg.) # of Firms: 10.4 (avg.) (N=5) (N=5) (N=5) (N=5) (N=5) 29.5% Information is not collected, but will be in the future. 20.5% Information is not collected, and there are no plans to collect it in the future. 16.7% Information is being collected, but is not yet available. 28.2% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 10.3% Other. Please explain: provided information for Part 23b. One agency did not answer question. 23a. What was the personal net worth of individuals who own and control non-DBE firms that were awarded prime and/or subcontracts through your agency in FY 2000. If you are not able to provide this information, please answer Question 23b. (Enter the number of firms for each category of personal net worth. If none, enter 0.) Personal Net Worth of Individuals Who Own and Control Non-DBE Firms That Were Awarded Prime Contracts and/or Subcontracts in FY 2000 $100,000 to $250,000 $250,001 to $500,000 $500,001 to $750,000 # of Firms: (No respondents provided information) # of Firms: (No respondents provided information) # of Firms: (No respondents provided information) # of Firms: (No respondents provided information) # of Firms: (No respondents provided information) 8.5% Information is not collected, but will be in the future. 62.2% Information is not collected, and there are no plans to collect it in the future. 4.9% Information is being collected, but is not yet available. 19.5% Information is not maintained in an electronic database, and would be difficult and/or time-consuming to report. 11.0% Other. Please explain: 24.Has the federal DBE program 29.Of the formal written discrimination administered by your agency been the subject of litigation? (Please check one.) N=83 71% No Please go to Question 27. complaints filed by DBE firms in FY 1999 and FY 2000, how many were investigated by your agency? (Enter the number of complaints. If none, enter 0.) N=16 Number of complaints investigated in FY 1999: 15 (sum) (N=16) Check here if information is not available. Number of complaints investigated in FY 2000: 14 (sum) (N=15) Check here if information is not available. FY 1999:$ 7,166.7 (avg.) (N=15) FY 2000: $ 19,897.3 (avg.) (N=13) Check here if information is not available. FY 1999: 2 (sum) (N=14) Check here if information is not available. FY 2000: 2 (sum) (N=12) Check here if information is not available. complaints filed by DBE firms with your agency in FY 1999 and FY 2000? (Please check one.) N=83 81% No Please go to Question 31. 28.How many complaints were filed? (Enter the number of complaints. If none, enter 0.) N=16 FY 1999: 15 (sum) (N=16) Check here if information is not available. FY 2000: 16 (sum) (N=15) Check here if information is not available. 31.Have you conducted, or are you conducting, any studies or analyses to determine if awarding prime contracts to DBE firms affects contract costs? (Please check one.) N=83 No 1.2% Yes Please briefly describe: 32.Have you conducted, or are you conducting, any studies or analyses to determine if awarding subcontracts to DBE firms affects contract costs? (Please check one.) N=83 98.8% No 1.2% Yes Please briefly describe: 33.Have you conducted, or are you conducting, any studies or analyses of discrimination against DBE firms on the basis of race, color, national origin, or sex? (Please check one.) N=83 67.5% No 32.5% Yes Please briefly describe: 34.Have you conducted, or are you conducting, any studies or analyses of discrimination on the basis of race, color, national origin, or sex against DBE construction firms by the financial, credit, insurance, or bond markets and/or in other contracts? (Please check one.) N=82 84.2% No 15.9% Yes Please briefly describe: 35.Have you conducted, or are you conducting, any studies or analyses of other factors that limit the ability of DBE firms to compete for prime and/or subcontracts? (Please check one.) N=83 79.5% No 20.5% Yes Please briefly describe: 36.Have you conducted, or are you conducting, any studies or analyses on the impact of the DBE program on competition and the creation of jobs? (Please check one.) N=83 92.8% No 7.2% Yes Please briefly describe: 37.In addition to the federal DBE program, is your agency subject to the requirements of a non- federal minority business enterprise (MBE), women-owned business enterprise (WBE), or another DBE program? (Please check one.) N=83 65.1% No 34.9% Yes 38. Has your agency participated in a non-federal MBE, WBE, or DBE program that has been suspended, repealed, or otherwise terminated? (Please check one.) N=83 85.5% No Please go to Question 40. 39.Please indicate the year(s) that program(s) were repealed and the type of program(s) repealed. 25.3% The benefits somewhat outweigh the been approved by DOT? (Please check one.) N=83 32.9% The benefits greatly outweigh the costs 22.8% No basis to judge 90% Yes When was your program approved? technical assistance you have received from FTA on implementing the revised DBE regulations? (Please check one.) N=83 49.Has your uniform certification program (UCP) been approved by the U.S. DOT? (Please check one.) N=7 71.4% Yes When was your plan approved? 91.5% No Please go to Question 50. 8.5% Yes When was your plan submitted? to track and monitor the information identified in the revised DBE regulation? (Please check one.) N=81 43.2% Yes When was your system implemented? Check here to list this person as your program’s contact. Check here to list this person as your program’s contact. Office/Department: Phone Number: Email Address: Check here to list this person as your program’s contact. Office/Department: Phone Number: Email Address: Thank you very much for taking time to complete this questionnaire. If you would like to make additional comments concerning any of the questions or comment on topics not covered, please feel free to use this page or to attach additional pages. The Transportation Equity Act for the 21st Century directed us to evaluate the impact of the U.S. Department of Transportation’s (USDOT) Disadvantaged Business Enterprise (DBE) program throughout the nation and address 11 specific objectives. We grouped the statute’s 11 objectives into the following 4 researchable questions: 1. How has the DBE program changed since 1999? 2. What are the characteristics of DBEs and non-DBEs that receive USDOT-assisted highway and transit contracts? 3. What do selected sources indicate about discrimination or other factors that may limit DBEs’ ability to compete for USDOT-assisted contracts? 4. What is the impact of the DBE program on costs, competition, and job creation as well as the impact of discontinuing federal and nonfederal DBE programs? To determine how the DBE program has changed since 1999 and to identify the characteristics of DBEs and non-DBEs that receive USDOT-assisted contracts, we reviewed USDOT’s regulations and guidance pertaining to the DBE program. We also interviewed USDOT officials and representatives from minority-owned business and transportation associations. In addition, we surveyed the departments of transportation of the 50 states, the District of Columbia, and Puerto Rico, and 36 transit authorities throughout the nation. (We planned to survey all transit authorities required to submit plans for a DBE program. However, the Federal Transit Administration could not provide an accurate list of these transit authorities.) The 36 transit authorities we surveyed are the largest transit authorities in the nation as defined by the number of unlinked passenger trips in 1999. They also received about two-thirds of all federal transit grant funds obligated in 1999. Our survey was designed to obtain information on the issues that TEA-21 directed us to examine, including the participation rates of DBEs in USDOT-assisted contracts, the annual gross receipts of DBEs and non-DBEs, and the cost of administering the DBE program. To help design our survey, we obtained input from USDOT, states, and transit authorities. After we developed our survey, we pre-tested the questionnaire with officials of 4 state departments of transportation (states) and 5 transit authorities. We selected states and transit authorities from a variety of geographical regions for our pre-tests. For each pre-test, members of our staff met with officials from the state or transit authority and simulated the actual survey experience by asking the officials to fill out the questionnaire. We also interviewed the officials after they had completed the questionnaire to ensure that (1) the questions were understandable and clear, (2) the terms used were precise, (3) the questionnaire did not place undue burden on state or transit authority officials, and (4) the questionnaire was unbiased. Appropriate changes were incorporated in the final survey based on our pre-testing. In addition, we provided a draft copy of our questionnaire to USDOT officials and incorporated comments from them, as appropriate. To increase the response rate of our survey, we sent two additional reminders after the survey was mailed in October 2000, including (1) a postcard sent one week after the survey and (2) a follow-up letter and replacement survey to nonrespondents sent about 3 weeks after the initial mailing. In addition, we conducted follow-up phone calls to nonrespondents through January 2001. We received survey responses from all 52 states and 31 transit authorities for a response rate of 94 percent. To evaluate the existence of discrimination against DBEs, we reviewed recent court cases that have addressed the constitutionality of the federal DBE program, transportation-specific disparity studies, and written discrimination complaints filed by DBEs with USDOT, states and transit authorities. Specifically: We reviewed the court decisions that have addressed the constitutionality of the federal DBE program since the Supreme Court’s 1995 decision in Adarand Constructors, Inc. v. Pena. We identified decisions meeting these criteria and consulted with officials from USDOT and the Department of Justice (DOJ) to ensure that we included all relevant decisions in our review. We also obtained information from USDOT and DOJ about pending cases concerning the constitutionality of the federal DBE program. We identified and reviewed all (14) transportation-specific disparity studies published between 1996 and 2000. We reviewed disparity studies because DOJ has stated that they are of particular relevance for affirmative action measures in federal programs providing grants to states and local governments, and because courts have recognized them as a source of evidence of discrimination in considering the federal DBE program. In addition, USDOT has identified disparity studies as one source that states and transit authorities could use to help set their federal DBE participation goals. Numerous state and local governments have used them to support their minority business contracting programs and to set their federal DBE goals. We selected disparity studies that (1) were published between 1996 and 2000, (2) contained a separate disparity analysis on transportation contracting, and (3) used a disparity ratio—that is, a comparison of the availability of MBE/WBEs to their utilization in contracts—as a indicator of discrimination. These criteria are generally consistent with USDOT’s regulations, which state that any disparity studies used in the DBE goal setting process should be as recent as possible and focused on the transportation contracting industry. To determine whether the disparity studies’ findings were reliable, we evaluated the methodological soundness of the studies using common social science and statistical practices. For example, we systematically examined each study’s methodology, including its assumptions and limitations, data sources, analyses, and conclusions. To identify relevant disparity studies, we obtained information from USDOT, DOJ, the Policy Sciences Graduate Program of the University of Maryland Baltimore City, the Minority Business Enterprise Legal Defense and Education Fund, Inc. (MBELDEF). In addition, we obtained information from the five consulting firms most noted for conducting disparity studies: National Economic Research Associates, Inc., BBC Research and Consulting, MGT of America, Mason-Tillman Associates, Ltd., and DJ Miller and Associates, Inc. The evidence—along with its strengths and weaknesses—contained in any disparity study would be limited to the geographical scope of that particular study. Moreover, because we limited our review to transportation-specific disparity studies, our conclusions cannot be generalized to disparity studies pertaining to other industries. We interviewed USDOT officials about written complaints of discrimination DBEs filed with USDOT. We also reviewed USDOT’s data on written complaints of discrimination filed by DBEs since fiscal year 1996. In addition, we analyzed information on written complaints of discrimination filed by states and transit authorities collected through our nationwide survey. We recognize that we did not review all of the information that could be relevant to the issue of discrimination in transportation contracting. However, we chose to review sources directly related to transportation contracting and the federal DBE program, including those suggested by USDOT and minority-owned business and transportation associations. Since we did not conduct an exhaustive review and evaluation of all evidence of discrimination, our results cannot be used to support or dismiss claims about the existence of discrimination against DBEs throughout the nation. Moreover, we did not address whether the DBE program satisfies the requirements of strict scrutiny and is therefore constitutional. To identify factors, other than discrimination that may limit the ability of DBEs to compete for transportation contracts, we reviewed information collected in our nationwide survey and recent GAO reports. In addition, we interviewed officials from USDOT and the Small Business Administration (SBA) and representatives from the American Road and Transportation Builders Association, Associated General Contractors of America, Minority Business Enterprise Legal Defense and Education Fund, Inc., Women Construction Owners and Executives, and National Black Chamber of Commerce. To determine the impact of the DBE program on costs, competition, and job creation, we collected data from states and transit authorities through our survey and from USDOT. In addition, we interviewed officials from USDOT and SBA as well as representatives from minority- and women- owned business groups and transportation associations. To evaluate the impact of discontinuing a federal DBE program, we identified the states and transit authorities that had discontinued the federal DBE program through our review of the court decisions that have addressed the constitutionality of the federal DBE program since the Supreme Court’s 1995 decision in Adarand Constructors, Inc. v. Pena. We identified 1 state and 1 transit authority that had discontinued their federal DBE programs due to court decisions. We interviewed officials from the state and transit authority and requested DBE and non-DBE participation data in federal transportation contracting for the years immediately before and after the discontinuance. Only the state DOT provided the requested data. To assess the impact of discontinuing a nonfederal DBE program, we used our survey to identify states and transit authorities that had participated in a nonfederal DBE program that was discontinued. Twelve survey respondents indicated that they had participated in such programs. We excluded the two transit authorities that had participated in nonfederal DBE programs that were discontinued in 2000 because sufficient time had not elapsed to determine the impact of this change. We contacted the remaining ten states and transit authorities and requested data on DBEs’ and non-DBEs’ participation in nonfederal and federal transportation contracting for the years immediately before and after the program was discontinued. Eight of the 10 states and transit authorities responded to our requests for data; however, only one state could provide the data necessary to thoroughly evaluate the impact of discontinuing its program— that is, data on DBEs’ and non-DBEs’ participation in nonfederal transportation contracting before and after the nonfederal program was discontinued. We conducted our review from August 2000 through April 2001 in accordance with generally accepted government auditing standards. The following are GAO’s comments on USDOT’s letter dated May 1, 2001. 1. As noted on pages 24 and 74, our objective was not to address the question of whether the DBE program satisfies the requirements of strict scrutiny and is therefore constitutional as USDOT seems to suggest. In particular, we did not attempt to determine whether sufficient evidence of discrimination exists to demonstrate that the DBE program serves a compelling interest. Further, as stated on pages 11, 14, and 24, we recognize that disparity studies are not required to support the federal DBE program, represent one of several sources of evidence of discrimination, and are but one method that states and transit authorities could use to set their federal DBE goals. 2. We agree with USDOT’s assertion that an inference of discrimination can be drawn from studies finding statistical disparities between the availability and utilization of MBE/WBEs. Consequently, we chose to review disparity studies as one source of evidence of discrimination. Also, as we stated on pages 6 and 29, all 14 studies we reviewed found disparities between the availability and utilization of MBE/WBEs in contracting, and taken as a whole, these studies suggest discrimination against MBE/WBEs. However, the data limitations and methodological weaknesses we identified create uncertainties about their findings. Furthermore, we agree with USDOT that we did not review all sources of evidence of discrimination against DBEs—a point we make repeatedly throughout the report. While we could not review all possible sources, we chose to review the sources directly pertaining to transportation contracting and the federal DBE program. As such, one of the sources we reviewed were transportation-specific disparity studies published between 1996 and 2000. As noted on page 29, we defined transportation-specific studies as those containing a separate disparity analysis on transportation contracting. While the Urban Institute report cited by USDOT included several studies focusing on transportation contracting, it combined these studies with a variety of others in its analysis and did not contain a separate disparity analysis of transportation contracting. In addition, although the Urban Institute published its report in 1997, all of the disparity studies it examined had been published before 1996. Therefore, the Urban Institute report did not meet our criteria. We did not discuss all of the details about the methods we used to analyze the 14 disparity studies because the methods are commonly used in social science research. To help clarify this for readers who are unfamiliar with these methods, we have added an example to our discussion in appendix III. 3. We agree with USDOT that states and transit authorities must use the best available data in setting their DBE goals and that there are inherent limitations in conducting disparity studies. However, we disagree that we are seeking an unobtainable level of sophistication and detail in these endeavors. Rather, we believe we identified some basic problems with the data sources that should be recognized and, in most cases, could reasonably be avoided in conducting disparity studies and setting DBE goals. For example, if bidders lists are used to set DBE goals, they should be as up-to-date as possible in order to avoid overstating or understating the number of available firms. 4. We disagree that the information necessary to calculate DBE participation rates in subcontracts is routinely made available to DOT. To calculate DBE participation rates in prime contracts and subcontracts, one needs the number and value of prime contracts and subcontracts awarded to DBEs and the number and value of prime contracts and subcontracts awarded to non-DBEs. We were able to calculate DBE participation rates in prime contracts because most states and transit authorities could provide the number and value of prime contracts awarded to DBEs and non-DBEs. However, the majority of states and transit authorities could not provide the number and value of subcontracts awarded to non-DBEs and therefore the data on DBEs’ participation rates in subcontracts are limited. Information on the number and value of subcontracts awarded to non- DBEs is not reported to USDOT and USDOT does not maintain this information. Most states and transit authorities provided the number and value of subcontracts awarded to DBEs—information that is routinely provided to USDOT. However, this information alone does not allow one to calculate DBEs’ participation rates in subcontracts. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. 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. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 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. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system) | The Department of Transportation's (DOT) Disadvantaged Business Enterprise (DBE) program seeks to remedy the effects of current and past discrimination against small businesses owned and controlled by socially and economically disadvantaged persons and to foster equal opportunity in transportation contracting. This report provides information on (1) important changes made to the program since 1999; (2) characteristics of DBEs and non-DBEs that receive DOT-assisted highway and transit contracts; (3) evidence of discrimination and other factors that may limit DBEs' ability to compete for DOT-assisted contracts; and (4) the programs impact on costs, competition, and job creation and the impact of discontinuing the federal and nonfederal DBE programs. GAO found that the program has changed significantly since DOT issued new regulations in 1999 in response to a 1995 Supreme Court decision that heightened standards for federal programs that use race or ethnicity as a criterion in decision-making. The new regulations overhauled the DBE goal-setting process. For example, states and transit authorities are no longer required to justify goals lower than 10 percent--the amount identified in the statutory DBE provision. Rather, goals are to be based on the number of "ready, willing, and able" DBEs in local markets. GAO was unable to determine the characteristics of DBE participants because of a lack of information. Without this information, it is impossible to define the universe of DBEs, compare them with the transportation contracting community as a whole, or gain a clear understanding of the programs impact. DOT does not systematically track information on discrimination complaints filed by DBEs. Although DOT receives written discrimination complaints filed by DBEs, it could not provide the total number of such complaints, the total number of investigations launched, or the outcomes of the investigations. |
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Joint education is provided to some extent at all levels of officer and enlisted professional military education. The professional development and career progression for both officers and enlisted personnel through DOD’s professional military education is a service responsibility; embedded within the professional military education systems is a program of JPME that is overseen by the Joint Staff. For officers, this system is designed to fulfill the educational requirements for joint officer management as mandated by law. The joint education program is intended to prepare aspiring military leaders for both conducting operations in a coherently joint force and thinking their way through uncertainty. Officer JPME program courses are taught at multiple sites across the country, including the service Staff and War Colleges and the National Defense University. See appendix II for a list and map of DOD’s academic institutions where officer JPME courses are taught. According to the Officer Professional Military Education Policy (OPMEP), the JPME program for officers comprises curriculum components in the five levels of the officer professional military education system and includes three-statutorily mandated levels of JPME designed to progressively develop the knowledge, analytical skills, perspectives, and values that are essential for U.S. officers to function effectively in joint, interagency, intergovernmental, and multinational operations. For each of those levels, the emphasis changes to provide instruction in target areas to enhance leader attributes of attending service members at their specific rank and tenure. Within officer PME, the first level of JPME—precommissioning—provides officer candidate and officer training school, Reserve Officer Training Corps, and Military Service Academy students with a basic foundation in defense structure, roles and missions of other military services, the combatant command structure, and the nature of American military power and joint warfare. The second level of JPME—primary—provides junior officers at the O-1 through O-3 ranks with primary education on the tactical level of war. This level of JPME helps to foster an understanding of the Joint Task Force combatant command structure and how national and joint systems support tactical-level operations, among other subjects. The third level begins the first statutorily-mandated level of JPME requirements—JPME Phase I. This phase generally focuses on tactical and operational levels of war, and is typically attended by intermediate- level officers at the O-4 rank, as well as some officers at the O-5 and O-6 ranks. JPME Phase I is incorporated into the curricula of the intermediate- and senior-level service colleges, as well as other appropriate educational programs that meet JPME criteria and are accredited by the Chairman of the Joint Chiefs of Staff. This level of education provides officers the opportunity to gain better understanding from a service component perspective of joint force employment at the operational and tactical levels of war. The subject matter to be covered by JPME Phase I instruction must, by law, include at the least (1) national military strategy; (2) joint planning at all levels of war; (3) joint doctrine; (4) joint command and control; and (5) joint force and joint requirements development. The fourth level of JPME provides Phase II of the statutorily-directed JPME requirements. JPME Phase II is a follow-on for selected graduates of service schools and other appropriate education programs that complements and enhances the JPME Phase I instruction. Phase II is taught at National Defense University’s National War College and Dwight D. Eisenhower School for National Security and Resource Management, the Joint Forces Staff College’s Joint and Combined Warfighting School and Joint Advanced Warfighting School to both intermediate- and senior-level (O-5 and O-6) students, and at senior-level service colleges to senior-level students, and consists of courses on the operational and strategic levels of war. Phase II helps prepare officers for high-level policy and command and staff responsibilities, with a focus on areas such as national security strategy and joint strategic leadership. In addition to the subjects specified in JPME Phase I, the curriculum for JPME Phase II must, by law, include: (1) national security strategy; (2) theater strategy and campaigning; (3) joint planning processes and systems; and (4) joint, interagency, intergovernmental, and multinational capabilities and the integration of those capabilities. This phase completes the educational requirement for joint officer management. The fifth and final level of instruction is the CAPSTONE course of JPME for general/flag officers and focuses on the operational and strategic levels of war for high-level joint, interagency, intergovernmental, and multinational responsibilities. Specifically, the CAPSTONE course focuses on (1) the fundamentals of joint doctrine; (2) integrating elements of national power across military operations to accomplish security and military strategies; and (3) how joint, interagency, intergovernmental, and multinational operations support strategic goals and objectives. This level of JPME is tiered to ensure the progressive and continuous development of executive level officers. Figure 1 summarizes the five levels of JPME. In addition to meeting legislative requirements to provide education on JPME matters, DOD’s colleges and universities that provide academic year-long programs for officers are Master’s Degree-granting institutions. According to the Middle States Commission for Higher Education, the body that accredits National Defense University, among others, accreditation is the means of self-regulation and peer review adopted by the educational community. The accrediting process is intended to strengthen and sustain the quality and integrity of higher education, making it worthy of public confidence and minimizing the scope of external control. Accreditation by the Commission is based on the results of institutional reviews by peers and colleagues and attests to the judgment that the institution has met the following criteria: that it has a mission appropriate to higher education; that it is guided by well-defined and appropriate goals, including goals for student learning; that it has established conditions and procedures under which its mission and goals can be realized; that it assesses both institutional effectiveness and student learning outcomes, and uses the results for improvement; that it is substantially accomplishing its mission and goals; that it is organized, staffed, and supported so that it can be expected to continue to accomplish its mission and goals; and that it meets the Requirements of Affiliation and accreditation standards of the Middle States Commission on Higher Education. DOD also conducts periodic assessments of the three statutorily- mandated levels of officer JPME to ensure that the curricula meet the prescribed joint educational requirements at each level, and uses the results of these assessments to update educational policy as appropriate. For enlisted personnel, the Enlisted Professional Military Education Policy circulates the policies, procedures, objectives, and responsibilities for enlisted professional military education and enlisted JPME. According to that policy, enlisted professional development and progression through the enlisted military education continuum is a service responsibility. The initial focus of enlisted professional military education is military occupational specialty training and education required to produce enlisted personnel capable of performing assigned tasks. Beyond occupational specialty training, the Enlisted Professional Military Education Policy states that all enlisted personnel also should be exposed to enlisted JPME as they progress through their respective services’ enlisted professional military education system. In addition, the policy states that, for some enlisted personnel, more comprehensive joint education is required to prepare those servicemembers for specific joint assignments. Enlisted JPME includes programs that span an enlisted member’s career and apply to all enlisted personnel. Basic Enlisted JPME addresses educational guidelines that should be completed by pay grade E-6, while Career Enlisted JPME addresses educational guidelines for senior enlisted personnel in grades E-6 or E-7 and above. Beyond these programs, Senior Enlisted JPME is a stand-alone Web-based course designed specifically for senior enlisted personnel in pay grades E-6 through E-9 who are serving in or are slated to serve in joint organizations. DOD’s KEYSTONE course exists to prepare command senior enlisted leaders for service in flag level joint headquarters or joint task force organizations. This course is designed for personnel who are serving in pay grade E-9. The focus of this course is to enable command senior enlisted leaders to think intuitively from a joint perspective while serving in their capacity in a general/flag officer joint organization. DOD also developed a program that, since 2003, has provided JPME specifically to reserve officers. In response to legislative direction, the Joint Forces Staff College established a 40-week, blended learning Advanced Joint Professional Military Education program (AJPME) that consists of two distance learning periods and two face-to-face periods. Similar to the active component courses, the Officer Professional Military Education Policy outlines the requirements for AJPME. The program’s mission is to educate reserve component officers to plan and execute joint, interagency, intergovernmental, and multinational operations to instill a primary commitment to teamwork, attitudes, and perspectives. AJPME builds on the foundation established by the institutions teaching JPME Phase I and prepares reserve component officers (O-4 to O-6) for joint duty assignments. DOD’s JPME programs are approved by the Chairman of the Joint Chiefs of Staff. The Director for Joint Force Development retains responsibility to support the Chairman of the Joint Chiefs of Staff and the joint warfighter through joint force development, in order to advance the operational effectiveness of the current and future joint force. The Joint Staff’s Directorate for Joint Force Development (J7) oversees general policy for the JPME programs. The MECC, which was tasked with conducting the most recent DOD-initiated study on JPME, serves as an advisory body to the Director of the Joint Staff on joint education issues. The purpose of the MECC is to address key educational issues of interest to the joint education community, promote cooperation and collaboration among the MECC member institutions, and coordinate joint education initiatives. Its membership consists of the MECC principals and a supporting MECC Working Group. These principals include the Director for Joint Force Development; the Deputy Director of the Joint Staff for Military Education; the presidents, commandants, and directors of the joint professional military education colleges and service universities; and the heads of any other JPME-accredited institutions. Additional representatives from other commands and organizations may be invited to participate as is appropriate. The MECC Working Group is comprised of dean’s level/ O-6 representatives of the MECC principals. The Deputy Director of the Joint Education and Doctrine Division chairs the MECC Working Group. Additionally, the Secretary of Defense, service chiefs, and combatant commanders are invited to send participants to the MECC meetings to provide feedback to improve the educational process. The purpose of DOD’s issued study of the JPME program was to identify desired leader attributes by defining what is needed from the JPME career-long learning experience to support DOD’s strategic vision, as well as any gaps in the current educational program to facilitate the development of the leaders needed to achieve that vision. The original purpose and objectives for the study were laid out in a July 16, 2012, white paper from the Chairman of the Joint Chiefs of Staff and a Joint Staff memorandum issued with the white paper. In the white paper, the Chairman stated that the study’s purpose was to support the development of the department’s leaders by fostering the values, strategic vision, and critical thinking skills needed to lead and support the development of Joint Force 2020. This white paper also identified four attributes that the department’s education programs should develop in its leaders. Those attributes include the following: the ability to understand the security environment and the contributions of all elements of national power; the ability to deal with surprise and uncertainty; the ability to anticipate and recognize change and lead transitions; and the ability to operate on intent through trust, empowerment, and understanding. The Chairman’s white paper also stated that other attributes for leader development would evolve and would need to be aligned with future operations and incorporated into curricula to help ensure that gaps are identified and eliminated. The memorandum, signed by the Director for Joint Force Development, identified three questions meant to shape the review. The first question focused on the value of joint education, why it is needed, and how the military will train and educate its leaders to meet the requirements of Joint Force 2020. The second question focused on the educational outcomes sought by the department, specifically with regard to training leaders for carrying out DOD’s strategic vision, in order to help ensure alignment of desired leader attributes with the curriculum. The third question built upon the first two by focusing on any changes needed to strengthen and achieve the value and outcomes DOD seeks in building leaders for Joint Force 2020. The memorandum also instructed DOD’s MECC to conduct the study. Subsequent to the issuance of the white paper and memorandum, the MECC met on August 23, 2012, to refine the study’s specific objectives. According to officials, at the direction of the Director for Joint Force Development, the MECC removed the requirement to address the value of joint education and instead focused its efforts on identifying the intended outcomes of the educational program and actions needed to achieve the outcomes. The MECC’s discussions also established two broad objectives for the study—documented in meeting minutes and an enclosure—based on the direction in the memorandum and further direction received by the Chairman. The two broad objectives the MECC established were to: 1. define the Joint Education Continuum needed to meet the joint leader development goals for Joint Force 2020, and 2. determine the gaps that need to be addressed for the Joint Education enterprise to progress from the current joint leader development outcomes to producing the future desired joint leader attributes for Joint Force 2020. The evolution of the study’s objectives is described below in figure 2. The MECC’s first objective focused on defining and improving upon both the officer and enlisted joint education continuums to ensure that they are in line with the development goals for DOD’s strategic vision. The MECC identified a need to retain many aspects of the current officer joint education continuum, as well as a need to incorporate new elements into the proposed officer joint education continuum that would help to meet the changing needs of future leaders of Joint Force 2020. For example, the proposed officer continuum retains the comprehensive approach of embedding elements of JPME at each level of service-delivered education with an emphasis on the statutory requirements for JPME Phases I and II, as well as key milestones from the precommissioning level of JPME to the general/flag officer rank. In addition to retaining the existing institutional structure for providing JPME education, however, in its report the MECC also emphasized the importance of self-directed, career-long learning and development. This facet of officer development is intended to convey an expectation that an individual is responsible for his or her own education and development, thereby inculcating a culture of lifelong learning. The MECC’s study concluded, on the other hand, that changes to the enlisted JPME continuum—specifically, between the Senior Enlisted JPME and KEYSTONE courses— are needed to improve the depiction of the Chairman’s intent for enlisted professional military education. Currently, enlisted personnel who complete the Senior Enlisted JPME course at pay grade E-6 or E-7 are not eligible to attend the KEYSTONE course until they attain pay grade E-9, potentially leaving a significant interval in time between participation in the two courses. Accordingly, the MECC recommended dividing the existing Senior Enlisted JPME course into two parts. Both parts would be offered prior to the KEYSTONE course and reduce the interval of time that senior enlisted servicemembers must wait between phases of enlisted joint education. The second objective expanded upon the first, and focused on identifying and closing gaps in the current JPME curriculum to produce joint leaders with attributes that are in line with Joint Force 2020. Specifically, the MECC refined the four attributes proposed in the Chairman’s white paper, added two additional attributes, and identified a set of subattributes associated with each of the six desired leader attributes, that the MECC used to analyze the current capabilities of the department’s joint education programs. The refined list of desired leader attributes consists of the abilities to: 1. Understand the security environment and contributions of all instruments of national power, 2. Anticipate and respond to surprise and uncertainty, 3. Anticipate and recognize change and lead transitions, 4. Operate on intent through trust, empowerment, and understanding, 5. Make ethical decisions based on shared values of the profession of 6. Think critically and strategically in applying joint warfighting principles and concepts to joint operations. The MECC then conducted a gap analysis to identify and crosswalk the desired leader attributes for Joint Force 2020 with the current officer and enlisted personnel JPME education continuums. For officers, the MECC’s analysis showed that, while the JPME program currently addresses the desired leader attribute outcomes at some level and also meets the intent of the existing requirements identified by the Skelton Panel, gaps exist where changes are needed to meet the challenges of Joint Force 2020. These include changes to teaching methodologies, assessment mechanisms, and other areas in support of the newly-identified desired leader attributes. Table 1 summarizes where DOD has identified gaps in its officer JPME curricula associated with the identified list of desired leader attributes and subattributes. For enlisted personnel, the MECC determined that a separate and distinct set of desired leader attributes should be developed for senior enlisted leaders that will require additional study. Officials from the Joint Staff initiated this work on April 8, 2013 and assigned this task to DOD’s Enlisted Military Education Review Council (EMERC). The EMERC took up this effort at its August 22, 2013 meeting and proposed a list of six desired leader attributes for enlisted personnel. DOD officials provided us with the proposed list of enlisted desired leader attributes on September 16, 2013. The MECC made a total of 21 recommendations, which collectively address the study’s objectives and span four categories, including: (1) desired leader attributes, subattributes, or educational outcomes; (2) joint education continuums; (3) lifelong learning and advancements in learning technologies; and (4) faculty quality. See appendix III for a list of the 21 recommendations. Several of these recommendations call for additional study by the National Defense University and the services to support the achievement of leader attributes. Other recommendations emphasize the importance of strengthening the educational outcomes at the primary level of joint education, making education programs more accessible, and using prior learning assessments to tailor education opportunities to students’ needs, among other things. One recommendation, in particular, calls for undertaking an approach to develop a separate and distinct set of desired leader attributes to guide enlisted joint education. Additionally, the MECC considered whether to make any legislative proposals, but did not identify the need for any legislative changes to the joint education enterprise based on the results of the review. According to officials, the results of the study will be used ultimately to inform updates and revisions to the Officer Professional Military Education Policy and the Enlisted Professional Military Education Policy, which are the primary instructions that distribute the policies, procedures, objectives, and responsibilities for professional military education and JPME. Our next section discusses DOD’s plans in this area. The methodology DOD used for its study of JPME generally included leading practices for evaluating strategic training and other programs, such as reviewing existing literature, using available data, and assessing skills gaps. However, the department has not yet fully planned for follow- on actions or fully engaged all stakeholders to help ensure that they are held accountable for making progress in implementing the study’s recommendations. Specifically, the department has not taken steps to ensure that the results of the study will be implemented using an approach agreed upon by all stakeholders, or that the results will be implemented in a timely manner. Further, the department has not yet fully evaluated the potential costs associated with the implementation of the MECC’s recommendations to provide decision makers with more complete information and assurance that the recommendations will be cost-effective. According to our 2012 report, Designing Evaluations, a key first step in designing a program evaluation is to conduct a literature review in order to understand the program’s history, related policies, and knowledge base. A review of the relevant policy literature can help focus evaluation questions on knowledge gaps, identify design and data collection options used in the past, and provide important context for the requester’s questions. Further, according to the RAND Corporation’s Standards for High-Quality Research and Analysis, a study team should demonstrate an understanding of other related studies, which should be evident in, for example, how a problem is formulated and approached. The team should also take particular care to explain the ways in which its study agrees, disagrees, or otherwise differs importantly from previous studies. The MECC’s report states that the initial step in its review was to determine the JPME enterprise’s effectiveness in meeting its current requirements. According to an official, the MECC reviewed many documents as part of a literature review, but derived its findings from four specific sources—all issued within the last 5 years—that it determined were most relevant to the review. Specifically, these sources were: The 2010 House Armed Services Committee (HASC), Subcommittee on Oversight and Investigations (O&I), study which provided a detailed assessment of the state of JPME; A Decade of War, conducted by the Joint and Coalition Operational Analysis Division within the Joint Staff (J7); The Ingenuity Gap: Officer Management for the 21st Century; and Keeping the Edge: Revitalizing America’s Military Officer Corps. According to the MECC’s report, these documents collectively provide a broad look across joint education. The MECC found that the 2010 HASC report, for example, provided a detailed assessment of the state of JPME, and concluded that while the overall PME system was basically sound, some areas needed improvement, such as an increased emphasis on joint, interagency, intergovernmental, and multinational operations. Consistent with this finding, the MECC made a recommendation that the Joint Professional Military Education Division review specific subject areas for increased emphasis within joint education as part of the process of revising the officer and enlisted policies. These subject areas include cyber warfare, interagency and intergovernmental operations, and information and economic instruments of national power, among others. Further, these sources suggested that responsibilities for junior officers will increase and that joint education should be expanded at lower levels. Similarly, the MECC found that officers are receiving joint education exposure earlier in their careers, and also recommended that the services strengthen the instruction of the desired leader attributes at the primary level of joint education for junior officers. Additionally, these sources recognized the need for increased emphasis on handling uncertainty and critical thinking skills. DOD’s study also focused on the ability to anticipate and respond to surprise and uncertainty, and critical thinking in joint operations. RAND’s Standards report further indicates that the data and information used for a study should be the best available and that a research team should indicate limitations in the quality of the available data. As part of its second objective, the MECC analyzed data from joint accreditation visits, that provided broad areas of assessment, and institutional survey and outcome assessments, that provided more detailed observations related to curricula. More specifically, the MECC conducted a review of the Process for the Accreditation of Joint Education (PAJE) reaffirmation results and institutional self-studies for the past 10 years. DOD uses these studies to document compliance with the Officer Professional Military Education Policy (OPMEP) standards and identify areas for improvement. These reviews have not identified systemic problems or required changes of PME over the past 10 years, and have concluded that PME institutions are successful in meeting policy and curricula standards, as well as the intent of the Skelton Report. The MECC also obtained and analyzed existing survey data—from various JPME institutions—of students, graduates, and supervisors of graduates as an indirect assessment of the programs to identify common areas and trends in JPME, as well as outcome assessments such as exams, quizzes, oral presentations, among other things, from the past 2 years as a more direct measurement of student learning. Consistent with the aforementioned RAND Standards report, while the MECC did leverage existing data, the MECC’s report also presented limitations of the existing survey data that it used for the study, stemming from variations in survey questions and measures that the separate JPME institutions used to conduct their own surveys. Regarding gap assessments, our 2004 Guide for Assessing Strategic Training and Development Efforts in the Federal Government highlights the need for determining the skills and competencies necessary to meet current and future challenges, and to assess any skill and competency gaps. According to the MECC’s report, to determine the ability of joint education to meet the Joint Force 2020 joint leader development requirements, the MECC conducted a three-phase gap analysis. These three phases included: (1) refinement of the desired leader attributes, which included breaking these attributes down into subattributes; (2) analysis of data provided by 27 officer and enlisted programs across the JPME system to identify gaps in the JPME program; and (3) gap analysis and documentation to break down the data into cohorts and rank the desired leader attributes. Specifically, 27 officer and enlisted programs, which included the services’ staff and war colleges and National Defense University, among others, were asked to assess the current capabilities of their joint education programs to achieve Joint Force 2020 outcomes by addressing the following three questions: Are current instructional methods effective, that is, how well do we Is the curriculum effective, that is, do we teach it? teach and deliver it? Are we achieving the educational outcomes, that is, can we measure it? According to its report, the MECC relied on the professional opinion of the academic deans of the JPME schools and directors of other joint education programs to make determinations about the effectiveness of their officer and senior enlisted programs based on the 35 subattributes identified by the MECC. To conduct the gap analysis, the MECC analyzed the 945 responses it received from the 27 programs and used a stoplight color coding scheme to summarize by cohort group each program’s assessment of its current capabilities to achieve the Joint Force 2020 outcomes. The gap analysis results were then coded, scored and ranked by officer cohort group (precommissioning, intermediate, senior, CAPSTONE) using four categories to describe the program’s current capabilities. In turn, this gap analysis helped inform the MECC’s 21 recommendations. While the MECC conducted a similar gap analysis for its senior enlisted JPME programs, the results of that analysis led the MECC to conclude that the department needed to further reconsider and redefine the desired leader attributes for enlisted personnel. The MECC has not yet fully developed timeframes and coordinated with all stakeholders, nor has it assessed the costs associated with implementing any of the study’s recommendations. As a result, it is not clear how the department will obtain concurrence among its stakeholders regarding an approach for moving forward, or how the department will hold its stakeholders accountable for implementing change. Furthermore, the department will not know whether the implementation of its recommendations will be cost effective. We have previously found that project planning is the basis for controlling and managing project performance, including managing the relationship between cost and time. Our 2004 Training Guide highlights the need for agencies to develop a formal process to help ensure that strategic and tactical changes are promptly incorporated in training and development efforts. Specifically, that report advises that agencies develop plans that describe or outline the way in which the agency intends to incorporate strategic and tactical changes into its training and developmental efforts. Our guide also highlights that including important agency stakeholders in the process can contribute to an open and continuous exchange of ideas and information, particularly when it comes to ensuring that strategic and tactical changes are promptly incorporated into training and developmental efforts. According to the July 16, 2012 memorandum that directed the MECC study, the March 1, 2013 deadline for the results of the study was intended to help shape the fall 2013 academic year. The MECC completed its report on June 24, 2013, and provided us with a copy of the final report on July 1, 2013. Subsequently, officials provided us with an informational paper that identifies an office of primary responsibility and outlines details on the status of the recommendations. However, this paper does not fully lay out DOD’s planned actions in a transparent manner. For nine of the recommendations, the document identifies potential target dates for completion, one of which is to be completed later in 2013, and eight of which are to be completed not later than September 2014. For the remaining 12 recommendations, DOD identified a target date for completion as either “not applicable” or “to be determined” because most of those recommendations fall under the purview of the services, the services’ schools, or National Defense University. Accordingly, officials states that consideration or implementation of any recommendations that fall under the purview of these stakeholders is at the discretion of those organizations and, according to officials, the department cannot identify or impose timeframes for implementing those recommendations. We recognize that the implementation of several of the recommendations fall under the purview of the services, the services’ schools, or National Defense University. However, the MECC has not yet reached out to these entities to identify estimated target dates for implementation to help guide these efforts. Further, the document does not identify interim milestones for specific actions between the date of the report and the target completion dates. The document also states that completion or implementation of a number of the recommendations is contingent on revisions to the Enlisted Professional Military Education Policy or the Officer Professional Military Education Policy, which officials estimated may take 12-18 months. Officials did tell us that the Joint Staff’s Joint Professional Military Education Division staff and members of the MECC are currently in the beginning stages of incorporating the changes into policy and that the individual schools may begin to incorporate changes resulting from the study at any time. However, at the time of our review, the department’s process for monitoring the implementation of the MECC’s recommendations was unclear. Without established milestones and timeframes for taking follow-on action, and mechanisms for coordinating with all key officials and stakeholders and holding them accountable, DOD may not be reasonably assured that the study’s recommendations will be implemented across the department or that its JPME program will achieve the potential benefits resulting from these recommendations. In addition, the department did not include a requirement that the MECC assess the costs associated with the JPME program or any recommendations resulting from the study. The MECC’s report acknowledges that the resource-limited environment facing the Department of Defense will make it difficult to sustain current practices, such as maintaining small class sizes and small student-to-faculty ratios, at the intermediate and senior courses or to consider additional requirements for the lower-level courses. The report states that leveraging new learning approaches, such as increased distance learning options, will not provide an inexpensive or free solution for increased joint education requirements. However, the MECC did not analyze or consider either the costs associated with implementing the study’s recommendations or efficiencies to be derived from implementing the study’s recommendations. Of the MECC’s 21 recommendations, the MECC identified five recommendations requiring further study and other possible investments, which suggests a potential need for additional funding resources to conduct those studies and implement any findings. For example, the report included recommendations to (1) conduct a study to identify and evaluate potential educational tools to achieve certain desired leader attributes, and (2) consider and explore opportunities to incentivize and reward lifelong learning. The costs associated with these recommendations are unclear and officials responsible for the study could not provide us with cost estimates. Prior studies of professional military education also did not or were unable to fully identify the costs associated with the overall JPME program, or with individual JPME programs. The Skelton Panel, for example, inquired into the cost per student at each school. The Office of the Secretary of Defense provided the panel with raw data produced with different methodologies by service, and sometimes by school, which resulted in widely varying costs for roughly similar programs. More recently, the House Armed Services Subcommittee for Oversight and Investigations made its own effort to ascertain whether a uniform cost accounting system existed for DOD’s professional military education system. The Department provided cost-per-student figures with standardized criteria. Comparative figures were no longer characterized by such enormous variations, but there were still a number of unexplained differences in the data provided by the Office of the Secretary of Defense. Our 2004 Training Guide states that agencies should strategically target training and development investments to help ensure that resources are not wasted on efforts that are irrelevant, duplicative, or ineffective. Our Training Guide further recommends that agencies should consider the appropriate level of investment and prioritize funding so that the most important training needs are addressed first. We have previously concluded that leading practices such as accounting for program resources enables managers to better manage existing resources and plan for future programmatic needs. Further, accounting for program resources is becoming increasingly important for decision makers within the department who must make difficult trade-off decisions in a sequestration budget environment. According to officials, the MECC omitted any and all cost elements from the study so as to not limit their assessment of the department’s needs for educating its leaders for Joint Force 2020 based on resources. Officials told us that they did not want to eliminate options for change based on the cost associated with them. However, by not assessing the cost of the MECC’s recommendations, as well as any efficiencies that may be achieved through their implementation, DOD may not be in a position to know if it has the resources to implement them or whether efficiencies will be achieved, and, without plans to assess cost in the near term as part of continued efforts to implement the results of the JPME study, decision makers may not know if implementing their recommendations will be cost effective. The experiences of the last 12 years of operations in Iraq and Afghanistan have underscored the importance of U.S. military officers’ ability to work jointly across the services and reinforced the need for an effective joint military education program. DOD’s recently completed study of JPME is an important step forward as DOD considers how to adapt its joint military education program to reach the goals it laid forth for Joint Force 2020. Nonetheless, some questions remain about how well its findings can be applied to the task of revising the department’s officer and enlisted JPME policies. Specifically, ensuring transparency and taking certain actions to ensure this study’s findings and recommendations can be utilized effectively is important. For instance, without establishing milestones and timeframes for conducting follow-on actions, and involving necessary stakeholders and developing an implementation approach that provides for accountability, the department may not be assured that the study’s findings and recommendations will be incorporated into the JPME program at institutions across the department and the services in a timely manner. Additionally, without reliable information on the costs of implementing the study’s recommendations, decision makers could be hindered in determining the most efficient allocation of departmental resources for JPME. DOD’s JPME program will continue to play a role in the future development of departmental leaders, and acting to help ensure the findings and recommendations of this and any future studies are both utilized and cost-effective could allow the department to make the best use of the resources it devotes to this program. To guide the implementation of actions DOD identified in its study on JPME, we recommend that the Chairman of the Joint Chiefs of Staff direct the Director for Joint Force Development to take the following two actions: establish well-defined timeframes for conducting follow-on actions, coordinate with all stakeholders, and identify key officials responsible for implementing the study’s recommendations to help ensure the usefulness, timeliness, and implementation of any actions DOD takes in response to the findings and recommendations contained in its study, and assess the costs of implementing recommendations made and efficiencies to be derived from the recommendations in order to implement DOD’s recommendations in a cost-effective manner. In written comments on a draft of this report, DOD concurred with our two recommendations to guide implementation of the actions that DOD identified in its review of joint education. DOD’s comments are reprinted in appendix IV. DOD also provided technical comments on the draft report, which we incorporated as appropriate. Regarding our first recommendation that DOD establish well-defined timeframes for conducting follow-on actions, coordinate with all stakeholders, and identify key officials responsible for implementing the study’s recommendations, DOD stated that, as the Joint Staff pursues implementation of the recommendations in its review, it will establish timelines, identify offices of primary responsibility, and coordinate with stakeholders as appropriate. DOD also noted that efforts are already underway to update the Chairman of the Joint Chief of Staff’s professional military education policies to ensure that these policy directives are consistent with the results and recommendations of the recent study. Regarding our second recommendation that DOD assess the costs of implementing recommendations made and efficiencies to be derived from the recommendations, the department again concurred, stating that, although assessing the costs of its recommendations is beyond the original scope and purpose in this study, it will consider costs and efficiencies prior to moving forward with the implementation of any recommendations. It also stated that a number of recommendations will be implemented through policy changes which are cost neutral. Further, it stated that the services will also consider such costs and efficiencies for recommendations under their purview. We are sending copies of this report to the appropriate congressional committees, the Chairman of the Joint Chiefs of Staff, and the Directorate for Joint Force Development. In addition, this report will also be available at no charge on the GAO Web site at http://gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To identify the purpose of the Department of Defense’s (DOD) study of the Joint Professional Military Education (JPME) program, we reviewed relevant DOD guidance and other documents related to the study, including the final report dated June 24, 2013, and met with knowledgeable officials. We reviewed the Chairman of the Joint Chiefs of Staff’s July 16, 2012 white paper that called for and outlined the general focus of the study. We also reviewed the Director for Joint Force Development’s (J7) memorandum that was issued with the white paper and clarified the overall intent of the study and specific questions to help frame the study, and directed responsibility of the study to the Military Education Coordination Council (MECC). We analyzed the MECC’s meeting minutes and interim briefing report, which provided insight into how the MECC addressed the questions posed in the Director’s memorandum, as its approach differed somewhat from the framework provided in the memorandum. We then compared the aforementioned guidance documents and interim report findings to the final report to assess consistency. In addition, we met with knowledgeable officials from the Joint Professional Military Education Division within DOD’s Joint Staff’s Directorate for Joint Force Development who, in conjunction with the MECC, were responsible for guiding DOD’s effort. We also met with the officers of primary responsibility and/or team leads responsible for carrying out the various elements of the study. These meetings helped to ensure our understanding of the purpose and objectives of the study. We reviewed the final report section that focused primarily on the study’s findings and recommendations for change to gain an understanding of the MECC’s findings and recommendations. Further, we met with knowledgeable officials within the Directorate for Joint Force Development and the team lead for the findings and recommendations portion of the study to gain clarification and insight into the major takeaways from the study, areas in need of change, and any plans for the way ahead. To assess the methodology DOD used to conduct the joint professional military education study and its planning for follow-on actions, we reviewed the MECC’s final report and supporting documents. We interviewed DOD officials from the Joint Professional Military Education Division within the Directorate for Joint Force Development and officials from across DOD who were identified as officers of primary responsibility or team leads for specific study tasks associated with the study’s two objectives. We reviewed relevant reports and guidance by GAO; the Office of Management and Budget; the Office of Personnel Management; and private sector organizations such as the RAND Corporation, among others, to identify select leading practices for evaluating training, educational, and other programs. The following list includes select sources we consulted for leading practices, in addition to those listed throughout the report, and against which we assessed DOD’s JPME study: GAO, GAO Schedule Assessment Guide: Best Practices for Project Schedules, GAO-12-120G (Washington, D.C.: May 2012), GAO, Designing Evaluations: 2012 Revision, GAO-12-208G (Washington, D.C.: January 2012), RAND Corporation, Standards for High-Quality Research and Analysis (Santa Monica, Calif.: November 2011), The Office of Personnel Management, Training Evaluation Field Guide (Washington, D.C.: January 2011), GAO, Government Auditing Standards: 2007 Revision, GAO-07-162G (Washington, D.C.: January 2007), GAO, Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government, GAO-04-546G (Washington, D.C.: March 2004), The Office of Management and Budget, Circular A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs (Washington, D.C.: Oct. 29, 1992), and GAO, Designing Evaluations, GAO/PEMD-10.1.4 (Washington, D.C.: March 1991). We identified key practices contained in these documents for evaluating educational programs and information that were applicable for the purposes of this engagement. We then compared DOD’s methodology with these select leading practices for program evaluation. We also reviewed documents provided to us and identified by DOD officials as project plans for the study, as well as documentation of the department’s intended follow-on actions. We conducted this performance audit from March through October 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. The MECC made a total of 21 recommendations, which collectively address the study’s two objectives and span four categories, including: (1) desired leader attributes, or educational outcomes; (2) joint education continuums; (3) lifelong learning and advancements in learning technologies; and (4) faculty quality. Several of these recommendations call for additional study by the National Defense University and the services to support the achievement of leader attributes. Other recommendations emphasize the importance of strengthening the educational outcomes at the primary level of joint education, making education programs more accessible, and using prior learning assessments to tailor education opportunities to students’ needs, among other things. Table 2 lists the recommendations by category. Brenda S. Farrell (202) 512-3604 or [email protected]. In addition to the individual named above, David Moser, Assistant Director; Richard Burkard; Timothy Carr; Gustavo Crosetto; Melissa Emrey-Arras; Jennifer Madison; Terry Richardson; Jennifer Weber; and Erik Wilkins-McKee made key contributions to this report. | To facilitate unified operations across the services, DOD has provided JPME programs at departmental and service academic institutions for almost 30 years. In July 2012, the Director for Joint Force Development, who reports to the Chairman of the Joint Chiefs of Staff, tasked the MECC to review DOD's joint education objectives and institutions to help ensure that outcomes match requirements for the strategic environment projected for Joint Force 2020. Subsequently, the National Defense Authorization Act for Fiscal Year 2013 mandated GAO to report to Congress on the analytical approach used by the MECC not later than 90 days after the Director submitted the MECC's report to GAO, which the Director did on July 1, 2013. In this report, GAO (1) identifies the purpose of DOD's study of the JPME program, and (2) assesses DOD's methodology used to conduct the Joint Professional Military Education study and its planning for follow-on actions. GAO analyzed the MECC's final report and relevant planning documents, interviewed DOD officials who conducted portions of the study, and reviewed leading practices for evaluating programs by GAO and other entities. The purpose of the Department of Defense's (DOD) study of its Joint Professional Military Education (JPME) program was to identify (1) desired leader attributes as part of the JPME career-long learning experience needed to support DOD's strategic vision and (2) any gaps in the current educational program to facilitate the development of the leaders needed to achieve that vision. Specifically, a Military Education Coordination Council (MECC)--following direction from the Chairman of the Joint Chiefs of Staff and the Director for Joint Force Development--proposed six desired leader attributes, including, for example, the ability to anticipate and respond to surprise and uncertainty, and concluded that the existing institutional structure for providing JPME should be retained. The MECC's gap analysis, however, indicated that in order to support the development of these attributes, a greater emphasis on career-long self-directed learning is also needed, among other things. In line with its findings, the MECC made 21 recommendations to improve the JPME program that address increased accessibility of educational programs, changes to teaching methodologies and assessment mechanisms, and enhanced use of technology. DOD's methodology generally included leading practices for assessing training programs, but DOD has not yet fully planned for follow-on actions and engaged all stakeholders, nor has it assessed the costs of the MECC's recommendations to provide decision makers with more timely and complete information and help ensure that the study's results are implemented. Specifically, the MECC reviewed other related studies, conducted a gap analysis to identify gaps based on existing and future needs, used the best available data and acknowledged limitations--all practices identified by GAO and other government agencies and research institutions as leading practices for successful evaluations of training and other programs. By contrast, DOD documents state that the results of the study were intended to inform and shape the fall 2013 academic year, but the MECC did not complete its study until June 24, 2013 and provided its report to GAO on July 1, 2013. Further, DOD has not yet identified milestones and timeframes for implementing all of its recommendations. Subsequently, the department developed an update to inform actions for moving forward on its recommendations. DOD identified target dates for completion not later than September 2014 for 9 recommendations, but did not include interim milestones, and has not yet developed target dates for 12 recommendations. In addition, the MECC did not formalize plans to achieve the buy-in of all stakeholders for recommendation implementation. Without this information, it may be difficult for DOD to ensure that stakeholders agree on and are accountable for implementing the recommendations in a timely manner. Finally, the MECC did not analyze the costs or efficiencies associated with implementing its recommendations, but it identified 5 recommendations that could incur additional costs because they require further study. Leading practices such as accounting for program resources enable managers to better manage existing resources and plan for future programmatic needs. Without cost data on the study's recommendations or plans to assess cost in the near term as part of continued efforts to implement the results of the JPME study, decision makers could be hindered in determining the most efficient allocation of departmental resources for JPME. GAO recommends that DOD establish well-defined timeframes for conducting any follow-on actions and include stakeholders necessary for implementation, and assess the costs of implementing recommendations made in the MECCs recent study of joint professional military education. DOD concurred with both of GAOs recommendations. |
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An EHR is a digital version of a patient’s paper medical record or chart. EHRs ideally make information available instantly and securely to authorized users. An EHR can contain the medical and treatment history of a patient, diagnoses, medications, treatment plans, immunization dates, allergies, radiology images, and laboratory and test results. An EHR can also give a provider access to evidence-based tools for making decisions about a patient’s care and can automate certain workflows. EHR system software is typically purchased by providers (such as physicians, hospitals, and health systems) from vendors that develop the systems. When EHR systems are interoperable, information can be exchanged—sent from one provider to another—and then seamlessly integrated into the receiving provider’s EHR system, allowing the provider to use that health information to inform clinical care. HHS and others view EHR system interoperability as a necessary step toward transforming health care into a system that can achieve goals of improved quality, efficiency, and patient safety. For example, use of interoperable EHR systems could better enable health care providers to view results from diagnostic procedures conducted by other providers to avoid duplication; evaluate test results and treatment outcomes over time regardless of where the care was provided to better understand a patient’s medical history; share a basic set of patient information with specialists during referrals and receive updated information after the patient’s visit with the specialist to improve care coordination; view complete medication lists to reduce the chance of duplicate therapy, drug interactions, medication abuse, and other adverse drug events; and identify important information, such as allergies or preexisting conditions, for unfamiliar patients during emergency treatment to reduce the risk of adverse events. Health data standards are technical requirements used to, among other things, facilitate health information exchange and interoperability of systems, including EHR systems. Such standards consist of terminology and technical specifications that, when adopted by multiple entities, facilitate the exchange and interoperability of health information. Health data standards include, for example, standardized language for prescriptions and laboratory testing. Standards define how information is packaged and communicated from one entity to another, setting the language, structure, and data types required for integration between the systems. Standards generally have been developed by nonfederal standard development organizations and are accompanied by implementation guides, which can help ensure that standards are implemented uniformly. Consistent implementation of the standards by the vendors that build and sell EHR systems and by providers who use these systems is necessary for interoperability. The Medicare and Medicaid EHR Incentive Programs are intended to help increase the adoption and meaningful use of EHRs by providing incentive payments for providers—that is, certain hospitals and health care professionals such as physicians—who participate in Medicare and Medicaid, and later imposing payment adjustments, also referred to as penalties, on those Medicare providers that do not meet meaningful use requirements for a program year. Within HHS, ONC and the Centers for Medicare & Medicaid Services (CMS) develop the programs’ requirements. CMS establishes specific requirements providers must meet to qualify for incentive payments. Some of these requirements include the exchange of health information, which is a component of interoperability. ONC identifies health data standards and technical specifications for EHR systems and certifies EHR systems used by providers in the program to help ensure that providers implement a system that offers a minimum level of technological capability, functionality, and security. In order for an EHR system to be certified, it must adhere to requirements related to health information exchange, among other capabilities. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 and its implementing regulations, the Privacy Rule, regulate covered providers’ use and disclosure of personal health information. Providers may also be subject to additional state privacy rules, which can be more stringent than HIPAA requirements or standards. For example, states can set requirements around default practices for health information exchange. Specifically, states that require patients to “opt-in” to health information exchange do not allow the sharing of health information unless patients affirmatively consent to share health information. States with “opt-out” policies around health information exchange permit, by default, the automatic sharing of patient health information, and patients must affirmatively express their preference to not have information shared if they do not want it exchanged. The initiatives we reviewed vary in their efforts to achieve or facilitate interoperability, including (1) the primary products or services they offer (e.g., a network or guidance for implementing standards), (2) the types of electronic systems the initiatives are working to make interoperable, (3) the cost of the initiatives’ products or services, (4) the geographic areas served by the initiatives, (5) the extent to which initiatives facilitate patient access to their health information, (6) the stakeholder groups that are members of the initiatives, and (7) the sources of funding for the initiatives. The majority of the initiatives we selected are works in progress, meaning that they are relatively new and therefore still in the process of developing, or encouraging others to adopt, their products or services. Of the 18 initiatives we selected, 10 began after January 2013. Representatives from 6 of the initiatives said that their primary products or services were available in some areas or available on a limited scale; however, according to the representatives, none of their products or services were widely available or widely used at the time of our review. For example, representatives from the 4 initiatives associated with HIE organizations said that they are actively facilitating interoperability, but this interoperability is confined to a single state or region. The 2 other initiatives have products available, but according to representatives, the initiatives are in the very early stages of deploying those products and anticipate that use of their products will increase by 2016. Representatives from 7 of the initiatives stated that their products or services are currently being developed and would not be available until the end of 2015 or sometime in 2016. Stakeholders and initiative representatives we interviewed described five key challenges to EHR interoperability, and initiative representatives described how they are working to address these challenges using different approaches. Initiative representatives also identified other issues beyond the scope of their initiatives that they say need to be addressed in order to move nationwide EHR interoperability forward. Stakeholders and representatives from the selected EHR initiatives described five key challenges to achieving EHR interoperability: (1) insufficiencies in standards for EHR interoperability, (2) variation in state privacy rules, (3) accurately matching patients’ health records, (4) costs associated with interoperability, and (5) need for governance and trust among entities. While standards for electronically exchanging information among EHR systems exist, stakeholders and initiative representatives said that these standards are not sufficient for achieving EHR interoperability. This challenge stems from the fact that some standards are not specific enough and, as a result, the systems that implement these standards may not be interoperable. According to some stakeholders, some standards allow EHR systems to use different formats and terminology when exchanging data. However, this resulting variability prevents the receiving system from processing the information and properly integrating it into the patient record; in other words, the systems are not interoperable. Information that is electronically exchanged from one provider to another must adhere to the same standards, and these standards must be implemented uniformly, in order for the information to be interpreted and used in EHRs, thereby enabling interoperability. Stakeholders and initiative representatives said that exchanging health information with providers in other states, which is necessary for nationwide EHR interoperability, can be difficult. This challenge exists because of variations in privacy rules from state to state, especially variation in laws pertaining to patient consent for sharing health information. According to a representative from one initiative, providers in opt-in states may be hesitant to exchange health information with providers in opt-out states if the providers lack assurance that the patients have explicitly consented to the exchange. This challenge may be more pronounced when exchanging certain types of sensitive information, such as mental health information or HIV status, among providers in different states. Some states require additional patient consent when exchanging such information. A representative from one initiative explained that current digital methods for exchange do not provide assurance that sensitive information is protected in accordance with privacy rules. According to this initiative representative, the sensitive information that is subject to more stringent privacy rules could be inadvertently aggregated with other health information and exchanged without the patient’s consent, thereby violating privacy rules. Representatives from one initiative noted that they specifically do not include any mental health information in electronic health information exchange, even with patient consent, because of concerns about inadvertently violating privacy rules. Stakeholders and initiative representatives said that another key challenge to EHR interoperability is accurately matching patients’ health records that are stored in different systems. This challenge exists because many EHR systems use demographic information, such as a patient’s name and date of birth, to match different health records for a given patient held by different providers. As we previously reported, demographic variables do not always yield accurate results because, for example, there could be more than one patient with the same information. In addition, providers may not collect and use the same demographic variables for matching. For example, one initiative representative explained that a recent effort to achieve interoperability with another organization stalled because the other organization relies on a patient’s social security number for patient matching, but the initiative does not collect social security numbers for its patients. In addition, some methods to match records for the same patient across providers can fail because of differences across EHR systems in data formats or because of missing data from or inaccurate data in some health records. Stakeholders and initiative representatives said that the costs associated with achieving interoperability can be prohibitive for providers. This challenge exists in part because of the high cost of EHR customization and legal fees associated with interoperability. One stakeholder said that many EHR systems require multiple customized interfaces—which are specially designed connections to other health IT systems—in order to facilitate interoperability with other providers and organizations. The costs associated with these customized interfaces are typically paid by the EHR buyers (i.e., providers). Representatives from some initiatives added that the legal fees associated with establishing EHR interoperability can also be significant. For example, as the next section describes, certain agreements may need to be established as a precondition to interoperability. Stakeholders and initiative representatives said that it can be challenging to establish the governance and trust among entities that are needed to achieve interoperability. These governance practices can include organizational policies related to privacy, information security, data use, technical standards, and other issues that affect the exchange of information across organizational boundaries. One stakeholder noted that it is important to establish agreements to ensure that entities share information openly with all other participants in a network. However, representatives from one initiative noted that there is some risk that the various agreements developed by different EHR initiatives could result in conflicting organizational policies. For example, the representative explained that participants in one initiative cannot participate in another initiative because the initiatives’ organizational privacy policies do not align. Representatives from all 18 of the initiatives we reviewed said they are working to address these key challenges using different approaches (see table 1). Fifteen of the 18 initiatives are working to address insufficient standards needed to achieve EHR interoperability. Representatives from 7 of the 15 initiatives told us that they are developing instructions for implementing standards in ways that enhance interoperability. For example, 1 initiative provides precise definitions of how different standards can be implemented to meet specific clinical needs, such as locating information about a patient that is contained in other organizations’ EHR systems. This initiative also provides an opportunity for vendors to test that they have successfully incorporated these instructions into their products. Four of these 7 initiatives are working to develop instructions for implementing existing standards, and 3 are working to develop instructions for implementing a new standard that representatives said will improve systems’ ability to interoperate. Representatives from 8 of the 15 initiatives told us that they require organizations to adopt common technical requirements as a condition of participation in the initiative. For example, representatives from 1 initiative said that it requires participants to adopt specific implementations of standards that enable functions like sharing health care information between entities. Representatives from 5 of the 8 initiatives told us that they also require participants to test their systems to confirm that the systems are able to interoperate with the systems of other initiative participants. For example, 1 initiative provides an online testing tool that vendors and providers must use to assess and demonstrate interoperability before joining the initiative. In addition to requiring agreement on technical requirements, 2 of the 8 initiatives said that they provide semantic normalization—that is, translation of data between different formats and terminology—in order to accommodate variation between organizations exchanging information and enable interoperability. One initiative representative predicted that there will always be a need for some semantic normalization as part of interoperability because it is unlikely that all organizations will adopt the same standards in exactly the same way. Representatives from initiatives expressed differing opinions on additional actions that are needed to fully address the challenge of insufficient standards, including the role of the federal government in addressing the issue. Representatives from three initiatives said that there is a need for federal leadership on standards and their implementation. Conversely, representatives from two initiatives said that current federal work on standards duplicates existing private sector efforts, and representatives from a third initiative expressed concern that the government is not flexible enough to account for changing technologies and should therefore leave this issue to the private sector. Representatives from three initiatives we spoke with said that standards should be tested through pilots before they are incorporated into national requirements, and suggested that this testing of standards could be an appropriate role for the federal government. Eleven of the 18 initiatives we selected are working to address the challenges encountered because of variation in state privacy rules. Representatives from 6 of these 11 initiatives said that their initiatives are working to improve providers’ ability to obtain and track patient consent and other patient preferences electronically. This is important because some state privacy rules require affirmative patient consent to enable exchange. Three of these 6 initiatives are focused on improving patients’ ability to document their consent to exchange and grant access to their personal health information. For example, 1 initiative is developing a framework that allows patients to document digitally whether they consent to information sharing and to incorporate this documentation in providers’ health IT systems. Another initiative is working to enable patient control of their information through patient-mediated exchange, which allows patients to aggregate their health records into a PHR and electronically grant providers access to these records according to the patient’s preferences. Three other initiatives told us that they are using or plan to develop technology that allows providers to share only portions of a patient’s health record, which would allow providers to ensure that they send only information that they are authorized to share. Representatives from 5 of the 11 initiatives told us that their initiative incorporated specific privacy policies into agreements signed by participants, including policies governing patient consent and access to their health records. For example, 1 nationwide initiative requires participants to obtain affirmative consent from patients before their information can be exchanged using the initiative’s product. Representatives from several initiatives identified additional actions that are needed to fully address this challenge. Specifically, six representatives said that education on or federal guidance about the application of privacy laws and liability issues would reduce confusion and increase willingness to exchange information across state lines. Representatives from one initiative noted that the difference between states that require patients to affirmatively consent to sharing some or all of their medical information and states that do not have this requirement is a significant barrier to interoperability, though representatives from another initiative said that this difference is less of an issue if providers are educated in the laws of their state. Thirteen of the 18 initiatives are working to address the challenge of accurately matching patients’ health records. Representatives from 4 of the 13 initiatives said that their initiatives are working to improve the quality of the data or types of information used for matching patients’ health records. For example, 2 initiatives are working to establish standard data formats for health IT systems, which may reduce differences in demographic data for the same patient, thus improving the accuracy of matching. Representatives from 2 other initiatives told us that their initiative is working to create a list of patient attributes (e.g., telephone number and address) that can be combined to establish a patient’s identity with high success and enable providers and others to match patient records as accurately as possible. Representatives from 7 of the 13 initiatives told us that they require their participants to use a standardized method for patient matching or are working to develop standardized methods. For example, 1 initiative requires that all participants incorporate the same patient-matching method into their EHR systems. Representatives from 2 other initiatives said that their initiative is working to reconcile variations in the data elements and formats used for patient matching by network participants, with the goal of adopting a single shared method among all participants. Representatives from another initiative told us that the initiative is working to develop a tool for matching patients to their records that can be incorporated directly into EHR systems. Notably, 2 of the initiatives that are working on patient-matching methods said that they rely on patients to confirm that the match is accurate at the site-of-care. Representatives from 1 of these initiatives noted that this approach may not be practical in circumstances or settings in which information is required immediately or the patient is unresponsive. Representatives from 2 of the 13 initiatives said that they are working to enable patient-mediated exchange, which involves allowing patients to aggregate their health information in a PHR. One representative noted that patients are likely to notice if their PHR contains information that is incorrectly matched and to correct the error. Representatives from five initiatives noted that a national patient identifier, which HHS identifies as currently prohibited under law, is needed to fully address this challenge. Sixteen of the 18 initiatives are working to address the challenge of the reported high costs associated with interoperability. Some of these initiatives are working to address this challenge using multiple approaches. Representatives from 10 initiatives that said they are addressing this challenge by reducing the need to customize EHR systems to connect with other systems. For example, representatives from 1 initiative explained that participants must adopt standard features that should reduce the amount of customization needed to connect with other systems. Representatives from 3 initiatives explained that they give participants the opportunity to reduce the cost of interoperability by paying for only one interface to connect with all the entities participating in the initiative, instead of paying for individual connections to each entity. Officials from 3 other initiatives told us that they are focused on creating APIs—programming instructions that allow systems to extract data from other systems that adopt the same API—that they said would nearly eliminate the need to customize systems that adopt the API, or are working to leverage APIs to create applications that can be easily added to EHR systems to exchange and analyze interoperable data. Representatives from 12 initiatives said that their initiatives’ products are or will be available at no cost or at a reasonable cost to providers or vendors. For example, representatives from 4 initiatives told us that the profiles and specifications they are developing will be available free of charge for vendors and providers to incorporate into EHR systems. Representatives from 6 other initiatives said that they are attempting to keep the cost of participation in the initiative reasonable. For example, representatives from 1 initiative said that they adjust their fees for different provider types to accommodate differences in the providers’ data exchange needs, thus increasing the likelihood that providers can afford to participate. Representatives from three initiatives explained that they are working to address the cost issue by creating standardized legal agreements to govern information sharing, which can be easily adapted by initiative participants and reduce the need for legal services and the accompanying legal fees. Eleven of the 18 initiatives are working to establish governance and trust among the entities that seek to exchange interoperable health information. Representatives from 7 of the 11 initiatives are fulfilling the need for governance and trust among entities by establishing standard legal agreements that their participants adopt and use to govern relationships within the initiative. For example, 1 initiative crafted a publically available agreement that includes provisions related to security and authentication policies, as well as a requirement that all participants share patient health information openly with all other participants that are authorized to receive this information. Another initiative has created a committee to evaluate specific ways that the data contained in the network may be used and incorporates these decisions into its agreement. Another initiative deliberately designed its agreement so that participants can also adopt existing national agreements; a representative from this initiative noted that if there was a situation in which their agreement conflicted with another initiative’s requirements, the initiative would work to reconcile the conflicting requirements so its participants could participate in both initiatives whenever possible. Representatives from 4 of the 11 initiatives told us that they are working to address this challenge by fostering consensus and harmonization of policies and business practices across entities and organizations. For example, 1 initiative facilitates consensus among different stakeholders about methods to enable interoperability for certain uses, and releases the results of these discussions publically for other entities to incorporate into their agreements, policies, and practices. In addition to the five challenges identified by stakeholders and initiative representatives, representatives identified two other issues that need to be addressed in order to move nationwide interoperability forward. EHR interoperability would move forward once providers saw a value in their systems becoming interoperable. Six initiative representatives said that improvements to EHR systems—such as enhancements that improve providers’ workflow or clinical decision-making—are needed to increase the extent to which an EHR system, and the information contained within it, is a valuable tool for health care providers. Six initiative representatives noted that reforms that tie payment to quality of care rather than number of services provided will incentivize sharing of information across providers to improve efficiency. Changes to CMS’s Medicare and Medicaid EHR Incentive Programs would also help move nationwide interoperability forward. While 8 initiative representatives we spoke with told us that the EHR Incentive Programs have increased adoption of EHRs, representatives from 5 initiatives suggested pausing or stopping the programs. Representatives from 10 of the initiatives noted that efforts to meet the programs’ requirements divert resources and attention from other efforts to enable interoperability. For example, some initiative representatives explained that the EHR programs’ criteria require EHR vendors to incorporate messaging capabilities into EHR systems, but this capability generally does not enable interoperability at this time. Representatives from 10 of the initiatives said that the criteria currently used to certify EHR systems under the EHR Incentive Programs are not sufficient for achieving interoperability, and representatives from 3 initiatives suggested amending the criteria to focus on testing systems’ ability to interoperate. We provided a draft of this report to HHS for comment. HHS provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of CMS, the National Coordinator for Health Information Technology, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix II. We identified nonfederal organizations that have ongoing initiatives that are working to facilitate electronic health record (EHR) interoperability. The 18 initiatives we selected for our work are listed below. California Association of Health Information Exchanges (CAHIE) Center for Medical Interoperability (C4MI) ConCert by Healthcare Information and Management Systems Society (HIMSS) eHealth Initiative (eHI) Electronic Healthcare Network Accreditation Commission (EHNAC) Healthcare Services Platform Consortium (HSPC) Identity Ecosystem Steering Group (IDESG) Healthcare Committee Integrating the Healthcare Enterprise (IHE) USA Kansas Health Information Network (KHIN) National Association for Trusted Exchange (NATE) Open ID Health Relationship Trust (HEART) Working Group Statewide Health Information Network of New York (SHIN-NY) Substitutable Medical Applications and Reusable Technologies (SMART) on Fast Healthcare Interoperability Resources (FHIR) In addition to the contact named above, Tom Conahan, Assistant Director; A. Elizabeth Dobrenz; Krister Friday; Monica Perez-Nelson; and Andrea E. Richardson made key contributions to this report. | EHR interoperability is viewed by many health care stakeholders as a necessary step toward improving health care. However, interoperability has remained limited. Although the federal government plays a key role in guiding movement toward interoperability, many of the actions are to be completed by nonfederal stakeholders. GAO was asked to review the status of efforts by entities other than the federal government to develop infrastructure that could lead to nationwide interoperability of health information. This report describes the (1) characteristics of selected nonfederal initiatives intended to facilitate EHR interoperability, and (2) key challenges related to EHR interoperability and the extent to which selected nonfederal initiatives are addressing these challenges. GAO interviewed representatives from 18 selected nonfederal initiatives that were frequently mentioned by stakeholders GAO interviewed, and reflected a range of approaches. GAO reviewed documents from these initiatives as well as other published research. Representatives from the 18 nonfederal initiatives GAO reviewed described a variety of efforts they are undertaking to achieve or facilitate electronic health record (EHR) interoperability, but most of these initiatives remain works in progress. EHR interoperability is the ability of systems to exchange electronic health information with other systems and process the information without special effort by the user, such as a health care provider. These initiatives' efforts include creating guidance related to health data standards, encouraging the adoption of certain health data standards or policies that facilitate interoperability, and operating networks that connect EHR systems to enable interoperability. The initiatives varied in a number of other ways, including the types of electronic systems the initiatives are working to make interoperable, the cost of their products or services, the geographic area served, patient use of the products or services, and their organizational structures. For example, GAO found that while some initiatives are making their products or services available at no cost, others are charging a fee for their products or services based on the type of entity using the product or service (e.g., individual physician or hospital) or the amount of data exchanged. Similarly, over half of the initiatives were using varying approaches to facilitate patient access to and control over their health information. The majority of the initiatives GAO selected are still in the process of developing, or encouraging others to adopt, their products or services. Most of the initiatives' products or services were not widely available at the time of GAO's review, but initiative representatives anticipated greater availability of their products or services in the next 2 years. Stakeholders and initiative representatives GAO interviewed described five key challenges to achieving EHR interoperability, which are consistent with challenges described in past GAO work. Specifically, the challenges they described are (1) insufficiencies in health data standards, (2) variation in state privacy rules, (3) accurately matching patients' health records, (4) costs associated with interoperability, and (5) the need for governance and trust among entities, such as agreements to facilitate the sharing of information among all participants in an initiative. Representatives from the 18 initiatives GAO reviewed said they are working to address these key challenges using different approaches. Each key challenge is in the process of being addressed by some initiatives. To move interoperability forward, initiative representatives noted, among other issues, that providers need to see an EHR system as a valuable tool for improving clinical care. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. |
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When first conceived, the LCS program represented an innovative approach for conducting naval operations, matched with a unique acquisition strategy that included two nontraditional shipbuilders and two different ships based on commercial designs—Lockheed Martin’s Freedom variant and Austal USA’s Independence variant, respectively. The Navy planned to experiment with these ships to determine its preferred design variant. However, in relatively short order, this experimentation strategy was abandoned in favor of a more traditional acquisition of over 50 ships. More recently, the Secretary of Defense has questioned the appropriate capability and quantity of the LCS. The purpose of the program has evolved from concept experimentation, to LCS, and more recently, to an LCS that will be upgraded to a frigate. The strategy for contracting and competing for ship construction has also changed. This evolution is captured in figure 1. While one could argue that a new concept should be expected to evolve over time, the LCS evolution has been complicated by the fact that major commitments have been made to build large numbers of ships before proving their capabilities. Whereas acquisition best practices embrace a “fly before you buy” approach, the Navy has subscribed to a buy before you fly approach for LCS. Consequently, the business imperatives of budgeting, contracting, and ship construction have outweighed the need to demonstrate knowledge, such as technology maturation, design, and testing, resulting in a program that has delivered 8 ships and has 14 more in some stage of the construction process (includes LCS 21, with a planned December 2016 construction start) despite an unclear understanding of the capability the ships will ultimately be able to provide and with notable performance issues discovered among the few ships that have already been delivered. The Navy’s vision for the LCS has evolved significantly over time, with questions remaining today about the program’s underlying business case. In its simplest form, a business case requires a balance between the concept selected to satisfy warfighter needs and the resources— technologies, design knowledge, funding, and time—needed to transform the concept into a product, in this case a ship. In a number of reports and assessments since 2005, we have raised concerns about the Navy’s business case for LCS, noting risks related to cost, schedule, and technical problems, as well as the overall capability of the ships. Business case aside, the LCS program deviated from initial expectations, while continuing to commit to ship and mission package purchases. The LCS acquisition was challenging from the outset. The Navy hoped to deliver large numbers of ships to the fleet quickly at a low cost. In an effort to achieve its goals, the Navy deviated from sound business practices by concurrently designing and constructing the two lead ship variants while still determining the ship’s requirements. The Navy believed it could manage this approach because it considered LCS to be an adaptation of existing commercial ship designs. However, transforming a commercial ship into a capable, survivable warship was an inherently complex undertaking. Elements of the business case further eroded— including initial cost and schedule expectations. Table 1 compares the Navy’s initial expectations of the LCS business case with the present version of the program. Our recent work has shown that the LCS business case continues to weaken. LCS ships under construction have exceeded contract cost targets, with the government responsible for paying for a portion of the cost growth. This growth has prompted the Navy to request $246 million in additional funding for fiscal years 2015-2017 largely to address cost overruns on 12 LCS seaframes. Similarly, deliveries of almost all LCS under contract (LCS 5-26) have been delayed by several months, and, in some cases, closer to a year or longer. Navy officials recently reported that, despite having had 5 years of LCS construction to help stabilize ship delivery expectations, the program would not deliver four LCS in fiscal year 2016 as planned. Whereas the program expected to deliver all 55 ships in the class by fiscal year 2018, today that expectation has been reduced to 17 ships. LCS mission packages, in particular, lag behind expectations. The Navy has fallen short of demonstrating that the LCS with its mission packages can meet the minimum level of capability defined at the beginning of the program. As figure 2 shows, 24 LCS seaframes will be delivered by the time all three mission packages achieve a minimum capability. Since 2007, delivery of the total initial mission package operational capability has been delayed by about 9 years (from 2011 to 2020) and the Navy has lowered the level of performance needed to achieve the initial capability for two packages—surface warfare and mine countermeasures. In addition to mission package failures, the Navy has not met several seaframe objectives, including speed and range. For example, Navy testers estimate that the range of one LCS variant is about half of the minimum level identified at the beginning of the program. As the Navy continues to concurrently deliver seaframes and develop mission packages, it has become clear that the seaframes and mission package technologies were not mature and remain largely unproven. In response, the Navy recently designated the first four LCS as test ships to support an aggressive testing schedule between fiscal years 2017 and 2022. Additional deficiencies discovered during these tests could further delay capability and require expensive changes to the seaframes and mission packages that have already been delivered. As the cost and schedule side of the business case for LCS has grown, performance and capabilities have declined. Changes in the LCS concept of operations are largely the consequence of less than expected lethality and survivability, which remain mostly unproven 7 years after delivery of the lead ships. LCS was designed with reduced requirements as compared to other surface combatants, and over time the Navy has lowered several survivability and lethality requirements further and removed some design features—making the ships less survivable in their expected threat environments and less lethal than initially planned. This has forced the Navy to redefine how it plans to operate the ships. Our previous work highlighted the changes in the LCS’s expected capability, as shown in table 2. Further capability changes may be necessary as the Navy continues to test the seaframes and mission packages, as well as gain greater operational experience. For example, the Navy has not yet demonstrated that LCS will achieve its survivability requirements and does not plan to complete survivability assessments until 2018—after more than 24 ships are either in the fleet or under construction. The Navy has identified unknowns related to the Independence variant’s aluminum hull, and conducted underwater explosion testing in 2016 but the Navy has yet to compile and report the results. Both variants also sustained some damage in trials in rough sea conditions, but the Navy has not completed its analytical report of these events. Results from air defense and cybersecurity testing also indicate capability concerns. The Navy elected to pursue a frigate concept based on a minor modified LCS. The frigate, as planned, will provide multi-mission capability that is an improvement over LCS and offers modest improvements to some other capabilities, such as the air search radar. Still, many questions remain to be settled about the frigate’s design, cost, schedule, and capabilities—all while the Navy continues to purchase additional LCS. Despite the uncertainties, the Navy’s acquisition strategy involves effectively demonstrating a commitment to buy all of the planned frigates—12 in total—before establishing realistic cost, schedule, and technical parameters—because the Navy will ask Congress to authorize the contracting approach for the 12 frigates (what the Navy calls a block buy contract) in 2017. Further, the frigate will inherit many of the shortcomings or uncertainties of the LCS, and does not address all the priorities that the Navy had identified for its future frigate. The costs for the frigate are still uncertain. Navy officials have stated that the frigate is expected to cost no more than 20 percent—approximately $100 million—more per ship than the average LCS seaframes. However, the Navy will not establish its cost estimate until May 2017— presumably after the Navy requests authorization from Congress in its fiscal year 2018 budget request for the block buy contracting approach for 12 frigates—raising the likelihood that the budget request will not reflect the most current costs for the program moving forward. In addition to the continued cost uncertainty, the schedule and approach for the frigate acquisition have undergone substantial changes in the last year, as shown in table 3. According to frigate program officials, under the current acquisition approach the Navy will award contracts in fiscal year 2017 to each of the current LCS contractors to construct one LCS with a block buy option for 12 additional LCS—not frigates. Then, the Navy plans to obtain proposals from both LCS contractors in late 2017 that would upgrade the block buy option of LCS to frigates using frigate-specific design changes and modifications. The Navy will evaluate the frigate upgrade packages and then exercise the option—now for frigates—on the contract that provides the best value based on tradeoffs between price and technical factors. This downselect will occur in summer 2018. Figure 3 illustrates how the Navy plans to modify the fiscal year 2017 LCS contract to convert the ships in the block buy options to frigates. The Navy’s current plan, which moves the frigate award forward from fiscal year 2019 to fiscal year 2018, is an acceleration that continues a pattern of committing to buy ships in advance of adequate knowledge. Specifically, the Navy has planned for its downselect award of the frigate to occur before detail design of the ship begins. As we previously reported, awarding a contract before detail design is completed—though common in Navy ship acquisitions—has resulted in increased ship prices. Further, in the absence of a year of frigate detail design, the Navy plans to rely on a contractor-driven design process that is less prescriptive. This approach is similar to that espoused by the original LCS program, whereby the shipyards were given performance specifications and requirements, selecting the design and systems that they determined were best suited to fit their designs in a producible manner. Program officials told us that this new approach should yield efficiencies; however, history from LCS raises concern that this approach for the frigate similarly could lead to the ships having non-standard equipment, with less commonality with the other design and the rest of the Navy. As LCS costs grew and capabilities diluted, the Secretary of Defense directed the Navy to explore alternatives to the LCS to address key deficiencies. In response, the Navy created the Small Surface Combatant Task Force and directed it to consider new and existing frigate design options, including different types of modified LCS designs. The task force concluded that the Navy’s desired capability requirements could not be met without major modifications to an LCS design or utilizing other non- LCS designs. When presented with this conclusion, senior Navy leadership directed the task force to explore what capabilities might be more feasible on a minor modified LCS. This led the task force to develop options with diminished capabilities, such as reduced speed or range, resulting in some capabilities becoming equal to or below expected capabilities of the current LCS. Ultimately, the department chose a frigate concept based on a minor modified LCS in lieu of more capable small surface combatant options because of LCS’s relatively lower cost and quicker ability to field, as well as the ability to upgrade remaining LCS. Table 4 presents an analysis from our past work, which found that the Navy’s proposed frigate will offer some improvements over LCS. For example, the Navy plans to equip the frigates with the mission systems from both the surface and anti-submarine mission packages simultaneously instead of just one at a time like LCS. However, the Navy’s planned frigate upgrades will not result in significant improvements in survivability areas related to vulnerability—the ability to withstand initial damage effects from threat weapons—or recoverability— the ability of the crew to take emergency action to contain and control damage. Further, the Navy sacrificed capabilities that were prioritized by fleet operators. For example, fleet operators consistently prioritized a range of 4,000 nautical miles, but the selected frigate concept is as much as 30 percent short of achieving such a range. The Director, Operational Test and Evaluation has noted that the Navy’s proposed frigate design is not substantially different from LCS and does not add much more redundancy or greater separation of critical equipment or additional compartmentation, making the frigate likely to be less survivable than the Navy’s previous frigate class. Further, the Navy plans to make some similar capability improvements to existing and future LCS, narrowing the difference between LCS and the frigate. We found that the proposed frigate does not add any new offensive anti-submarine or surface warfare capabilities that are not already part of one of the LCS mission packages, so while the frigate will be able to carry what equates to two mission packages at once, the capabilities in each mission area will be the same as LCS. While specific details are classified, there are only a few areas where there are differences in frigate warfighting capability compared to the LCS. Since it will be based on the LCS designs, the frigate will likely carry forward some of the limitations of the LCS designs. For example, LCS was designed to carry a minimally-sized crew of approximately 50. The Navy has found in various studies that the crew is undersized and made some modest increases in crew size. A frigate design based on LCS may not be able to support a significant increase in crew size due to limited space for berthing and other facilities. Additionally, barring Navy-directed changes to key mechanical systems, the frigate will carry some of the more failure-prone LCS equipment, such as some propulsion equipment, and will likely carry some of the non-fleet-standard, LCS-unique equipment that has challenged the Navy’s support and logistics chain. Uncertainties or needs that remain with the surface and anti-submarine warfare mission packages, such as demonstrating operational performance of the surface-to-surface missile and the anti-submarine warfare package, also pose risk for the frigate. The Navy’s plans for fiscal years 2017 and 2018 involve significant decisions for the LCS and the frigate programs, including potential future commitments of approximately $14 billion for seaframes and mission packages. First, the Navy plans to buy the last two LCS in fiscal year 2017, even though DOD and the Navy recognize that the LCS does not meet needs. Second, the Navy is planning to seek congressional authorization for a block buy of all planned frigates and funding for the lead frigate as soon as next year—2017—despite significant unknowns about the cost, schedule, and capability of the vessel. The Navy’s acquisition approach for the frigate raises concerns about overcommitting to the future acquisition of ships for which significant cost, schedule, and technical uncertainty remains. Similar to what we previously have advised about LCS block buy contracting, a frigate block buy approach could reduce funding flexibility. For example, the LCS contracts provide that a failure to fully fund the purchase of a ship in a given year would make the contract subject to renegotiation. Following this reasoning, such a failure to fund a ship in a given year could result in the government paying more for remaining ships under the contract, which provides a notable disincentive to take any action that might delay procurement, even when a program is underperforming. The Navy requested funding for two LCS in its fiscal year 2017 budget request. We previously suggested that Congress consider not funding any requested LCS in fiscal year 2017 because of unresolved concerns with lethality and survivability of the LCS design, the Navy’s ability to make needed improvements, and the lagging construction schedule of the shipyards. As figure 4 depicts, even if no ships were funded in fiscal year 2017, delays that have occurred for previously funded ships have resulted in a construction workload that extends into fiscal year 2020. In all, 8 ships have been delivered (LCS 1-8) and 14 are in various phases of construction (LCS 9-22), with 3 more (LCS 23, 24, and 26) set to begin construction later in fiscal year 2017. Although the Navy has argued that pausing LCS production would result in loss of production work and start-up delays to the frigate program, the schedule suggests that the shipyards in Marinette, Wisconsin, and Mobile, Alabama, will have sufficient workload remaining from prior LCS contract awards that offsets the need to award additional LCS in fiscal year 2017. The Navy’s concern also does not account for any other work that the shipyards may have from other Navy or commercial contracts and the possibility of continued delays in the delivery of LCS. On the heels of the decision to fund fiscal year 2017 LCS will be the decision on whether to authorize the frigate contracting approach and fund the lead frigate. As I noted above, the current acquisition plans for the frigate have been accelerated during the past year. If these plans hold, Congress will be asked in a few months to consider authorizing a block buy of 12 frigates and funding the lead frigate when the fiscal year 2018 budget is proposed—before detail design has begun and the scope and cost of the design changes needed to turn an LCS into a frigate are well understood. The frigate acquisition strategy also reflects a proclivity by the Navy to use contracting approaches such as block buys and multiyear procurement for acquisition programs, which may have the cumulative effect of inuring the programs against changes—such as in quantities bought. If you or your staff has any questions about this statement, please contact Paul L. Francis 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 statement. GAO staff who made key contributions to this testimony are Michele Mackin (Director), Diana Moldafsky (Assistant Director), Pete Anderson, Jacob Leon Beier, Laurier Fish, Kristine Hassinger, C. James Madar, Sean Merrill, LeAnna Parkey, and Robin Wilson. Littoral Combat Ship: Need to Address Fundamental Weaknesses in LCS and Frigate Acquisition Strategies. GAO-16-356. Washington, D.C.: June 9, 2016. Littoral Combat Ship: Knowledge of Survivability and Lethality Capabilities Needed Prior to Making Major Funding Decisions. GAO-16-201. Washington, D.C.: December 18, 2015. Littoral Combat Ship: Additional Testing and Improved Weight Management Needed Prior to Further Investments. GAO-14-827. Washington, D.C.: September 25, 2014. Littoral Combat Ship: Navy Complied with Regulations in Accepting Two Lead Ships, but Quality Problems Persisted after Delivery. GAO-14-749. Washington, D.C.: July 30, 2014. Littoral Combat Ship: Deployment of USS Freedom Revealed Risks in Implementing Operational Concepts and Uncertain Costs. GAO-14-447. Washington, D.C.: July 8, 2014. Navy Shipbuilding: Opportunities Exist to Improve Practices Affecting Quality. GAO-14-122. Washington, D.C.: November 19, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-738T. Washington, D.C.: July 25, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-530. Washington, D.C.: July 22, 2013. Defense Acquisitions: Realizing Savings under Different Littoral Combat Ship Acquisition Strategies Depends on Successful Management of Risks. GAO-11-277T. Washington, D.C.: December 14, 2010. National Defense: Navy’s Proposed Dual Award Acquisition Strategy for the Littoral Combat Ship Program. GAO-11-249R. Washington, D.C.: December 8, 2010. Defense Acquisitions: Navy’s Ability to Overcome Challenges Facing the Littoral Combat Ship Will Determine Eventual Capabilities. GAO-10-523. Washington, D.C.: August 31, 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. Best Practices: High Levels of Knowledge at Key Points Differentiate Commercial Shipbuilding from Navy Shipbuilding. GAO-09-322. Washington, D.C.: May 13, 2009. Defense Acquisitions: Overcoming Challenges Key to Capitalizing on Mine Countermeasures Capabilities. GAO-08-13. Washington, D.C.: October 12, 2007. Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255. Washington, D.C.: March 1, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Navy envisioned a revolutionary approach for the LCS program: dual ship designs with interchangeable mission packages intended to provide mission flexibility at a lower cost. This approach has fallen short, with significant cost increases and reduced expectations about mission flexibility and performance. The Navy has changed acquisition approaches several times. The latest change involves minor upgrades to an LCS design—referred to now as a frigate. Yet, questions persist about both the LCS and the frigate. GAO has reported on the acquisition struggles facing LCS and now the frigate, particularly in GAO-13-530 and GAO-16-356 . This statement discusses: (1) the evolution of the LCS acquisition strategy and business case; (2) key risks in the Navy's plans for the frigate based on the LCS program; and (3) remaining oversight opportunities for the LCS and small surface combatant programs. This statement is largely based on GAO's prior reports and larger work on shipbuilding and acquisition best practices. It incorporates limited updated audit work where appropriate. The Navy's vision for Littoral Combat Ship (LCS) program has evolved significantly over the last 15 years, reflecting degradations of the underlying business case. Initial plans to experiment with two different prototype ships adapted from commercial designs were abandoned early in favor of an acquisition approach that committed to numerous ships before proving their capabilities. Ships were not delivered quickly to the fleet at low cost. Rather cost, schedule, and capability expectations degraded over time. In contrast, a sound business case would have balanced needed resources—time, money, and technical knowledge—to transform a concept into the desired product. Concerned about the LCS's survivability and lethality, in 2014 the Secretary of Defense directed the Navy to evaluate alternatives. After rejecting more capable ships based partly on cost, schedule, and industrial base considerations, the Navy chose the existing LCS designs with minor modifications and re-designated the ship as a frigate. Much of the LCS's capabilities are yet to be demonstrated and the frigate's design, cost, and capabilities are not well-defined. The Navy proposes to commit quickly to the frigate in what it calls a block buy of 12 ships. Congress has key decisions for fiscal years 2017 and 2018 that have significant funding and oversight implications. First, the Navy has already requested funding to buy two more baseline LCS ships in fiscal year 2017. Second, early next year, the Navy plans to request authorization for a block buy of all 12 frigates and funding in the fiscal year 2018 budget request for the lead frigate. Making these commitments now could make it more difficult to make decisions in the future to reduce or delay the program should that be warranted. A more basic oversight question today is whether a ship that costs twice as much yet delivers less capability than planned warrants an additional investment of nearly $14 billion. GAO has advised Congress to consider not funding the two LCS requested in 2017 given its now obsolete design and existing construction backlogs. Authorizing the block buy strategy for the frigate appears premature. The decisions Congress makes could have implications for what aspiring programs view as acceptable strategies. GAO is not making any new recommendations in this statement but has made numerous recommendations to the Department of Defense (DOD) in the past on LCS and frigate acquisition, including strengthening the program's business case before proceeding with acquisition decisions. While DOD has, at times, agreed with GAO's recommendations, it has taken limited action to implement them. |
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Efficient payment systems are important for the smooth functioning of the large and complex U.S. economy. As the availability and use of technology evolves, the payment systems at all government levels must adapt to the changing needs and expectations of individuals, businesses, and governments. The U.S. Treasury disburses the great majority of federal government payments, including benefit payments. Increasingly, in recent years, Treasury has made those disbursements electronically. Treasury and other federal agencies using electronic payments have a variety of mechanisms with which to make benefit payments, including direct deposit, EBT, and other EPCs. In the United States, many payments traditionally made with paper instruments—checks and cash—are now being made electronically, with debit or credit cards or via the automated clearinghouse (ACH). Until recently, paper checks accounted for the majority of noncash payments. A 2002 Federal Reserve Board of Governors (Federal Reserve) study concluded that the number of checks paid annually in the United States likely began to decline during the mid-1990s. A 2005 Federal Reserve study stated that the average annual rate of decline in the number of checks paid is estimated to have been 3.3 percent between 1995 and 2000 and 4.3 percent between 2000 and 2003. The cumulative effect of the growth in electronic payments has only recently become large enough to substantially affect the number of checks paid. By 2003, led by rapid growth in debit card payments, the number of electronic payments exceeded the number of check payments for the first time in U.S. history. As of 2006, electronic payments comprised over two thirds of all noncash payments by number, but less than half by value. Specifically, the number of electronic payments was 62.7 billion in 2006, with a value of $34.1 trillion, compared with 30.6 billion checks paid in 2006, with a value of $41.7 trillion. Some of the increase in the use of electronic payments was due to changes in the financial behavior of consumers and businesses, particularly their payment instrument choice. For example, electronic payments have been used more frequently in transactions where checks or cash may have been used in the past. Many other factors, such as growth in economic activity and population, may have contributed to the increase in electronic payments. Figure 1 shows the annual number of electronic and paper check payments in the United States for selected years—that is, 1995, 2000, 2003, and 2006. The large number of electronic payments generally indicates the growing efficiency of the payment system, according to the 2005 Federal Reserve study. The processing of paper payments typically requires extensive physical handling. Automation has created opportunities for depository institutions and other payment processors not only to introduce new payment instruments, but also to reduce their costs in processing paper and electronic payments. Future innovations are expected to continue to help decrease costs and add value and functionality. Treasury’s FMS is the primary disburser of payments to individuals and businesses on behalf of federal agencies. Annually, FMS disburses almost 1 billion payments, with an associated dollar value of more than $1.6 trillion. Programs administered by SSA account for the largest percentage of Treasury-disbursed benefit payments. The majority of SSA’s payments fall under the Old-Age and Survivors Insurance and the Disability Insurance programs. These programs combined are commonly referred to as Social Security. In addition, SSA administers the SSI program. Besides administering payments for SSA, Treasury makes retirement and compensation payments on behalf of (1) DOL for victims of black lung disease, (2) the Office of Personnel Management for retirement benefits for federal employees, (3) the Railroad Retirement Board (RRB) for retired railroad workers, and (4) VA for benefits paid to veterans or their survivors. As of fiscal year 2008 (through January), about 88 percent of all Treasury-disbursed payments are benefit payments made on behalf of these agencies. Treasury’s use of electronic payments to disburse these benefit payments has increased significantly over the past decade. As shown in figure 2, in fiscal year 1996 Treasury disbursed 56 percent of the total volume of benefit payments electronically compared with 81 percent in fiscal year 2007. As of fiscal year 2008 (through January), 81.6 percent of these benefits were paid electronically. Treasury experienced the greatest gains in the use of electronic payments between fiscal years 1996 and 1999, where there were increases of about 5 to 6 percent per year. Beginning in fiscal year 2000, electronic payment volumes generally increased about 1 percent per year. Federal agencies use several electronic methods, some dating to the 1970s, to distribute recurring benefits and payments to individuals. As originally implemented, direct deposit is the electronic transfer of a benefit or other type of payment into a checking, share draft, savings, or prepaid card account. However, this option could only be used for delivering benefits when a benefit recipient who has a bank account chooses to authorize direct deposit. Technological advances in the way EFT works now allow for direct deposit to payroll and other types of prepaid debit cards that are not tied to an individual account in the name of the cardholder, but rather draw funds from a pooled account that may hold money belonging to thousands of cardholders. Federal programs, such as Social Security, SSI, Railroad Retirement, Veterans Benefits, and Civil Service Retirement, have used direct deposit since as early as 1976. The DCIA instructed Treasury to ensure that individuals have access to an account at a financial institution, that such an account have the same consumer protections provided to other account holders, and that the account be provided at a reasonable cost. In a variation of direct deposit, Treasury designed the Electronic Transfer Account (ETA) in July 1999 to ensure that individuals who receive a federal benefit, wage, salary, or retirement payment have access to a federally insured account. According to Treasury, at the time of our review, there were currently about 90,000 active ETA accounts. In addition to methods that link and distribute benefits to a bank or other account, the federal government uses a variety of disbursement options that employ cards. For example, the primary delivery vehicles for food stamp payments are EBT cards. Food stamp recipients use a debit-type card that allows them to access their food stamp benefits at point-of-sale (POS) terminals in USDA-authorized retail grocers. The EBT cards are industry-standard magnetic stripe debit cards that are protected by using an industry-standard personal identification number (PIN). These cards are not tied to a consumer asset account, and generally the account structures and processing requirements differ from other payment cards. EBT cards can be used to deliver benefits to banked and unbanked recipients and also can be used to deliver multiple benefits using a single card. EBT works well when the benefit form is noncash and when access to benefits are limited to certain locations, like food retailers. Other types of cards can be used for multiple functions or at a wide variety of retail locations. For example, EPCs can be employed to deliver benefit payments to banked and unbanked recipients. One EPC can be used to deliver multiple payments to the cardholder—for example, enabling the cardholder to receive both state and federal payments. Depending on the structure and enrollment criteria of programs, EPCs also can be used to receive direct deposit of payroll or other nongovernment payments. Some EPCs are debit cards tied to a cardholder-owned account, while others are prepaid or stored-value cards tied to an aggregated account that is not cardholder owned. The stored-value card allows a prepaid balance of funds to be recorded electronically on a card. Both types of EPCs can support government payment needs. The debit cards use magnetic stripe technology and can be processed online or offline. An online transaction results in the immediate electronic transfer of funds and requires the use of a PIN to authorize the transaction. With an offline transaction, a hold is placed against the buyer’s account for the amount of the transaction, but the settlement is not made immediately. Offline debit transactions can be signature-based—that is, they require the customer to sign a receipt—or PIN-secured. Embedded computer chips can turn stored-value cards into “smart cards” that store cardholder information. Smart cards are considered offline systems because they do not have a real-time connection to a host processing system that authorizes the transaction. Transaction authorization and PIN verification occur in communications between the chip and a smart card “reader” at the POS. Furthermore, EPCs can be “branded” or “nonbranded.” Branded cards have a MasterCard, American Express, Discover, or Visa logo and allow cardholders to conduct signature-based transactions anywhere that those brands are accepted as well as at ATM and POS machines. Nonbranded cards allow PIN-based transactions only through POS or ATM networks. Federal benefit programs generally are any such programs administered or funded by the federal government, or by any agent or state on behalf of the federal government, that provide cash or in-kind assistance in the form of payments, grants, loans, or loan guarantees to individuals. Government assistance programs can be critically important to the well-being of individuals and their families. A variety of benefit programs exist for veterans, seniors, students, children, people with disabilities, dependents, disaster victims, farmers, caregivers, and others. As discussed more fully in appendix I, for this review, we identified and analyzed data for 42 federal benefit programs that provided recurring payments to individuals. These programs are under the purview of 11 federal agencies, including SSA, DOL, USDA, and HHS, among others. The types of federal programs that we identified included food and nutrition assistance programs, training and education assistance programs, and income support programs. Our survey of 42 federal benefit programs showed that the majority of these programs were using electronic payments to deliver benefits to recipients. In some cases, the programs used more than 1 type of electronic payment. However, 6 programs indicated that they did not use electronic payments, and that they disbursed benefit payments by paper check. Eighteen of the 42 programs we surveyed provided data we needed to compute the percentage of payments made electronically. Of these 18 programs, the percentage of payments made electronically ranged from about 5 to 100 percent. Some programs were unable to provide us with data because they are federal benefit programs administered by states. Thus, data are collected by individual states and are not available at the federal level. Of the 42 programs we surveyed, 34 programs (81 percent) indicated that they used electronic payment methods to distribute benefits to recipients; 6 programs indicated they did not use electronic payments; and 2 programs indicated that they were unsure whether they used electronic payments. Of the 34 programs that used electronic payments, 20 programs were administered at the federal level—as opposed to the state agency level—and about half of the 34 programs paid cash benefits to recipients on a monthly basis. In addition, 16 of the 34 programs using electronic payments were needs-based programs, which require recipients to meet some qualifications on the basis of factors such as income, familial status, or household size. As shown in more detail in appendix II, 31 of the 34 programs that used electronic payments provided data on the number of recipients in the program, and 30 of the 34 programs provided data on the total dollar value of benefits made to recipients in the program in fiscal year 2006. More specifically, 16 of the 34 programs that used electronic payments indicated there were fewer than 1 million recipients in the program in fiscal year 2006. Two programs—Food Stamp and Social Security Retirement Insurance—reported having 26.7 million and 33.9 million recipients, respectively, in fiscal year 2006. The remaining programs that used electronic payments reported having between 1 million and 9 million recipients. In addition, 7 of the 34 programs that used electronic payments indicated that the total dollar value of payments made to recipients in fiscal year was less than $20 million. Fifteen programs reported disbursing $100 million to $10 billion in benefit payments in fiscal year 2006, and the remaining programs that used electronic payments disbursed more than $10 billion in benefit payments during the same year. The largest program we surveyed, in terms of dollar value of benefit payments, was the Social Security Retirement Insurance program, which distributed $418 billion in benefit payments in fiscal year 2006. The programs used a variety of electronic payment options for delivering the benefits. For example, 25 programs distributed benefits through direct deposit; 9 programs used EBT; and 8 programs used another type of EPC, such as the debit card. However, some programs used more than 1 type of electronic method. The Low Income Home Energy Assistance Program, for example, indicated that it used 3 electronic payment options—direct deposit, EBT card, and debit card. Most of the 34 programs that made electronic payments indicated that they did so for a majority of their recipients. About 59 percent of the programs that responded to the question (20 of 34) indicated that all, almost all, or most of their recipients received payments through electronic methods. Twenty-three programs (68 percent of those who responded to the question) indicated that about half or more of their recipients received payments electronically. Although most of the programs we surveyed used an electronic payment method, the following 6 programs indicated that they did not use an electronic payment method to distribute benefits, and that they delivered benefits using paper checks: Women, Infants, and Children Farmers’ Market Nutrition Program Survivors and Dependents Educational Assistance Post-Vietnam Era Veterans’ Educational Assistance Indian Job Placement United Sioux Tribe Development Corporation These 6 programs each had fewer than 3 million recipients in fiscal year 2006 and expended less than $500 million in benefit payments that year. Four programs had fewer than 100,000 recipients in fiscal year 2006. The Women, Infants, and Children Farmers’ Market Nutrition Program had about 2.5 million recipients. In addition, 4 programs expended less than $100 million in fiscal year 2006, but the Survivors and Dependents Educational Assistance program expended about $495 million in benefit payments. All 6 programs provided cash benefits to recipients; however, the frequency of payments made to the recipients varied. For example, 3 programs paid benefits monthly, 2 programs paid benefits annually, and 1 program distributed benefits on a quarterly basis. See appendix II for selected information on the 42 programs we surveyed. Eighteen of the 42 programs we surveyed were able to provide specific data that would allow us to calculate the percentage of the total dollar value of payments that were made electronically (see fig. 3). Of these 18 programs, the percentage of payments made electronically ranged from about 5 to 100 percent. One reason for some programs’ inability to provide data was that they are federal benefit programs administered by states. Thus, data were collected by individual states and were not available at the federal level. Other reasons for the programs not being able to provide the data included their not being able to disaggregate payment data or collect payment data by type of payment. Eight of these 18 programs reported having made 100 percent of their payments electronically (see fig. 3). However, 6 of these programs are education assistance programs, which may pay benefits directly to an educational institution, rather than to an individual. For example, the Nurse Anesthetist Traineeships, Scholars and Fellows, and Minority Faculty Fellowship programs indicated that they distribute their benefits directly to universities or training providers by electronic means. The remaining 2 programs that reported making 100 percent of their payments electronically were USDA’s Nutrition Assistance for Puerto Rico and Food Stamp programs. While most programs we surveyed used electronic means, many programs indicated that they used paper checks to distribute benefits. Thirteen of the 42 programs provided sufficient data that would allow us to calculate the percentage of the total dollar value of payments paid by paper check (see fig. 4). For those 13 programs, the percentage of payments made by paper check ranged from about 1 to 100 percent. Of these 13 programs, 9 distributed less than half of the total dollar value of benefit payments by paper check. The remaining 4 programs distributed 100 percent of their benefit payments by paper check. Federal and state agencies, industry representatives, and others widely agree on the advantages of electronic payments, including timely payments for recipients and reduced costs for agencies. However, agencies also consider other factors, such as certain perceived disadvantages, program characteristics, costs and efficiencies, and security risks, when determining whether and how to implement electronic payments or when encouraging the increased use and acceptance of electronic payments among recipients and the public. According to agency officials, industry representatives, and consumer groups, the use of electronic methods to make benefit payments has advantages for the recipient. For example, according to agency officials, electronic payments are secure and reliable because they use the ACH network to deliver payment. According to Treasury, ACH provides the recipient with a secure, dependable, and efficient way to receive payments. Recipients can also receive their payments more quickly. Benefit payments are deposited on a specific date, and recipients no longer have to wait in line to pick up a check or wait for it to arrive in the mail. Benefits paid electronically are also more easily replaced if lost or stolen. Treasury officials explained that if a check were stolen, it might take as long as several months to replace a claimant’s check; in contrast, if an electronic payment file were lost or misdirected, replacement funds could be provided electronically on the same or the next day. Also, recipients can purchase products as needed without forfeiting unused benefits. For example, the vast majority of benefits under USDA’s WIC program are issued using paper checks or vouchers, but certain states are piloting or have implemented WIC EBT, which is an electronic method for distributing WIC benefits. When the WIC program uses paper vouchers, recipients have to purchase all food items listed on their voucher at one time. With WIC EBT, however, recipients can buy as much or as little of their authorized food prescription at any time during the authorized benefit period, and the EBT system automatically manages expiration of any unused benefits. According to a consumer group representative, electronic payments offer other advantages, including convenience and the ability to withdraw funds in small increments to prevent the need for recipients to carry around large sums of cash. Finally, electronic payment methods can provide intangible benefits. According to agency and industry representatives, EBT cards reduced the stigma associated with using food stamp coupons or vouchers. Representatives from one industry group stated that recipients involved in focus groups stated that using the EBT card gave them a sense of pride. Furthermore, an evaluation of the EBT system in one state indicated that substantial majorities of recipients, retailers, and financial institutions prefer the EBT system to the check or coupon system. However, certain bank and automated teller machine (ATM) fees associated with electronic payments may increase the cost of using electronic payments, especially for recipients with precarious financial circumstances or low account balances. Minimum balance requirements for bank accounts may pose a hindrance for recipients, according to agency officials, because financial institutions may impose fees when the account balances fall below the minimum requirement. Also, according to agency officials and a consumer group representative, ATM withdrawal fees can increase the costs of using an electronic payment, especially when out-of-network ATMs are used. Financial institutions are permitted to impose fees for overdrawn accounts, which may affect recipients who may not be financially savvy or who have precarious financial circumstances, according to agency officials and a consumer group representative. Furthermore, recipients residing in rural or remote areas often lack access to financial services, making the delivery of benefits to a bank account or on an EPC more challenging. For example, agency officials stated that many businesses in rural areas, particularly those on Indian reservations, do not accept debit cards. In addition, agency officials explained that remote Indian reservations and Alaska Native communities may lack the infrastructure (e.g., telephone lines and the Internet) needed to implement electronic payments, and not all reservations have access to banks and ATMs. Certain recipients may face specific challenges in obtaining electronic payments or using cards to access benefits. For example, some SSI and VA recipients have mental or physical disabilities that could hinder their ability to manage a bank account for direct deposit of their benefits. Also, because many SSI recipients have an individual appointed to manage their benefit payments due to the nature of their disabilities, the use of electronic payments can pose challenges relating to titling of accounts. Moreover, dexterity and visual challenges that elderly recipients or recipients with disabilities face also can make it difficult to use an EPC. In addition to issues related to physical and mental disabilities, according to VA officials, some older veterans from the World War II and Vietnam War eras simply distrust the government and would prefer to receive a paper check. Certain banking practices and varying levels of consumer protection may hinder the acceptance of electronic payments by some consumer group representatives and recipients. Although some federal benefits are generally exempt from garnishment, a consumer group representative with whom we spoke was concerned that banks did not distinguish exempted funds when processing a garnishment order. Certain federal benefit payments—such as Social Security, SSI, and veterans’ benefits, which are generally exempt under federal law from garnishment and the claims of judgment creditors—often constitute an important part of, and sometimes all of, a recipient’s income. As a result, when financial institutions receive garnishment orders and place freezes on accounts containing exempt federal benefit funds pending resolution of the garnishment process, the recipients of these funds can face significant hardship. At the same time, financial institutions are required by state law to comply with garnishment orders, which may necessitate placing a freeze on an account that contains federal benefit payments. According to the consumer group representative, payments drawn on an account before the recipient becomes aware that the account was frozen are returned to the bank unpaid, and the bank assesses fees for those returned items, which are also taken from the recipient’s account. The representative stated that this practice causes a hardship for low-income, elderly, and disabled Social Security recipients. Also according to this representative and an agency official, some recipients make a deliberate decision to receive a paper check, rather than to sign up for direct deposit, so that their benefits will not be garnished. Treasury officials acknowledged concerns related to the garnishment of benefits, and stated that Treasury is working with banking regulators to determine how best to segregate funds in bank accounts to address such issues. On September 28, 2007, the federal financial institution regulatory agencies issued proposed guidance to encourage financial institutions to have policies and procedures in place regarding the handling of garnishment orders. The agencies developed the proposed guidance to address concerns associated with the garnishment of exempt federal benefit payments, and to encourage financial institutions to minimize the hardships encountered by federal benefit recipients while remaining in compliance with applicable law. Among the practices included in the proposed guidance are that a financial institution should promptly determine if an account contains only exempt federal benefit promptly notify a consumer when receiving a garnishment order and placing a freeze on the consumer’s account, minimize the cost to the consumer when the account containing exempt funds is frozen by refraining from imposing overdraft or insufficient funds fees or by refunding such fees when the freeze is lifted, and offer consumers segregated accounts containing only federal benefit funds without commingling other funds. Treasury officials stated that they recognized the concerns of many benefit recipients that their federal benefit payments may be garnished in violation of federal law. Treasury has a new payment option that may help to address this issue—the Direct Express card, which is more fully discussed later in this report. According to Treasury, this card has no monthly fee and many free services, and, because only federal benefit payments may be deposited on the card, there should not be any confusion concerning whether an individual’s money is generally protected from garnishment in accordance with federal law. Consumer groups have also raised concerns about the varying levels of consumer protection offered to recipients receiving benefits through different electronic methods. According to consumer group representatives with whom we spoke, consumer protections are not the same for recipients using EPCs. Regulation E, the implementing rule of the Electronic Fund Transfer Act, establishes protections for individuals engaging in electronic fund transfers and applies to any electronic fund transfer that authorizes a financial institution to debit or credit a consumer’s account. However, Regulation E does not apply to needs- tested benefits in a program established under state or local law or administered by a state or local agency. According to USDA officials, EBT cards that are used to deliver food stamp and other cash benefits administered by the states, such as Temporary Assistance for Needy Families (TANF), are exempt from Regulation E requirements. Recipients using these cards, for example, may not be compensated for benefits that might have been used by an unauthorized individual, according to consumer group representatives. Although such EBT cards are not covered by Regulation E, an industry representative told us that some benefit programs have requirements for dispute resolution. For example, USDA has dispute resolution requirements for food stamp EBT transactions that were perceived by the official to be in the best interest of the beneficiary. Certain programs have characteristics that make implementing or expanding electronic payments more complicated. According to agencies and industry representatives, programs that distribute cash benefits can be easily converted to electronic payments. However, noncash or service delivery programs can present more complex planning and technology challenges. For example, WIC benefits are not cash, but a food “prescription,” that provides certain nutritional items tailored to the needs of the individual recipient that only can be obtained at authorized retailers. Challenges to the electronic distribution of WIC benefits include keeping the database of universal product codes (UPC) updated, because the codes are needed to identify eligible food items. USDA is currently working to implement, and some states have volunteered to pilot, a national UPC database that would allow agencies and food manufacturers to enter product information into the database. A workgroup of state agencies, food retailers, and food manufacturers was convened to assist in identifying and resolving critical issues associated with the database. Another challenge to distributing WIC benefits electronically is processing the different types of WIC EBT transactions. For example, some states use an “online” EBT card with the magnetic stripe, and other states use the “offline” EBT card with the circuit chip. USDA officials stated that USDA is working with retailers to update their existing cash register systems so they can process both types of EBT cards used by state agencies. Furthermore, according to USDA officials, not having a common set of standards for transaction processing to govern WIC EBT transactions poses a challenge. Therefore, USDA works with retailers, industry representatives, and state agencies in an effort to develop standards that will lay the groundwork for nationwide WIC EBT. According to USDA officials, USDA has worked with Accredited Standards Committee X9, Inc., which is an American National Standards Institute accredited standards developing organization, to define common processes for WIC EBT transactions processed using both online and offline EBT cards and is working with certain states to develop standard practices for WIC EBT transactions, such as setting standards for the type of information that should be on a WIC EBT receipt. The Trade Adjustment Assistance (TAA) program administered by DOL, which provides assistance to individuals adversely affected by increased imports to help them obtain suitable employment, is composed of an income-assistance component and service-delivery components. The income-assistance component of the benefit, called Trade Readjustment Allowance (TRA), is provided to individuals in the form of a monetary, or cash, payment. One of the service-delivery components of the benefit provides assistance for education or training in the form of vouchers. Officials in one state have explored ways to implement an electronic solution for training vouchers issued through the TAA program. Officials we interviewed in other states stated they had successfully implemented or planned to implement an electronic payment option for the TRA cash benefit. For example, almost all TRA benefits in Minnesota are disbursed using a debit card or direct deposit, and state officials in Georgia stated that they have successfully delivered TRA benefits through direct deposit since 1999. State officials we interviewed in California stated that they were considering issuing TRA benefits using a debit card. Payments for programs, such as unemployment insurance and Social Security, that do not restrict how or where funds are used can be made through many types of electronic methods. Treasury officials stated that one method—EBT—is a better option for programs with restrictions such as the Food Stamp Program, which only can be redeemed for eligible food items at authorized locations. According to a paper published by NACHA—The Electronic Payments Association, EBT is generally most effective as a payment solution when the transfer of value involves requirements specific to program policy or unique recipient needs that differentiate it from a simple payment product. One industry representative with whom we met stated that if a benefit program has rules restricting how the benefits are accessed and used, then it needs an EBT solution. If the benefits are unrestricted, then other payment cards work well. Another industry representative also stated that if a benefit payment is strictly cash, then EBT is not the best option; rather, EPCs are better for benefits that include cash payments. Along with the type of benefit, agencies also consider how to meet the needs of various stakeholders when deciding to implement an electronic payment solution. For example, USDA officials stated that they had to consider the impact of WIC EBT on grocers and retailers to develop a system that would meet the needs of all users. Agency officials in one state told us that they conducted focus groups with local health clinics, grocers, WIC recipients, and the advocacy community to obtain input from all stakeholders prior to implementing WIC EBT. Stakeholder reluctance, on the other hand, can inhibit federal programs from implementing electronic payments or prolong the development of an electronic payment mechanism. For example, an industry representative we interviewed explained that one state opposed the interoperability of EBT among states because it did not get the additional revenue from sales taxes when its EBT customers purchased food items from a bordering state with no sales tax. Typically, it costs less to issue an electronic payment than to issue a paper check. Treasury estimated that in fiscal year 2007, a check payment cost the federal government $0.979 and an electronic payment cost $0.099. According to Treasury, the government could have potentially realized an annualized cost savings in fiscal year 2007 of more than $189 million for all check payments that could have been paid electronically. State agencies have also cited cost reduction and efficiency as key reasons for implementing electronic payments. For example, electronic payments eliminate check ordering, storage, printing, and postage costs for the agency. The use of electronic payments also reduces paperwork and other administrative processes for the agency. According to some state agency officials and industry representatives, cost savings and efficiency are only fully realized when 100 percent of payments are disbursed electronically. For example, an industry representative stated that the benefits of electronic payments are realized when paper checks are eliminated; that is, when there is no need for any type of infrastructure to distribute and process checks. Another industry representative with whom we spoke also stated that, in the long run, as fewer and fewer paper checks are printed, the cost per check will continue to increase because there will be fewer economies of scale. According to this representative, true efficiencies would be realized only when checks are no longer used. Officials in one state agency stated that providing recipients with benefits by paper check was not an option because the agency would need two parallel payment systems to accomplish one task, which would not be cost-effective. In response to these officials’ and representatives’ statements, Treasury stated that it maintains a check payment system in addition to its electronic payment options. One of the reasons that Treasury maintains its check payment system is to make payments to recipients without bank accounts, or unbanked recipients. According to Treasury, approximately 4 million recipients of Social Security and SSI benefits are unbanked, and there has been no widely used national initiative to deliver electronic payments to unbanked recipients. Furthermore, electronic payments to the unbanked are not mandated. According to Treasury, the savings from making an electronic payment compared with making a check payment will continue to be realized as check costs rise due to postage increases and other cost increases, such as paper and envelopes. However, cost can be a deciding factor in implementing or choosing between electronic payment methods, according to agency officials. According to some agency officials with whom we spoke, implementing electronic payments for a benefit program is resource-driven. To accomplish electronic payments, agencies need funding and staff. According to BIA officials, some Indian reservations and Alaska Native communities would have difficulty bearing the costs associated with administering and maintaining an electronic system. An industry representative with whom we spoke explained that a primary cost of implementing electronic payments is associated with modifying software, planning meetings to discuss technical and operational aspects of the project, and training staff. Agency officials explained that before implementing electronic payments for a specific program, they have to consider the cost-effectiveness of doing so. For example, the current payment system for the Veterans Education Assistance Program is not capable of generating electronic payment files and would have to be redesigned to accommodate this feature. Fewer than 500 individuals are eligible to receive benefits under this program, and the number of eligible recipients is declining. Therefore, VA officials stated that the benefits they would realize from implementing electronic payments for this program would not outweigh the associated up-front costs. Other agency officials echoed VA’s sentiment, stating that it is sensible for an issuer to use electronic payments to make large numbers of payments. However, if the issuer were making only a small number of payments, it might be more advantageous for it to issue paper checks. Small or low-volume programs were not the only ones that cited up-front costs as a challenge to the electronic delivery of benefits. The WIC program has had difficulty finding an electronic payment model that can provide effective services at a reasonable cost. For example, a WIC EBT system requires sophisticated POS devices that can identify and sort foods by category and amount. Also, according to a USDA official, the WIC program does not have much funding for development of new payment systems. For example, an early attempt at WIC EBT in the New England region was inhibited by, among other things, up-front costs borne by the WIC program. In another example, USDA terminated a WIC EBT pilot in Ohio due to the high costs associated with the monthly caseload. USDA officials explained that states have to be able to afford to operate the WIC EBT program within the administrative funding amount provided annually. According to USDA, if Ohio had expanded its WIC EBT pilot statewide, the costs would have been too expensive to operate, given the amount of funding the state received to administer the program. However, according to USDA officials, other states have successfully implemented WIC EBT within the cost restraints of the program. For example, Wyoming was the first state to implement WIC EBT statewide in January 2002, and New Mexico implemented WIC EBT statewide in December 2007. Texas and Michigan are currently in the process of implementing WIC EBT statewide and expect to be fully implemented by early 2009. USDA also provides grants to states to assist with implementing WIC EBT. According to USDA officials, they give priority to states that are piloting WIC EBT. In 2007, USDA also offered preplanning awards for states that expressed an interest in using WIC EBT. States can use the preplanning grant funds to conduct feasibility studies for implementing WIC EBT, among other things. According to USDA officials, a thorough cost evaluation is needed before a state agency can determine whether it can afford the ongoing cost of WIC EBT within its nutrition services and administration budget. USDA officials stated that many factors impact the affordability of WIC EBT. Because each state agency has discretion in how it operates its WIC program and designs its paper benefit delivery system, costs vary from state to state. This cost variation, in turn, makes it difficult to assess the affordability of EBT across all states. Each state agency must assess whether it can find savings by replacing current paper-based systems with electronic benefit delivery systems. For example, if a state agency’s banking costs for processing paper food instruments is high, elimination of that cost may help offset the cost of EBT. Furthermore, states that can process EBT transactions using state resources, rather than hiring an EBT processor, may experience a lower EBT cost than state agencies that must pay ongoing processor fees. Furthermore, although different electronic payment methods can appear to be equally cost-efficient and feasible to implement, they may present different operational costs. Generally, state agencies bear the cost of making payments using EBT because they pay a fixed cost to the EBT provider on the basis of the number of households that receive a benefit allotment in a given month. Payment providers can provide other payment cards at no cost to the state agency because they can gain revenue from the transaction in the form of interchange or other transaction fees (e.g., ATM withdrawal fees) paid by the retailer or the card user. An industry representative stated that, at one time, EBT was a good means for distributing cash payments to beneficiaries, but now the current trend is for programs that distribute cash benefits to provide beneficiaries with branded EPCs that function like debit cards. The administering agency must pay a monthly fee for each individual that uses an EBT card. However, with branded EPC cards, the administering agency may not be responsible for a monthly fee because the card issuer (e.g., VISA or MasterCard) collects a portion of the interchange fees. Electronic payments can help reduce certain risks associated with a paper environment, including fraud and payment system vulnerabilities, but risks continue to exist in an electronic environment. In an effort to bolster information system security in the federal government, Congress passed the Federal Information Security Management Act of 2002, which authorized and strengthened information security program, evaluation, and annual reporting requirements for federal agencies. Virtually all federal operations are supported by automated systems and electronic data, and agencies would find it difficult, if not impossible, to carry out their missions and account for their resources without these information assets. Therefore, it is important for agencies to safeguard their systems against risks such as loss or theft of resources (such as federal payments and collections), modification or destruction of data, and unauthorized uses of computer resources. According to agency officials and industry representatives, risks associated with an agency’s payment system exist regardless of the method used to distribute benefits. As agencies implement electronic methods for distributing benefit payments, they should be aware of how susceptible to risk the payment system is and how risks may change in an electronic environment. To assist agencies in providing adequate security, the federal government and the electronic payments industry have developed standards for EBT and other types of EPCs. Federal rules and regulations resulting from the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which mandated nationwide EBT issuance of food stamp benefits, established technical standards for processing EBT transactions. Also, the Quest Operating Rules, which set forth the requirements for the distribution of government benefits under the Quest service mark, provide technical standards for the exchange and processing of EBT transactions. Adherence to the Quest Operating Rules is optional, and states that have not adopted these rules operate under state-specific rules. According to USDA officials, whether or not states adopt the Quest Operating Rules, they must follow the standards and regulations established by various federal rules governing food stamp EBT transactions, which include compliance with applicable standards developed by the American National Standards Institute and the International Organization for Standardization. In addition, the Payment Card Industry (PCI) Data Security Standard, which major credit card companies developed to help organizations that process card payments prevent credit card fraud and various other security vulnerabilities and threats, provides a set of comprehensive requirements for enhancing payment account data security. One industry representative stated that the increased use of payment cards has resulted in an increased awareness of the importance of maintaining high standards for security. In addition to security standards, electronic payments provide a complete audit trail for agencies, which makes it easier to resolve payment errors and detect fraud. According to USDA officials, EBT systems in particular can identify suspected patterns of fraud and create electronic audit trails that provide the agency with an opportunity to target its fraud investigations. USDA collects daily food stamp transaction data from each state and adds the data to its EBT transaction database for analysis. The system scans these data to flag transactions or sets of transactions that fit a certain set of criteria defined by established patterns of fraudulent activity. The system then generates a monthly “Watch List” of retailers with suspicious transaction patterns incongruent with a store’s particular type of retail operation. Since adopting EBT for food stamps, USDA officials told us that fraud has been reduced dramatically. The national rate of food stamp trafficking declined from about 3.8 cents per dollar of benefits redeemed in 1993 to about 1 cent per dollar during the period of 2002 to 2005. However, electronic payments are susceptible to unauthorized use, loss, or theft, just as paper payments, albeit to a lesser extent. According to Treasury officials, most problems are associated with paper checks. They stated that the level of risk with check payments will always be considerably higher than that of electronic payments, since checks are more susceptible to being lost, stolen, or forged. Electronic systems also are vulnerable to the use of benefits inconsistent with program policy or the erroneous or unauthorized establishment and funding of benefits. The use of EBT cards for food stamps has changed how food stamp benefits are trafficked, for example, by making it much more difficult for middlemen who previously collected and redeemed large amounts of paper coupons from recipients who were willing to sell them. Now, some food stamp recipients can stand outside of stores offering to loan their EBT cards to shoppers entering the store. In this situation, the shopper would purchase groceries using the card and return it with a discounted amount of cash to the recipient upon leaving the store. Recipients can also swipe their EBT card, but instead of buying groceries, they receive a discounted amount of cash and the retailer keeps the difference. In addition, for certain VA benefits, there is a risk that authorized individuals could fail to notify the agency that a recipient is deceased to continue to receive funds, and could continue to withdraw funds from the deceased recipient’s bank account. According to an industry representative, recipients can sell an EPC and the PIN, and then report that the card had been lost or stolen to recoup lost benefits. However, according to federal and state agency officials and industry representatives, electronic payments are much less susceptible to fraud and risk than payments made by a paper instrument, such as a check or voucher. Federal and state agencies could employ various options to increase the use of electronic payments to distribute federal benefit payments. These options include requiring recipients to receive their benefits electronically through mandates, making electronic payment the default option, promoting the benefits of electronic payment through public outreach, using pilot programs, and applying EPCs in a variety of ways. The most- sweeping option for increasing use of electronic payments would be mandating electronic payments without exception for recipients. Other, less-sweeping alternatives also could result in the increased use of electronic payments, and they range from making electronic payment a default option upon benefit enrollment to greater public education and outreach. These alternatives also include piloting electronic distribution programs and applying EPCs in new ways. Treasury, the primary disbursing agency for the federal government, has introduced several initiatives and conducted outreach to federal agencies in its efforts to support and increase the use of electronic payments. For example, Treasury has met with CFOs from the largest federal agencies to discuss Treasury’s program initiatives, such as increasing electronic payments. However, Treasury has no plans to meet with CFO agencies and other smaller agencies on a regular basis. The most-sweeping option—and one that would guarantee an increase in the use of electronic payments—would involve mandating electronic payments without exceptions for recipients. Congress could mandate that all federal benefit payments be made electronically and not allow recipients to opt out of receiving payments electronically. Current federal law covers some, but not all, federal benefit payments, since, as stated by Treasury, the law does not include federally funded, state-disbursed payments. In addition, Treasury’s implementing regulations include a waiver policy, which permits individuals to determine for themselves whether direct deposit would cause them a hardship. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 is an example of a mandate with no exceptions for recipients. The act required that state agencies administering the Food Stamp Program use EBT exclusively by 2002 to distribute benefits, except for those states facing unusual barriers to implementing an EBT system. However, once implemented, EBT became mandatory for the recipients. In a 2002 report, we did not identify any overall technical barriers impeding the statewide implementation of EBT systems. Although, we did note that four jurisdictions, which collectively distributed about 1.7 percent of food stamp benefits nationally, delayed their implementation, in part, due to concerns over the higher cost of EBT over the old paper coupon system of food stamp benefit delivery. According to USDA, as of June 2004, all 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands were operating EBT systems to issue food stamp benefits. Overall, several industry representatives agreed that EBT works well, and many prefer it because it is convenient and safer than checks or cash. Furthermore, some agency officials with whom we spoke said they require or will require electronic payments for certain state-administered federal benefits, such as unemployment insurance, without a statutory mandate. Specifically, agency officials said they notified recipients that direct deposit or a debit card were the only payment options available to them. However, a mandate would present challenges, particularly for certain types of programs. For example, as we noted in the previous section of this report, challenges to using EBT for WIC involve the product-driven nature of the benefit. Although Congress has not mandated that USDA WIC benefits be distributed electronically, one industry representative and two agency officials indicated that states adopting EBT for the WIC program are by default making EBT distribution a requirement because that is the only way the benefits would be distributed. As of March 2008, only two states had implemented WIC EBT statewide. Depending on the type of technology being used, states may need to modify the existing electronic checkout system to process WIC transactions. According to one industry representative, an electronic WIC solution that uses a magnetic stripe can be used at any retailer equipped with an electronic cash register system. However, a solution that uses smart card technology, where a chip is embedded in the card, would require special equipment to read the chip. Furthermore, a representative of one consumer group noted that making electronic payments mandatory for recipients reduces the incentive for the industry to develop good EBT products and deliver quality services. Some consumer groups and industry representatives believe that recipients should be given a choice of how their benefit payments are distributed. Rather than mandating electronic payments for recipients, agencies could choose a less-sweeping option that would make electronic payment the primary payment option on benefit applications. According to some industry representatives, enrollment in a benefits program should automatically default to electronic distribution. That is, individuals would receive benefits electronically, unless they specifically opted out and asked for a paper check. According to one industry group, this approach likely would foster broader acceptance and prove less intimidating to elderly recipients than an approach without the choice of opting out. In addition, a few industry representatives stated that recipients were less likely to opt out of receiving payments electronically because it would require some effort on their part. Some industry representatives indicated that exceptions could be retained for certain recipients with special challenges or needs—for example, those living in remote areas with limited banking access—should continue to receive paper checks. However, one industry representative contended that providing an opt out puts an agency in the position of having to support multiple distribution processes; that is, electronic as well as paper infrastructures. Furthermore, officials from one state told us that having parallel systems reduced cost savings. Officials from another state we interviewed said that offering paper checks as an option afforded recipients a ready opportunity to decline electronic payments. In another approach, agencies could conduct consumer outreach to educate recipients of the benefits they could derive from receiving their payments electronically and, as a result, could increase their acceptance and use of electronic methods. Agency officials, some consumer groups, and industry representatives indicated that consumer outreach helps in promoting electronic payments. Along these lines, Treasury has conducted consumer outreach through a variety of means. For example, Treasury, in partnership with SSA, has communicated directly with Social Security recipients at preretirement seminars and indirectly through printed publications. More specifically, Treasury’s key marketing strategy to inform check recipients about the advantages of direct deposit is to include mail inserts with their payments. Treasury also has tailored its communications strategies for different audiences. According to Treasury officials, the use of media such as radio, television, and outdoor advertising (e.g., signage at bus stops) is a better way to reach the unbanked, rather than the use of print media. In other examples, officials from one state agency told us they issued press releases about the benefits of electronic payments, sent mailings to recipients of certain benefit payments to encourage them to sign up for direct deposit or the debit card, and led discussions with labor union representatives and workers to obtain feedback. Two representatives from an industry group stated that they did not know how effective conducting consumer outreach would be because it was already well-known that electronic payment programs worked well. They also stated that mail inserts might not be effective because individuals tended to throw inserts away. Piloting an electronic benefit program is yet another mechanism that agencies can use to increase electronic payments. Implementing pilot programs can demonstrate whether recipients or other stakeholders, such as retailers, are receptive to electronic payments and identify needed refinements or fixes that could make electronic payments more feasible. Several industry representatives and agency officials agreed that pilot programs give agencies a chance to test information and payment systems as well as an opportunity to gauge public perceptions and acceptance of methods and products that agencies use. However, one industry representative contended that pilots are not always necessary because the success of electronic payment solutions had already been proven. Several states—including Michigan, New Mexico, Ohio, Texas, Washington, and Wyoming—have piloted or are in the process of piloting WIC EBT to test its feasibility before rolling out the program statewide. According to the results of the Washington State online WIC demonstration project and some agency officials and industry representatives, the pilots helped gain acceptance among retailers, recipients, and others. In a survey of participants in the Washington State pilot, 60 percent of the recipients said EBT was much better than paper checks. While the survey results for retail staff, including managers, were mixed, they agreed that they liked the concept of WIC EBT but believed that enhancements to the terminals were necessary. Washington’s WIC commitment was only for 6 months, and, according to USDA, Kentucky will continue the project begun in Washington to further test the use of online technology for WIC EBT. An agency official from another state reported that the pilot program led to enhancements of its WIC EBT pilot system. Specifically, its vendor identified a glitch in the pilot system that placed a hold on recipients’ benefit accounts while waiting for the EBT host to confirm a transaction. The delayed processing could have prevented the recipients from using the EBT cards for a few hours. The vendor modified the system so that this step was no longer required and recipients’ accounts were no longer put on hold. In contrast, as we have previously discussed, Ohio’s pilot was terminated in June 2005 because of the high cost to process EBT transactions. According to USDA officials, it would have been too expensive, at that time, for Ohio to operate the WIC EBT system statewide with the amount of administrative funding it received. As EBT has become more widely accepted and the use of debit card technology has increased, state agencies administering federal benefits are exploring other types of EPCs to further increase the use of electronic payments. The recent increased use of debit card payments (e.g., according to the 2007 Federal Reserve Payments Study, the number of debit card payments increased from 15.6 billion in 2003 to 25.3 billion in 2006) has led states to explore using variations of the EBT and the EPC cards to deliver benefit payments. For example, some states have explored using hybrid cards to deliver multiple state-administered benefits. Hybrid technology involves the issuance of a single card with a magnetic stripe and integrated chip technology that could allow recipients to access benefits as well as store cardholder information such as medical records. Specifically, benefits such as Food Stamp and TANF would be accessed by swiping the magnetic stripe, whereas medical information would be read from the integrated chip embedded in the card. According to an industry group, smart cards are generally more durable than magnetic stripe cards because the data on the stripe can easily be changed or can be erased by magnets. In addition, smart cards have the ability to carry a variety of applications, such as identification and payment data, on a single card. While some states have used the EBT card to deliver multiple benefits, some have also been considering using a “co-branded” EBT card to deliver a number of benefits. The card—which, for example, can bear both the Quest service mark and a logo, such as Visa or MasterCard—would allow benefit recipients to access restricted and unrestricted government-issued benefits using a single payment card. Specifically, the co-branded card would be accepted for unrestricted cash transactions at all locations that accept commercial payments such as Visa or MasterCard. With co- branding it is presumed that food stamp benefits, which are restricted, would be established as a separate account type from cash benefits, thereby ensuring that purchases could only be made at USDA authorized retail locations. Individual states have been considering co-branded cards for a variety of reasons. According to the Electronic Benefits and Services Council’s white paper on the co-branding of EBT cards, some states have determined that their clients would like a single card. For example, 87 percent of the clients surveyed in Texas would like to have a single card. States on the Gulf Coast have sought the best and easiest way to disburse funds after a disaster. Furthermore, other states seek to increase the number of locations where recipients could access benefits and payments. However, the concept of co-branding is relatively new, and state agencies and the electronic payment industry continue to explore many issues associated with co-branding. For example, according to the Electronic Benefits and Services Council’s white paper, a cardholder could conduct a co-branded transaction by using either a PIN or a signature. Federal regulation limits food stamp transactions to PIN-based transactions, and merchants favor the use of PIN-based transactions because they are comparatively low cost for the retailer. However, a signature-based transaction generally allows the cardholder to access cash benefits at virtually any retail location that accepts commercial payments, such as Visa or MasterCard. Treasury, as the primary disbursing agency for the federal government, has introduced two initiatives and is working on a third program to encourage the use of electronic payments to distribute federal benefit payments for programs for which they disburse payments. The first initiative, “Go Direct,” is Treasury’s marketing and education campaign targeting check recipients. The goal of the campaign is to have more individuals convert from paper checks to direct deposit by emphasizing the benefits of direct deposit—such as safety, security, and convenience. According to Treasury, over the last 3 years, 1.8 million recipients have converted from paper checks to direct deposit. However, the rate of growth in direct deposit has slowed. Furthermore, Treasury stated that it faced challenges in converting unbanked recipients to electronic payments and in reaching new enrollees. To overcome challenges related to converting check payments to electronic payments, Treasury developed a second initiative. Specifically, in January 2007, Treasury piloted the Direct Express debit card (bearing the MasterCard logo) for 1 year to unbanked Social Security and SSI recipients in Illinois. Approximately 3,000 recipients participated in the program. According to its Web site, Treasury’s financial agent established a Direct Express account for the recipients, who then could use the card at ATMs to access benefits in their accounts. The pilot was successful, and Treasury launched the Direct Express card nationwide in April 2008. According to Treasury officials, results of a survey conducted after the pilot showed that 85 percent of the card users were satisfied with the debit card, and that 88 percent indicated that they would refer the program to a family member or a friend. Information provided on Treasury’s Web site indicated that Direct Express gives recipients the advantages of direct deposit, even if they do not have a bank account. In addition, Treasury explained on its Web site that the Direct Express card offers cardholders the convenience and security of making purchases anywhere that MasterCard is accepted and of getting cash back at thousands of locations and ATMs. Some of the services provided free of charge include purchases at retail locations, cash back with purchases, or cash withdrawal through banks or credit unions; one ATM cash withdrawal for each deposit posted to accounts each month when using a Direct Express ATM; balance inquiry at ATMs, by telephone or online; and access to the toll-free customer service number or Web site 24 hours a day, 7 days a week. Furthermore, the Direct Express card benefits are FDIC-insured, and the consumer protections of Regulation E (such as disclosures of consumer liability and procedures for resolving errors) apply to the debit card account. The Web site also notes that Treasury and SSA strongly recommend that Social Security and SSI recipients receive benefits electronically—either by direct deposit to their bank accounts or to a Direct Express debit card. However, recipients are not required to sign up for the Direct Express card if they do not have a bank account. Furthermore, if after signing up for a Direct Express card, recipients do not like using it, they may close their card account. As an alternative, Treasury suggests that these recipients enroll in direct deposit. According to Treasury officials, because of the many features that we have previously described, they are optimistic that the debit card will reach the core of check recipients that are reticent about electronic payments. Lastly, to address the challenge that new enrollees present, Treasury is working closely with SSA to ensure that new SSA benefit enrollees sign up for direct deposit at the point of the initial application for benefits. Through a newly designed application process, SSA will encourage benefit applicants to sign up for direct deposit into an existing bank account. Furthermore, SSA will offer the Direct Express debit card to individuals who do not have bank accounts. Treasury and SSA will also market direct deposit and the Direct Express debit card to preretirees. Although Treasury disburses payments for some federal agencies and programs, it does not disburse payments on behalf of all federal agencies because some agencies have authority to disburse payments themselves— for example, when an agency has statutory authority or when Treasury delegates to an agency the authority to issue specific payments. As the federal government’s leader for payments, Treasury said that its goal is to move toward an all-electronic government for disbursement and collection of payments. Toward this end, Treasury, in its Fiscal Years 2003-2008 Strategic Plan has discussed increasing electronic payments as a strategic goal and also has identified a cross-cutting objective and strategy, such as including federal program agencies as key partners in achieving this goal. Furthermore, Treasury encourages all agencies to improve their cash management practices by using EFT whenever cost-effective, practicable, and consistent with statutory authority. For example, Treasury officials told us that they met with CFOs from the largest federal agencies (those under the CFO Act) to discuss payment solutions and other issues, and that they are willing to meet with any federal agency to discuss issuing payments on their behalf electronically. Specifically, in the late fall of 2006 and early 2007, FMS’s Commissioner and Deputy Commissioner established an effort to meet with the CFO and Deputy Chief Financial Officer of each of the 24 CFO Act agencies. In addition, the Commissioner and Deputy Commissioner attended a Small Agency Council meeting of the financial officers of executive federal agencies that are not a part of the CFO Act. These meetings with other agencies were designed as an opportunity for Treasury to strengthen communications and establish relationships with those who influence financial management within the federal sector as well as to discuss Treasury’s program initiatives, such as increasing electronic payments. According to Treasury, there was universal support during the CFO meetings for its goal of moving to all-electronic means for payments and collection. Treasury also noted that agencies cited as concerns a lack of staff and a lack of funding resources to undertake EFT and related electronic initiatives, although these concerns were not specific to electronic payment. Treasury introduced this action due to personnel changes in FMS’s Office of the Commissioner and in the CFO offices of some agencies. In addition, according to Treasury, as a part of its routine business activities, Treasury conducted informal outreach at the program level, particularly to staff from the larger agencies for which it disburses payments, such as SSA and VA, to encourage the use of electronic payments. These efforts were positive in introducing agencies to Treasury’s initiatives and also provided Treasury with information on some of the challenges agencies were facing in using electronic methods. However, while Treasury’s focus has primarily been on the larger agencies for which it disburses payments, smaller agencies could also benefit from these outreach efforts. Treasury has not conducted outreach to CFOs and staff from smaller agencies on a consistent basis and has no plans for more regular outreach to CFOs and smaller agencies, including those that may not fully use electronic payments. However, officials from one agency told us that other agencies could benefit from Treasury’s experience and expertise on electronic solutions. By developing a means to ensure regular dialogue with the CFO Act agencies and other smaller agencies for which Treasury disburses payments, Treasury may be able to further encourage the use of electronic payments and help agencies develop solutions to address the challenges or constraints they are facing. Such action could assist Treasury in reaching its goal of moving to an all-electronic government for payments. The use of electronic payments to disburse federal benefits appears to be increasingly accepted by agencies and recipients. The results of our survey of 42 federal benefit programs indicated that 34 programs used some form of electronic payment to disburse benefits to the majority of recipients. At the same time, some of these programs also continue to disburse benefits using a paper check, and some programs we surveyed did not disburse benefits electronically, which means that some challenges remain to increasing the use of electronic payments. Agency officials and industry and consumer group representatives were largely in agreement that there are several advantages of electronic payments compared with paper checks, but they also recognized that agencies have several factors to consider when making the decision to implement an electronic payment method. When agencies decide to implement an electronic payment method to disburse benefits, they do so while considering the perceived disadvantages of electronic payments, characteristics of the program whose payments will be made electronically, costs of implementing and using an electronic method, and potential risks associated with electronic payments. Taking these factors into consideration can help agencies understand how best to choose and implement the most appropriate electronic payment method for distribution of federal benefit payments. Doing so might also have the added benefit of encouraging the increased use and acceptance of electronic payments among recipients. Federal and state agencies have a range of options to increase the use of electronic payments to distribute federal benefits payments, and, specifically, Treasury has a leadership role in supporting the use of electronic payments. These options include the most-sweeping option that mandates electronic payments without exception to less-sweeping alternatives that range from making electronic payment a default option to conducting more public education and outreach and implementing pilot programs. Moreover, through its initiatives, such as the “Go Direct” campaign and the Direct Express debit card, Treasury has used some of these options and assisted agencies for which it disburses payments in increasing the use of electronic payments. Treasury has also taken steps to encourage federal agencies to improve their financial management practices, including increasing the use of electronic payments. Conducting such an outreach effort on a more regularly scheduled basis—including meeting with the agencies we identified in this report that did not use electronic payments or did not fully use electronic payments to disburse benefits—would allow Treasury to include more detailed discussions about electronic payments and develop ongoing relationships with agencies’ CFOs and staff who could use Treasury’s expertise to move toward the use of electronic payments governmentwide. To help Treasury achieve its goals of increasing the use of electronic payments and moving to an all-electronic government, we recommend that the Secretary of the Treasury direct the Commissioner of FMS to consider developing a process for conducting outreach to federal agencies on a more regular basis, with the goal of identifying opportunities for increasing the use of electronic payments. For example, Treasury could meet with agency CFOs, or their designees and with staff from smaller agencies, on a semiannual or annual basis to discuss challenges that agencies face in moving to electronic payments and to identify actions that Treasury and agencies could take to facilitate the transition to electronic payments. We requested comments on a draft of this report from the Secretaries of Treasury and USDA. In an e-mail summarizing comments from Treasury’s Financial Management Service, Treasury noted that it generally agreed with the report. Treasury did not comment on the recommendation but stated that it would address the recommendation in its statement of actions to congressional committees not later than 60 days after the date of the report. Treasury suggested we note in the report that while there has been increased support for mandating electronic payments, some consumer and special interest groups have not been supportive of implementing a mandatory electronic delivery method for delivering benefits. Our report presented various options that exist for agencies to increase electronic distribution of federal benefits, including mandating electronic payments for recipients. We noted in the report that there are concerns about making electronic payments mandatory. Specifically, we stated that some consumer groups and industry representatives believe that recipients should be given a choice of how their benefits payments are distributed. Treasury also provided technical comments that we incorporated in the report as appropriate. Officials from USDA’s Food and Nutrition Service provided oral comments on a draft of this report and stated that they agreed with its overall message. USDA officials specifically stated that up-front costs did not pose the greatest challenge to implementing WIC EBT because the WIC program provides grants to state agencies for EBT project planning and development. Although these officials expressed concern that the grant funds are limited, they stated that the bigger issue for WIC is the ability of state agencies to afford the ongoing costs of EBT. We added language in the report that explains the difficulty with assessing states’ ability to afford the ongoing costs of a WIC EBT program. USDA officials also stated that while WIC EBT will allow greater cost monitoring and provide administrative efficiencies, cost reduction is not a key reason for implementing WIC EBT. We understand that not all programs implement electronic payments solely to reduce costs. Nonetheless, agency officials we interviewed cited cost reduction and efficiency as key reasons for implementing electronic payments. We did not specifically attribute this statement to USDA officials, nor did we make a specific reference to WIC EBT. USDA officials also noted that the report discussed fees that could be passed on to recipients, such as those for minimum balances or ATM fees, but that such fees do not apply to EBT cards that offer access to targeted benefits outside of banks—for example, Food Stamp or WIC benefits redeemed at authorized retailers using the EBT card. We acknowledge that the type of fee and extent to which fees apply vary by the type of electronic payment method being used. We also understand that there are no associated fees for recipients when using EBT cards to access Food Stamp and WIC benefits. However, such fees may apply when accessing other types of benefits—for example, unrestricted cash benefits—using an EBT card or another type of EPC. Our intent was to generally describe the types of perceived disadvantages of using electronic payment methods— which included fees, recipient and benefit characteristics, and certain banking practices, among others—and not necessarily to link only EBT to a discussion of fees or to imply that all methods of electronic payment have all of the perceived disadvantages described in the report. USDA officials also provided technical comments, which we incorporated in the report where appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of the report to the Chairman, House Committee on Oversight and Government Reform, and other interested congressional committees. We are also sending copies of this report to the Secretary of the Treasury; the Secretary of Agriculture; the Chairman, Board of Governors of the Federal Reserve System; the Commissioner of the Social Security Administration; the Secretary of Labor; and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8678 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) describe the extent to which federal programs are using electronic payment methods to disburse benefits; (2) identify factors that agencies consider when implementing or using electronic payments; and (3) identify potential options for increasing the use of electronic payments, particularly the Department of the Treasury’s (Treasury) actions to increase electronic payments. To respond to these objectives, we reviewed agency documents, reports, and studies on electronic payments. We interviewed Treasury officials and collected written and testimonial information about their experiences in implementing and using electronic payment methods to distribute benefits, as well as current initiatives aimed at increasing the use of electronic payments. We conducted a site visit to Harrisburg, Pennsylvania, and met with state agency officials in the state’s Department of Health, Department of Public Welfare, and Office of the Budget to obtain information on the state’s use of electronic payments because Pennsylvania was the first state to pilot Electronic Benefit Transfer for the Food Stamp Program in October 1984. We interviewed officials at the following six federal agencies responsible for overseeing or administering federal benefit programs that provided recurring benefits to individuals to obtain information on their use of electronic payments: the U.S. Department of Agriculture (USDA), Department of Labor (DOL), Department of Veterans Affairs, Social Security Administration (SSA), Department of the Interior’s Bureau of Indian Affairs, and Department of Health and Human Services. We also attended conferences sponsored by NACHA—The Electronic Payments Association’s Electronic Benefits and Services Council and the Electronic Funds Transfer Association to observe presentations from a variety of federal and state agencies, electronic payment providers, and private-sector consultants on issues related to implementing and using electronic payment methods to disburse benefits. To determine the extent to which federal programs use electronic payments, we used the Catalog of Federal Domestic Assistance (CFDA) and the Federal Assistance Award Data System (FAADS) to identify federal benefit programs that provided recurring payments to individuals. CFDA and FAADS, used together, provided general information on each federal benefit program, including a brief description of the program, the number of recipients in the program, and dollar amounts obligated for the program. Our analysis of CFDA and FAADS data began on June 14, 2007, and we used the most recently available data as of that date for our analysis. For CFDA, we analyzed data from fiscal year 2006. The most recent complete set of available data from FAADS was from fiscal year 2005. We first queried the CFDA database to obtain a list of programs that would be suitable for our review. The CFDA query returned a list of programs, for which the team needed corresponding data from FAADS, including the number of recipients and the dollar amount obligated for each program. The unique CFDA number for each program was the primary data element that allowed us to obtain corresponding information from the FAADS database for those programs identified in CFDA. Therefore, we queried a list of similar programs using the FAADS database. These queries ultimately returned 455 federal benefit programs. The team developed criteria and, using program descriptions from CFDA, agency, and other government Web sites, conducted a content analysis of the programs to determine which of the 455 programs identified by FAADS and CFDA met our criteria for further review. For example, consistent with our criteria, we excluded programs whose benefits were not ultimately paid to individuals, programs that did not provide recurring payments, loan or loan guarantee programs, programs whose payments were made in connection with an insurance program, and programs whose payments subsidized the hiring or salaries of employees. On the basis of our review of the programs using these multiple sources of information, we selected 45 federal programs that met the criteria. As such, the final selection of programs for study was a nonrandom, nongeneralizable sample of programs selected to represent a variety of federal benefit programs that exist. The FAADS and CFDA databases provided information that allowed us to identify programs, but the databases did not provide information on whether electronic payments were used to disburse benefit payments. Therefore, we surveyed the 45 programs we identified to obtain information on the extent to which they used electronic payments. We conducted a Web-based survey with the 11 agencies responsible for administering the 45 programs, but we later excluded 3 programs upon receiving their survey responses. We requested the names and e-mail addresses of specific program respondents—typically, program officials or managers in the divisions responsible for administering the program— from the GAO liaison at each agency in which we sent surveys. To ensure security and data integrity, we provided each program respondent with a Web address, a unique identification number, and a password to allow them access to the survey. The survey included questions on program funding and benefits, program data and statistics, electronic payments, paper check payments, voucher payments, and other types of payments used to deliver benefits. To prepare for the survey, we pretested the survey with program officials for 4 programs to determine whether respondents would understand questions the way that we intended. Since the survey was administered via the Internet, we also conducted a usability pretest with officials from 1 of the programs we surveyed to observe the respondent answering the survey questions as they would appear when the survey was activated. To increase the response rate of the survey respondents, we sent two reminder notices via e-mails to encourage completion prior to the survey deadline and conducted follow-up telephone calls to those programs that did not respond to the survey by the initial deadline. We checked the validity of the survey data by conducting limited checks of the accuracy of survey responses from agency officials using a data verification protocol. We identified key survey items for which we wanted to verify or obtain additional information as well as other survey items that were missing or incomplete. For the programs that we determined should not have been included in the review on the basis of their survey responses, we did not conduct follow-up if the program provided sufficient information to determine that it should have been excluded. Survey development, such as obtaining contact information for survey respondents and conducting survey pretests began on September 10, 2007, and our collection of survey responses ended on January 31, 2008. We received responses from all 42 programs, providing an overall response rate of 100 percent. While the overall response rate to the survey was 100 percent, not all survey questions were answered by our respondents, particularly the two questions that asked for the total dollar value of benefits paid electronically and by paper check. To assess the reliability of the FAADS and CFDA databases, we (1) reviewed existing information related to the data sources, (2) performed electronic testing for obvious errors in accuracy and completeness, and (3) interviewed agency officials knowledgeable about these data. There were certain limitations with the FAADS and CFDA databases—namely, the fact that the information is self-reported by various agencies and may have missing or incorrect information. However, given our intended use of the FAADS and CFDA data—to identify programs that provide recurring benefits to individuals, not to identify the entire universe of federal benefit programs or make statements about a particular population of programs— and the results of previous reliability assessments of CFDA, the data elements were sufficiently reliable for the purposes of selecting a variety of programs to include in our review. To identify factors to consider when implementing electronic payments and options for increasing use of electronic payments, we interviewed and obtained documentation from Treasury and other federal agencies, such as USDA, DOL, and SSA, among others. We also met with experienced private-sector consultants who had assisted agencies in developing or implementing electronic payment solutions, such as Booz-Allen Hamilton; Maximus; and Burger, Carroll, and Associates, Inc., and with the three major electronic payment providers that agencies use to implement electronic payment solutions—J.P. Morgan Chase, Affiliated Computer Services, and EFD (eFunds Corporation). In addition, we obtained the views of consumer advocacy organizations, such as the Consumer Federation of America, Consumers Union, and the National Consumer Law Center. Finally, we interviewed representatives from groups representing the electronic payments industry, such as the Electronic Funds Transfer Association and NACHA—The Electronic Payments Association. We also selected the following 5 programs from our survey to use as case illustrations and examined additional information related to their experiences using electronic payments: Supplemental Nutrition Program for Women, Infants, and Children; Indian Social Services Welfare Assistance; Supplemental Security Income; Unemployment Insurance; and Trade Adjustment Assistance. In selecting programs for case illustrations, we considered survey responses that were important for describing the characteristics of each program, such as the type and frequency of the benefit payment; the number of recipients in the program; the dollar value of benefit payments made to recipients in the program; and the extent to which the program used electronic payments to disburse benefits. The team then purposively selected programs that represented a variety of the characteristics found in the data. Four of the 5 programs that we selected for case illustrations were federal programs whose benefits were administered by individual state or tribal agencies. For these programs, we selected state and tribal agencies in Arizona, California, Georgia, Michigan, Minnesota, Ohio, Oklahoma, Texas, and Utah and conducted interviews with program officials to obtain more information on factors that they considered when deciding to implement electronic payments and options for increasing the use of electronic payments. In selecting state agencies and tribes, we considered various factors, such as whether they were using or planning to use electronic payments, had conducted pilots to test the feasibility of using electronic payments, and recommendations from agency officials. We conducted our work from April 2007 through June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Selected Data for the 42 Federal Benefit Programs We Surveyed, by Dollar Value of Benefit Payments (Fiscal Year 2006) Dollar value of benefit payments (FY 2006) (FY 2006) Use an electronic payment method? Dollar value of benefit payments (FY 2006) (FY 2006) Use an electronic payment method? Dollar value of benefit payments (FY 2006) (FY 2006) Use an electronic payment method? In addition to the individual named above, Kay Kuhlman, Assistant Director; Mark Egger; Kevin Jackson; Jamila Jones; Yola Lewis; Robert Lowthian; Natalie Maddox; Andrew Nelson; Carl Ramirez; Linda Rego; and Barbara Roesmann made key contributions to the report. | Traditionally, federal agencies made benefit payments by paper check, but they faced increased pressure to reduce costs and increase the convenience, security, and timeliness of payment delivery. In response to a 1996 congressional mandate, the U.S. Department of Agriculture's Food Stamp Program implemented Electronic Benefit Transfer (EBT) to distribute food stamps. According to agency evaluations, EBT has reduced program costs and fraud and offered recipients a quick, secure way to receive payment. These results spurred interest in using electronic payment methods for other benefit programs. GAO was asked to report on (1) the extent to which federal benefit programs are using electronic payments, and factors agencies consider for their use and (2) options for increasing the use of electronic payments, particularly the Department of the Treasury's (Treasury) actions to that end. GAO surveyed federal benefit programs identified from two federal databases; reviewed documents, reports, and studies on electronic payments; and interviewed federal and state agency, industry, and consumer representatives. Most federal benefit programs GAO surveyed (34 of 42) reported using 1 or more electronic payment methods, and the majority of those programs also indicated that most of their recipients received their benefits electronically. Less than half (18 of 42) of the programs surveyed provided data that would allow GAO to determine the percentage of payments made electronically, in part because state agencies disburse payments for many programs. For the 5 largest, by dollar value, programs that provided data, about 54 to 100 percent of payments were made electronically (see figure below). Agencies consider various factors, including financial burden to recipients, program and recipient characteristics, program costs, and fraud and security risks, when making a decision to use an electronic payment method for the delivery of benefits. Various options exist for agencies to increase electronic distribution of federal benefits, including (1) mandating that recipients receive benefits electronically, (2) making electronic payment the default option upon enrollment, (3) promoting electronic payments through public outreach, (4) piloting electronic distribution programs, and (5) using electronic payment cards in new ways. Treasury has introduced key initiatives in its efforts to support and increase the use of electronic payments, particularly programs for which Treasury disburses payments, such as Social Security benefits. However, Treasury does not disburse payments for all federal benefit programs. In 2006 and 2007, Treasury met with federal Chief Financial Officers (CFO) to discuss Treasury's cash management initiatives, such as increasing electronic payments. Treasury also discussed electronic payments with program staff from larger agencies for which Treasury disburses payments. However, Treasury has no plans to conduct these meetings regularly with CFO agencies and other smaller agencies. Treasury's role as the federal government's leader for payments and its experience with electronic payment methods suggest that it could provide valuable information and assistance to smaller agencies with less experience or expertise. Regularly scheduled outreach efforts to other agencies could provide opportunities for Treasury to increase the use of electronic payments. |
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Under the Postal Reorganization Act of 1970 (the 1970 Act), the Postal Service is an independent establishment in the executive branch that began operations on July 1, 1971. The Postmaster General, Deputy Postmaster General, and the nine presidentially appointed members of the Postal Board of Governors direct the operations of the Postal Service. The 1970 Act set a number of goals, objectives, and restraints for the Postal Service. The Postal Service is to operate in a businesslike manner and is to break even in the long term. Unlike its competitors who can select the markets they serve, the Postal Service by statute must provide universal service to all urban, suburban, and rural customers at uniform and reasonable rates. To regulate the Postal Service’s adherence to ratemaking standards and to ensure that it does not take advantage of its monopoly—granted through the Private Express Statutes—on the delivery of letter mail, the 1970 Act established the Postal Rate Commission as an independent establishment of the executive branch. The 1970 Act requires the Postal Service to file with the Commission a request for changes in rates for all services offered. As part of its request, the Postal Service provides detailed information and data explaining revenue requirements, mail-volume estimates, costing, pricing, and rate design. The Commission must hold public hearings and allow interested parties, including Postal Service competitors, the opportunity to make their views on proposed rate changes known. The Commission is required to provide the Postal Service’s governors with its recommended decision on new rates within 10 months of the filing. In making its decision, the Commission is required to take into account the nine criteria (see app.I) specified in the 1970 Act. The ratemaking criteria set forth in the 1970 Act were established during a period when the Postal Service had less competition than it does now. The Postal Service now operates in a different environment because of increasing competition from private companies and advances in electronic communications. In 1992, we reported that Congress should reexamine the nine criteria set forth in the 1970 Act and consider amending them to state, among other things, that in allocating institutional costs, demand factors are to be given a weight that takes into account the need to maintain the long-term viability of the Postal Service as a nationwide full-service provider of postal services, and to determine whether these criteria are still valid in light of changing marketplace realities. Since the late 1970s, the Postal Service and the Commission have disagreed over the extent to which the ratemaking criteria allow the use of demand factors to allocate the Postal Service’s overhead burden among the various mail classes. The Postal Service believes that demand factors should play a major role in overhead cost allocation in determining prices for various mail classes to recognize market realities, whereas the Commission has in the past placed less weight on demand factors in its pricing decisions than the Postal Service has. This report focuses on this issue as well as volume discounting. In preparing this report, we reviewed the Commission’s rate decision for 1994 (Docket No. R94-1), the Postal Service’s testimony supporting the 1994 rate case, expert testimony given on demand pricing, technical papers on postal pricing policies, and our past work. We also discussed the 1994 rate case with Postal Service and Commission officials. In addition, we reviewed reports that recommended reforms to the ratemaking process, in particular, reports by the Institute of Public Administration and the Joint Task Force on Postal Ratemaking. We received written comments on a draft of this report from the Postal Service and the Postal Rate Commission. We discuss these comments at the end of this report. Copies of the comments are located in appendixes II and III. We did our work in Washington, D.C., between March and May 1995 in accordance with generally accepted government auditing standards. In our March 1992 report, we said that to better compete in the current market, the Postal Service needs more flexibility in setting postal rates and that these rates should be based to a greater extent on economic principles. Therefore, we suggested that Congress should reexamine the 1970 Act to (1) determine if volume discounting by the Postal Service would be considered a discriminatory pricing policy and (2) clarify the extent that demand pricing should be considered in postal ratemaking. These pricing mechanisms could help minimize mail volume losses due to competitive forces and help keep rates lower for most mail classes over the long run. The reasons underlying our position follow. Three mail categories are subject to significant direct competition where Postal Service competitors provide discounts to large volume customers: parcel post, Express Mail, and Priority Mail. These three categories accounted for $4.7 billion or 10 percent of total Postal Service 1994 revenues. As we reported in March 1992, the Postal Service lost major market share in the multi-billion dollar parcel post and Express Mail markets. Although other factors contributed, such as the operating costs faced by the Postal Service and quality of service, a key element in this loss was that the Postal Service could not offer competitive prices to large users. The Postal Service’s Priority Mail (second-day) service is its fastest growing service and has a mix of statutorily protected and unprotected material. According to the Postal Service’s Origin-Destination Information System database, about 53 percent of Priority-Mail volume consists of small parcels and packages not subject to the Private Express Statutes or urgent letter regulation. This market is being pursued by competitors of the Postal Service through aggressive pricing strategies and service offerings. In our March 1992 report, we said that if the Postal Service is to be more competitive, it will need greater pricing flexibility in markets exposed to direct and growing competition, including its second-day market, as well as its overnight and parcel post markets. The Postal Service lacks authority to revise rates quickly or grant volume discounts to users of its competitive services. It has proposed volume discounts for Express Mail and certain international services. The Commission did not accept the Express Mail proposals. However, after a federal district court ruled that the Postal Service’s proposed volume discounts for international mail service unreasonably discriminated among mail users and could not be implemented, the United States Court of Appeals for the Third Circuit reversed the District Court’s ruling and upheld the authority of the Postal Service to implement volume discounts. The Postal Service is a multiproduct, regulated enterprise subject to varying degrees of competition in its product lines. Since the late 1970s, there has been a basic disagreement between the Commission and the Postal Service on the extent that the principles of economically efficient pricing or Ramsey pricing can be applied to postal ratemaking. Ramsey pricing has been used in varying degrees as a basis for ratesetting in regulated industries, and its advantages have been analyzed at length in the economic literature. Under Ramsey pricing, an agency that regulates a natural monopoly would set prices so that in each market segment, the percentage markup would be inversely proportional to the elasticity of demand in that segment. For example, available evidence from Postal Service econometric models shows that First-Class Mail is more inelastic than third-class mail. In this situation, use of Ramsey pricing or the inverse elasticity rule would result in allocating a higher-than-average percentage of the institutional costs to First-Class Mail and a lower-than-average percentage to third-class mail. It should be noted that Postal Service estimates included with R94-1 show that demand for 15 selected mail categories is inelastic. In one category, Express Mail, demand is elastic. Under Ramsey pricing, the markups depend on relative elasticities, not whether demand for a particular postal service is elastic or inelastic. As illustrated in R94-1, on the basis of Postal Service elasticity estimates, a 10-percent increase in the First-Class letter rate would result in about a 2-percent loss in volume. Although the Postal Service and the Commission both agree that market factors should play a role in ratemaking, our March 1992 report described the different views and strategies they have in applying these factors in the ratemaking process. Since our report, another omnibus ratemaking proceeding has been completed (Docket No. R94-1). In the 1994 rate case, the Postal Service’s strategy was to keep the rate change process relatively simple and provide enough revenue until it could propose a major rate reclassification. It requested a 10.3-percent increase for most major subclasses, which the Postal Service said was less than the economywide rate of inflation since its March 1990 filing. The Commission did not accept the proposed uniform rate increase, stating that the resulting rates for some classes would not be in accordance with the 1970 Act’s requirement that the Commission recommend rates that are fair and equitable. As in previous rate cases, one disagreement in R94-1 centered on the Postal Service’s proposed allocation of a large portion of the $19.7 billion in total institutional costs to First-Class letters and third-class bulk mail, which together account for 83 percent of postal mail volume and 78 percent of postal mail revenue. These allocations are made as “markups” to the costs that can be attributed to each mail class. The Postal Service proposed to mark up by 81.5 percent the costs attributed to First-Class letters. According to the Commission, this markup would result in First-Class Mail absorbing 77 percent of total institutional costs—an increase of 5 percentage points over the contribution approved in the 1990 rate case. The Commission considered this an excessive burden for First-Class mailers, considering that the costs attributed to First-Class had declined from 60 percent to 58 percent since the 1990 case. In support of its uniform rate proposal, the Postal Service said that the cost allocations proposed in R94-1 for First-Class letters and third-class bulk mail were more in accord with Ramsey pricing principles than were the allocations in recent Commission-recommended decisions. In addition, the Postal Service said that its emphasis on demand factors is consistent with the criteria in 39 U.S.C. 3622(b), in particular, section 3622(b)(2) dealing with the value of the mail service to both the sender and the recipient. The Commission believed that the Postal Service’s proposed allocation of institutional costs to these two major mail categories would be a significant departure from previous rate-case decisions. The Commission’s stated objective in previous rate cases was to have First-Class markups slightly above the systemwide average and third-class markups slightly below the systemwide average. The Commission allows a lower markup for third-class bulk regular mail to reflect its “higher elasticity of demand, the potential for volume diversion to alternative delivery, and the need to set rates which are responsive to the market,” as well as to recognize “the low intrinsic value of its service standards and service performance.” The Commission calculated rate changes necessary to return to the relative markup relationships that were recommended in the 1990 rate case. On the basis of this analysis, the Commission found that the third-class bulk regular rate would require a 17-percent increase rather than the uniform 10.3-percent increase proposed by the Postal Service. In its recommendation to the Board of Governors, however, the Commission limited the third-class bulk regular rate increase to 14 percent. The Commission tempered the rate increase to reflect its concern with the impact a larger rate increase would have on users of this service. As finally recommended, the First-Class letter markup was 131 percent of the systemwide average, and the third-class bulk mail markup was 90 percent of the systemwide average. While the Commission accepted the Postal Service’s proposed 32-cent rate for the First-Class stamp, it recommended a smaller increase than the Postal Service’s proposed rate for postcards and no increase in the extra ounce rate for letters weighing more than 1 ounce. The Postal Service and the Commission also disagreed on the resulting rate increases among the competitive mail categories. For example, the Commission recommended a lower-average rate increase (4.8 percent) for Priority Mail, overall, than the uniform rate increase (approximately 10.3 percent) proposed by the Postal Service, because it believed the rate proposed would place an unfair institutional cost burden on this mail component. Similarly, the Commission recommended a lower rate increase for Express Mail (8.0 percent compared to 10.2 percent) because it had the highest elasticity of any mail class. While it recommended lower rates in two competitive categories, the Commission recommended a higher rate increase (18 percent) for fourth-class parcel post, another highly competitive market, instead of the Postal Service’s proposed 13 percent. The Commission believed that this small mail component should make a higher contribution to institutional costs than that proposed by the Postal Service. As we noted in our March 1992 report, the Postal Service and the Commission do not agree on the extent to which demand factors can be used to price postal products. There appear to be two principal sources of disagreement. First, section 3622 (b) of the 1970 Act specifies nine criteria to be used in setting postal rates. (See app. I.) These criteria set a number of potentially conflicting objectives, and the Postal Service and the Commission disagree on the relative emphasis to be placed on each of them. Second, the implementation of a pricing scheme that includes demand factors crucially depends on the availability and quality of data on economic variables and on the econometric methodology that is used to analyze the data and derive estimates of relative demand elasticities. The Commission has generally been more pessimistic than the Postal Service about whether the current state of the art is sufficiently advanced to permit heavy reliance on demand-based pricing. With regard to these disagreements, we made the following observations in our 1992 report, which we believe are still germane. First, we recognize that existing law requires the Commission to balance multiple objectives in setting the rate structure. For that reason, we do not advocate the application of Ramsey pricing principles to the exclusion of other considerations. However, the pursuit of diverse objectives comes at a price in terms of loss of consumer welfare, as well as possible erosion of the Postal Service’s competitive position in the long run. Further, there is every reason to believe that changes in the economy that have taken place since 1970 have increased the potential cost to the Postal Service and the economy of pursuing diverse objectives. Resolving this situation may require that Congress clarify the ratemaking criteria set forth in the 1970 Act. Second, we are aware of ongoing disagreements among econometricians who have studied technical issues related to demand-based pricing. However, we continue to believe that decisions should be made on the basis of the best information available, and that policymakers should not wait for such controversies to subside before taking action. Postal ratemaking is a complex process that usually takes 10 months—the statutory deadline established by Congress in 1976. This period does not include the time the Postal Service spends preparing a rate case, nor the time it takes for an appeal when the Board of Governors and the Commission do not agree. In the last rate case (R94-1), the Commission issued its recommended decision in less than 9 months. While we do not know how long the process should take, various study groups believe that the current process takes too long for the Postal Service to respond to today’s rapidly changing market conditions. The ratemaking process begins when the Postal Service files a formal request with the Commission for rate changes. The Postal Service provides detailed information and data explaining (1) revenue requirements, (2) mail volume estimates, (3) costing, (4) pricing, and (5) rate design. As required by the 1970 Act, the Commission holds public hearings and allows interested parties the opportunity to make their views known. A typical rate case can involve up to 100 parties, 150 witnesses, and several rounds of hearings lasting many days or weeks. In addition to the Postal Service and an officer of the Commission representing the interests of the general public, the parties and witnesses represent an array of interest groups, including (1) commercial mailers, (2) publishers and publishers’ associations, (3) Postal Service competitors, and (4) Postal Service unions. The most important and time-consuming parts of the proceedings center on the Postal Service data explaining the attribution and assignment of costs to specific services or classes of mail and the rate design based on those data. As long as the core letter mail business—represented largely by First-Class and third-class mail and accounting for about 80 percent of revenues—is protected by the Private Express Statutes, some type of regulatory oversight will be necessary. The President’s Commission on Postal Reorganization (“Kappel Commission”) whose 1968 reportpersuaded Congress to pass the 1970 Act said that “were we to recommend a privately-owned Post Office,” which it did not, “rate regulation by an independent Federal commission would be a necessary and appropriate corollary.” Instead, the Kappel Commission recommended that Congress establish an independent government-owned postal corporation. The Kappel Commission said that it saw no advantages to, and had serious problems in, proposing the regulation of a government corporation by another government body. Over the 25-year period since the 1970 Act, many studies, including four by us, have proposed changes to the postal ratemaking process. The remaining section of this report focuses on proposals for modifying the postal ratemaking process contained in two recent and important studies that were completed in fiscal year 1992. These studies, like our pricing report, focused on ratemaking changes to reflect the competitive environment in which the Postal Service operates. The findings and recommendations in earlier studies are generally revisited in these more recent reports. Because of the contention between Postal Service management and the Commission over the 1990 rate case, the Board of Governors contracted with the Institute of Public Administration in May 1991 to study the ratemaking process. The study examined the process by which prices are set for mail services and assessed the process in terms of timeliness, flexibility, simplicity, and fairness. The Institute’s report to the Board of Governors in October 1991 concluded that the ratemaking process had adversely affected the Postal Service’s ability to serve the public and compete in a changing competitive environment. The study found that the process had become too cumbersome, rigid, and narrow to best serve the overall financial interests of the Postal Service and its customers. The Institute made a number of recommendations that would, among other things, allow the Postal Service more flexibility to compete, as well as an increased ability to protect the system from financial loss. It did not make any specific recommendations for changing the rate criteria. However, it stated that (1) “the full range of factors listed in the Postal Reorganization Act should be used in redefining rate criteria” and (2) the Commission’s use of “historical average” markups to guide ratemaking “is an inappropriate criterion, and not on the list in the Act.” This latter point was consistent with our view in the 1992 report on pricing postal services in a competitive environment. The Institute recommended that the Board of Governors and the Commission establish a joint task force to draft a comprehensive revision of rules governing ratemaking and classification and propose a strategy for reform of the process. Among many other ideas, it also offered several that we believe merit further consideration: (1) base an omnibus rate case on a 4-year financial plan, rather than on a 1-year test period; (2) have the Postal Service and the Commission agree on categories of information to be submitted with the plan, which should become regular products of budgeting and information systems, thus reducing the need for special statistical studies for ratemaking; and (3) permit the Postal Service to compete on “level playing fields” in its competitive markets, while also constantly improving its existing core services by controlling costs and improving efficiency. The Institute also proposed legislative changes that we believe merit consideration as follows: require the Commission to determine which segments of Postal Service proposals are competitive and use expedited review processes for rate changes on these segments, give the Postal Service experimental authority to market-test new products and service enhancements without being subjected to the standard rate and classification procedures of the Commission, change the requirement that unanimous consent of the Board of Governors is needed to reject or modify a Commission-recommended decision to a two-thirds majority requirement, and eliminate the second round of rate-case reconsideration. In response to the Institute’s report, the Postal Service and the Commission established a joint task force to examine the problems of ratemaking and to provide proposals for new procedures that would eliminate some of the structural rigidities. The Commission and the Governors each appointed four members to the task force. The eight-member task force started its work in January 1992 and issued its unanimous report on June 1, 1992. The task force found “a need for more flexibility in pricing by the Postal Service, a need for greater predictability of prices, and a continuing need for greater accountability in postal financial performance.” The task force proposed a number of recommendations, none of which has been implemented. Based on past work on postal ratemaking, our observations on some of the key recommendations follow. First, the task force recommended that postal ratemaking be based on a 4-year, 2-step rate cycle. Under the 4-year cycle, the Commission would recommend rates for the first 2 years of the cycle and project but not recommend rates for the remaining 2 years. A midcycle case proceeding would be held to validate or adjust the earlier proposed rates, but the scope would be limited in that the Commission would not revisit cost attribution methods, volume estimating methods, and pricing policies or other factors affecting assignment of institutional costs. According to the task force, the proposed 4-year process would (1) provide better rate matching to marketplace realities, (2) provide more predictable rate increases in smaller increments, (3) reduce the costs of the ratemaking process, and (4) improve accountability in financial performance. Looking at the Postal Service’s financial and operating needs over a 4-year period, rather than a single year as is currently practiced, was similar to the proposal suggested by the Institute. Among the issues that need further study would be (1) whether the Postal Service can accurately project revenues and expenses for 4 years; (2) how the specific proposal would be implemented; (3) what rules and procedures would need to be changed in the two-stage process; and (4) what would be the views of the Postal Service, mailers, and other interested parties to the proposed rate-case cycle. To address these issues, the Commission issued a Notice of Proposed Rulemaking in August 1992 containing proposed rules on implementing the 2-phase, 4-year rate cycle for omnibus rate proceedings. In its October 13, 1992, comments, the Postal Service disagreed with the proposed rules believing there were more disadvantages than advantages. Basically, the Postal Service wanted a more flexible approach to general rate proceedings and did not want to be locked into a rigid 2-phase, 4-year rate cycle. While the Postal Service did not support the proposed general rate cycle, it encouraged the Commission to formulate procedures to address other recommendations made by the joint task force (see below), which the Postal Service believed would be more responsive to its needs in a competitive environment. Second, the task force suggested changes in how rates are set for mail that directly competes with products offered by the private sector. The three service areas it identified as competitive classes were Express Mail, parcel post, and heavy-weight Priority Mail. The task force recommended that the Commission adopt a “rate band” approach to introduce more flexibility in setting rates for these products. Under this proposal, upper and lower bands for each rate element within the rate category’s rate structure would be recommended by the Commission. Within these bands, the Postal Service would be free to select specific prices after giving appropriate notice to its customers. In establishing the rate bands, the Postal Service and the Commission would ensure that the lower rate band covered attributed costs and made a minimum acceptable contribution to institutional costs to “protect against the possibility of cross-subsidy” from another mail class. Third, a proposal that would recognize market pricing strategies dealt with developing a system of “declining block rates” to create incentives to postal customers to increase usage. This recommendation, if adopted, would allow the Postal Service to offer discounts to large-volume users in its competitive markets. When the Postal Service proposed discounting schemes in past rate cases, a major issue was rate discrimination, as discussed in our March 1992 report. In addition, the task force made a series of recommendations to help the Postal Service experiment with new product lines and changes in service, which currently are subject to lengthy reviews by the Commission and the public. These recommendations include accelerated review procedures for marketing new products and services and multi-year cost recovery for new service introductions. As we previously mentioned, the Postal Service filed a petition with the Commission on April 10, 1995, to obtain more flexibility in ratemaking. In this petition, the Postal Service asked the Commission to consider the recommendations of the task force that the Postal Service had not rejected in October 1992. In addition, the Postal Service has filed a proposal with the Commission to establish a market-based classification schedule that, among other things, restructures First-Class and bulk regular third-class mail. Although we still believe that Congress should consider changes in policies concerning volume discounting and demand pricing, such consideration might be more useful after the outcome of these Postal Service initiatives is known. Furthermore, other changes to the 1970 Act may be required if the Postal Service is to be competitive as discussed in our September 1994 labor-management report. Today, the Postal Service is competing with communication technologies and private carriers for the delivery of services in markets that in 1970 were the sole domain of the Postal Service. Many observers believe the current ratemaking process takes too long for the Postal Service to respond to today’s rapidly changing market conditions. The proposals that we and others have offered—to improve the effectiveness of the postal ratemaking process, ensure financial accountability, and give the Postal Service more flexibility to price and compete in the marketplace—provide the Postal Service, the Postal Rate Commission, and the Subcommittee with a variety of ideas to consider in reforming the ratemaking process. The Postal Service and the Postal Rate Commission provided written comments on a draft of this report. They are located in appendixes II and III. The Postal Service said that Congress should not defer consideration of the issues raised in our 1992 report while the Postal Service initiatives are pending before the Commission. The Postal Service believes that the ratesetting criteria should be clarified by an explicit congressional determination that market demand factors be given substantial weight in pricing postal products. In addition, it believes that Congress should make clear through an amendment to the 1970 Act that appropriate economic factors, such as marginal costs, should be given a relatively large role in establishing an attributable cost threshold for rates. The Commission said that it would welcome a review of the ratesetting criteria in the 1970 Act, and it agreed with our suggestion that Congress should defer this review until the two pending Service initiatives are concluded. The Commission said it would not comment on the merits of volume discounting because this issue is pending before it. Regarding market-based pricing, the Commission said it disagreed with our conclusion in this report and our 1992 report that postal rates should be based to a greater extent on demand-pricing principles. The Commission had several overall criticisms of our report, saying that we produced a report that was not within our proper institutional role, that we failed to address key issues, and that we did not sufficiently understand the economic theory underlying postal ratemaking. We do not believe that these criticisms are warranted. It is important to understand that our objective was to report to Congress on the implications of a greater or lesser reliance on demand pricing for setting postal rates, recognizing the need for balance with the pursuit of other goals. It was not our role or goal to reduce the postal ratesetting process, which is inherently complex, to a single formula or set of formulas that specifies the exact weight to be given to demand factors vis-a-vis other considerations. We have made several changes to this report to clarify this point. Because this was not our objective, we did not present an exhaustive discussion of all the technical aspects of the economics of postal ratemaking. In our 1992 report, we analyzed some of the more important issues as they relate to the application of criteria prescribed in the 1970 Act for ratemaking. The basis for our conclusions that these criteria are matters that require consideration by Congress is spelled out in the objectives, scope, and methodology section of our 1992 report and the scope and methodology section of this report. The Commission (1) summarized what it considered to be the conclusions and recommendations of our 1992 report and this update of that report, (2) stated that our report had a “major error” because it believes the effects of Ramsey pricing on the Postal Service’s rates and long-run finances will be different than we reported, and (3) argued that the effects of demand pricing on the Postal Service’s competitiveness will be different than we reported. The Commission also said that (4) the conditions necessary for Ramsey pricing to achieve efficient consumption patterns are not met, (5) Ramsey pricing would not have a substantial effect on consumption patterns, and (6) disagreements between the Commission and the Postal Service do not necessarily imply that the ratesetting process is intrinsically defective. Below, we respond to each of these positions. The Commission’s summation of our work is inaccurate in certain crucial respects. We never predicted that Ramsey pricing would ultimately lower rates for all classes of mail, as the Commission asserts. Rather, both of our reports said that demand pricing, along with volume discounting, could help keep rates lower for most mail classes over the long term. Further, we do not agree that our conclusions would apply only in “extreme and improbable conditions,” for the reasons given in the following sections. We do not concur with the basis for the Commission’s second point, which deals with an alleged “major error” in this report. The Commission argues that, because the demand for most postal services is relatively inelastic, the effects of demand pricing on the Postal Service’s rates and long-run finances will be different than we reported. The Commission argues that the total institutional-cost contribution from competitive postal services could decrease if their markups were reduced. We agree that this could happen under certain conditions. In particular, it might happen where demand is very inelastic. While the precise magnitudes of future elasticities of demand are unknown, we do not believe that the situation described by the Commission applies to the Postal Service in the long run. Rather, we believe that, if mailers are increasingly offered alternatives and postal rates continue to increase as in the past, the Postal Service will face considerably more competition in some markets. This would likely lead to elasticities of demand that are higher (in absolute terms) than those reported for the Commission’s most recently recommended postage rates (Docket No. R94-1). Further, we question the relevance of the hypothetical example provided in footnote 5 of the Commission’s letter regarding the impact of adjusting the rates on a single mail class. Not only might the demand for various mail classes change significantly in future years, but also it is the relative elasticities that are relevant, not absolute elasticities. The Postal Service is required to operate subject to a break-even constraint. Thus, the task is one of determining the relative markup on different classes in order to achieve a systemwide average markup that just covers institutional costs. This means that the markups on all classes of mail, taken together, should cover institutional cost. When the markup on one class of mail is increased, the markup on one or more other classes of mail must be lowered to maintain a break-even operation overall, all other factors being equal. We continue to believe that demand pricing, along with volume discounting, could help keep rates lower for most mail classes over the long term. Such pricing mechanisms could help minimize mail volume losses due to increasing competition in some postal markets. The extent of the curtailment of volume losses will depend in part on the future demand for the various classes of mail. We do not believe that over the long term, the outcomes that we have indicated are at all improbable in light of past mail volume trends. Our 1992 report discusses how the Postal Service has already lost major market share in parcel post and Express Mail due to competition. One reason for this loss was the application of the current pricing criteria and the resulting limited ability to (1) price postal services with sufficient weight given to market factors, i.e., the relative demands for the various services, and (2) use pricing schemes that are routinely used by the Postal Service’s competitors, e.g., volume discounts. In its third point, the Commission argues that the Postal Service’s competitive position would not be improved by a shift toward Ramsey pricing. The Commission’s arguments emphasize second-class mail, parcel post, Priority Mail, and Express Mail. As we noted in our 1992 report, the principal issue we discuss has been and remains the allocation of institutional cost between First-Class and third-class mail, which together accounted for 93 percent of total mail volume and 84 percent of revenue in fiscal year 1994. We believe that this is where the potential benefits of demand-based pricing will primarily be found. Further, the Commission argues that the Postal Service will be incapable of realizing any contribution to overhead, or what the Commission calls “profit,” in competitive markets over the long term. The Commission’s logic is that competition will drive the rates toward the level of marginal costs, and thus drive the “profit margins” toward zero. We find this argument unpersuasive. If this logic were applied to private carriers, who are subject to similar market forces and presumably also have cost structures involving overhead or fixed costs, it would imply that their “profit margins” would also be driven to zero. However, this is implausible, at least for viable competitors over the long term, because the firms would be operating at a loss. We agree that the Postal Service’s experience in the parcel post delivery market is important, but we disagree with the Commission about the exact nature of the lesson to be learned. As we discussed in our 1992 report and in this report, at the time it was losing parcel delivery business to its competitors, the Service was limited in its ability to use pricing techniques similar to theirs. We recognize, nonetheless, that the use of different pricing techniques alone will not guarantee financial stability. As we have pointed out in this report, unless significant progress is also made in, for example, controlling labor costs and improving labor relations, the Service may still be unable to compete effectively, regardless of ratemaking changes. Finally, the Commission said that our report noted “with approval” the Postal Service proposal for a rate increase. In fact, we merely cited the Service’s view that its proposal regarding cost allocations for First-Class letters and third-class bulk mail were more in line with Ramsey pricing. It was not our purpose to approve or disapprove of any specific proposal. Also, as previously indicated, the debate surrounding cost allocations in prior rate cases has focused primarily on First-Class and third-class mail and not on Priority Mail and Express Mail, which the Commission has chosen to emphasize. In its fourth point, the Commission argues that the conditions necessary for Ramsey pricing to achieve economically efficient consumption patterns are not present. Regarding the Commission’s arguments in this area, we have several observations. First, although monopoly ratepayers may perceive that they are paying a disproportionate share of fixed costs under demand-based pricing schemes, we believe that over the longer term their rates would likely increase less under a demand-based pricing scheme than under other schemes, for the reasons we stated in our 1992 report. This view has been supported by others who have studied postal economics. With regard to the Commission’s argument that Ramsey pricing is viewed by many as unfair to competitors, we repeat that we do not advocate the use of demand-based pricing, and certainly not Ramsey pricing, to the exclusion of all other considerations. To respond to concerns about fairness to competitors, the Commission would be free to use this factor in its deliberations, since it is included in the criteria specified in the 1970 Act. Further, the issue of fairness to competitors involves considerations that go far beyond ratesetting, into such areas as the existence and magnitude of the postal monopoly, and hence are beyond the scope of either our 1992 report or this report. As noted in this report, we are reviewing aspects of the postal monopoly and plan to report on that review later. We agree with the Commission about the importance of measuring costs properly. However, if the inability to measure both stand-alone costs and incremental costs is a problem for Ramsey pricing or other demand-based pricing schemes, it would seem to be equally problematic for other types of pricing schemes. In our 1992 report, we noted the need for better cost and demand data. However, as we noted both in that report and this one, we continue to believe that decisions should be based on the best information available, and that decisions on the continued appropriateness of the rate criteria in the 1970 Act should not be postponed pending improvements in the data. Further, with regard to the Commission’s statement that the Postal Service’s underlying direct costs (e.g., labor costs) are not at a technically efficient level, we note that its operating costs, whether efficient or not, must be taken as a given for ratesetting purposes. Again, to the extent that this is a problem, it is equally problematic for both demand-based pricing and other forms of pricing. We did not address Postal Service workforce issues in this report; however, as noted in the text, we have done so in other recently issued reports on automation and labor-management relations. As a final comment on the Commission’s fourth point regarding the conditions necessary for Ramsey pricing, we note that the assertion that no regulatory body requires rates to conform strictly to Ramsey pricing principles is not relevant to our report. Again, we did not state that demand pricing in general, or Ramsey pricing in particular, should be used for setting postal rates to the exclusion of all other factors. As we noted earlier, Ramsey pricing has received considerable attention in the academic literature, and it has been applied to varying degrees in ratesetting proceedings in regulated industries. The Commission’s fifth point is that a rate structure that is derived from Ramsey pricing formulas would not affect consumption patterns in a way that differs substantially from the impact of the rate structure that the Commission actually adopted in Docket No. R94-1. In fact, we made no estimate of the impact of Ramsey pricing on consumption patterns. We are aware of the estimates that are cited by the Commission. We note that these estimates are based on short-run estimates of demand elasticities and that the long-run scenario may be quite different. Further, the Commission asserts that our draft report criticizes the Commission for its actions. In fact, our purpose was merely to describe the differences in reasoning expressed by the Postal Service and the Commission in their respective applications of the postal ratemaking criteria set forth in the 1970 Act. Regarding the Commission’s observation on the differing views of the Commission and the Postal Service, we agree that regulators often disagree with regulated entities over the prices to be set in a particular case. However, our report addressed the more fundamental issue of whether the criteria established by Congress in 1970 for setting postal rates are still valid today. Critical to addressing this issue is the question of the weight to be assigned to demand factors, relative to other criteria prescribed in the 1970 Act. It is the difference in Postal Service and Commission perspectives regarding this relative weight that is of concern to us and that we believe requires consideration by Congress. We are sending copies of this report to the Board of Governors and Postmaster General of the U.S. Postal Service, the Commissioners of the Postal Rate Commission, and other interested parties. The major contributors to this report are listed in appendix IV. If there are any further questions or if assistance is needed, please call me on (202) 512-8387. | GAO examined the U.S. Postal Service's proposals for modifying the postal ratemaking process, focusing on: (1) how the current ratemaking process could be improved; and (2) the effects of the 1970 Postal Reorganization Act on postal rates. GAO found that: (1) the Postal Service has petitioned the Postal Rate Commission to give it more flexibility in pricing postal products and establish a market-based mail classification schedule; (2) new Postal Service pricing mechanisms could minimize mail volume losses and keep rates lower for most mail classes; (3) Congress may have to clarify the 1970 ratemaking criteria because the Postal Service and Commission disagree on the extent that market forces impact postal rates; (4) postal ratemaking usually takes 10 months to complete and it does not include the time the Postal Service spends preparing rate cases and appeals; (5) proposed postal ratemaking reforms include developing accelerated procedures for market testing new products, establishing rate bands for competitive products, and allowing volume-based rates for high volume shippers; and (6) the Postal Service needs to be able to control labor costs and resolve workforce issues to remain competitive in the postal marketplace. |
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DHS invests in major acquisition programs to develop capabilities intended to improve its ability to execute its mission. DHS policy defines acquisition programs as follows: Level 1 major acquisition programs are expected to cost $1 billion or more over their life cycles. Level 2 major acquisition programs are expected to cost at least $300 million over their life cycles. Special interest programs, without regard to the established dollar thresholds, are designated as Level 1 or Level 2 programs. For example, a program may be raised to a higher acquisition level if its importance to DHS’s strategic and performance plans is disproportionate to its size or it has high executive visibility. Level 3 programs are those with a life-cycle cost estimate less than $300 million and are considered non-major. DHS’s Acquisition Management Directive 102-01 (MD 102) and DHS Instruction Manual 102-01-001 (Guidebook), which includes 12 appendices, establish the framework for the department’s policies and processes for managing these acquisition programs. MD 102 establishes that DHS’s Chief Acquisition Officer—the Under Secretary for Management (USM)—is responsible for the management and oversight of the department’s acquisition policies and procedures. The Deputy Secretary, USM, and CAE are the acquisition decision authorities for DHS’s acquisition programs, depending on the level. The acquisition decision authority is responsible for reviewing and approving the movement of DHS’s major acquisition programs through four phases of the acquisition life cycle at a series of five acquisition decision events. These acquisition decision events, which can be more than one year apart, provide the acquisition decision authority an opportunity to assess whether a major program is ready to proceed through the life-cycle phases. Following are the four phases of the acquisition life cycle, as established in DHS acquisition policy: 1. Need: Department officials identify that there is a need, consistent with DHS’s strategic plan, justifying an investment in a new capability and the establishment of an acquisition program to produce that capability; 2. Analyze/Select: A designated program manager reviews alternative approaches to meeting the need and recommends a best option to the acquisition decision authority; 3. Obtain: The program manager develops, tests, and evaluates the selected option. During this phase, programs may proceed through acquisition decision event 2B, which focuses on the cost, schedule, and performance parameters; and acquisition decision event 2C, which focuses on low rate initial production; and 4. Produce/Deploy/Support: DHS delivers the new capability to its operators, and maintains the capability until it is retired. This phase includes sustainment, which begins when a capability has been fielded for operational use; sustainment involves the supportability of fielded systems through disposal, including maintenance. Figure 1 depicts the four phases of the acquisition life cycle and the associated acquisition decision events. An important aspect of these acquisition decision events is the review and approval of key acquisition documents critical to establishing the need for a major program, its operational requirements, an acquisition baseline, and testing and support plans. Examples of key DHS acquisition documents include: a life-cycle cost estimate, which provides an exhaustive and structured accounting of all resources and associated cost elements required to develop, produce, deploy, and sustain a program; and an acquisition program baseline, which establishes a program’s critical baseline cost, schedule, and performance parameters. We are also conducting a separate review that assesses the extent to which select DHS major acquisition programs are on track to meet their cost estimates, schedules, and capability requirements. PARM is designated by MD 102 as the lead body responsible for overseeing the acquisition process of major acquisition programs. PARM was established in October 2011 to develop and update program management policies and practices, oversee the acquisition workforce, and collect program performance data. PARM is led by an executive director who reports directly to the USM. In addition to its role of overseeing major acquisitions, PARM provides support and assistance to CAEs and program managers at each of DHS’s 13 components during the acquisition process. Within these components, CAEs are responsible for establishing acquisition processes and overseeing the execution of their respective portfolios. Also within the components, program management offices are responsible for planning and executing DHS’s individual programs within cost, schedule, and performance goals and preparing required acquisition documents for acquisition decision events, which help facilitate the governance process. Table 1 lists elements at the headquarters, component, and program level that contribute to oversight of DHS major acquisition programs. The Fiscal Year 2012 DHS Appropriations Act required the USM to submit a Comprehensive Acquisition Status Report (CASR) with the President’s budget proposal for fiscal year 2013, and an associated conference report contained the specific information to be included in the CASR. The requirement for the CASR has been continued in subsequent appropriations acts, and DHS is currently working on the next iteration of the CASR, assuming DHS will again be required to produce this report. The legislation required DHS to provide to Congressional appropriations committees programmatic data and evaluative information, such as a program’s current acquisition phase, life-cycle cost, and a rating of cost, schedule, and technical risks. DHS is to include this information for each major acquisition on the Master Acquisition Oversight List (MAOL)—a list of DHS acquisitions that is broken down into categories defining the differing oversight requirements across programs. The legislation established the following CASR requirements for major acquisition programs: 1. A narrative description including current gaps and shortfalls, the capabilities to be fielded, and the number of planned increments and/or units; 2. Acquisition Review Board status of each acquisition, including the current acquisition phase, the date of the last review, and a listing of the required documents that have been reviewed and/or approved; 3. The most current approved acquisition program baseline, including project schedules and events; 4. A comparison of the original and current acquisition program baseline, and the current estimate; 5. Whether or not an independent verification and validation has been implemented, with an explanation for the decision and a summary of any findings; 6. A rating of cost risk, schedule risk, and technical risk associated with the program, including narrative descriptions and mitigation actions; 7. Contract status, including earned value management data, as 8. A life-cycle cost of the acquisition, and time basis for the estimate; 9. A planned procurement schedule, including the best estimate of the annual cost and increments/units to be procured annually; 10. A table delineated by appropriation that provides the actual or estimated appropriations, obligations, unobligated authority, and planned expenditures; 11. The reason for any significant changes from the previous CASR in acquisition quantity, cost, or schedule; 12. Key events or milestones from the prior fiscal year; and 13. Key events or milestones for the current fiscal year. Although DHS has taken steps to improve oversight of major acquisition programs, such as clarifying the role of the CAEs, it lacks written guidance for a consistent approach to oversight. Specifically, there is no guidance to define the roles and responsibilities of PARM and other DHS headquarters organizations in providing day-to-day support and oversight to programs during the acquisition process. PARM started conducting monthly high visibility meetings to discuss programs that require immediate or additional management attention. PARM also maintains a list of programs subject to oversight, the MAOL. The process for creating this list has fluctuated over time; PARM recently made revisions to the MAOL and plans to make further changes to it in the future. Finally, DHS has not established a structure for overseeing the costs of 42 programs in sustainment whose acquisition documentation requirements were waived by the USM in 2013. Sustainment costs can account for more than 80 percent of total costs, and all but one of these programs lack an approved cost estimate. While DHS has made progress in defining and documenting roles and responsibilities in the oversight of major acquisitions, such as issuing guidance describing the roles of CAEs, the roles and responsibilities of PARM and other DHS headquarters organizations are not clear. Without defined roles and responsibilities, DHS cannot ensure it is providing the appropriate level of oversight or receiving the right information to conduct oversight. PARM has made efforts to expand its oversight and support roles through its component leads, PARM’s liaisons to the components; however, roles and responsibilities for these positions are not defined. In addition, there was no guidance to define the differences in the role of PARM and OCIO-Enterprise Business Management Office (EBMO) in the oversight of major IT acquisitions, and we found potential overlap in the roles of these entities. Figure 2 illustrates PARM’s interactions with DHS headquarters, component, and program-level offices and officials with acquisition oversight responsibility. Some of these interactions are set forth in policy while others are not. PARM provides ongoing oversight and support to programs in a number of ways, such as consulting with program officials to prepare required documents prior to an Acquisition Review Board and providing training to components on various aspects of program management. One of PARM’s key mechanisms for providing day-to-day oversight and support to programs between acquisition decision events is through its staff of 10 component leads, but their roles and responsibilities are not defined in DHS acquisition policy. According to PARM officials, the component leads provide day-to-day oversight and support to acquisition programs for a specific component and are intended to be a key source of communication and coordination between PARM and the programs. In turn, component leads provide program information to PARM’s executive director, which may be used in high visibility meetings with the USM. PARM component leads told us they interact directly with the CAEs and program offices to ensure that programs are adhering to the acquisition process, along with meeting acquisition milestones and reporting requirements. While PARM’s component leads play an important role in the coordination with components, their roles and responsibilities are not defined in DHS acquisition policy. We found that their involvement and relationships with components varies significantly. For example, PARM’s component lead for U.S. Citizenship and Immigration Services is involved in the day-to-day management of programs. This component lead regularly attends component and program-level meetings and organizes training workshops to educate component and program-level staff. In another example, the PARM component lead for the National Protection and Programs Directorate provided additional guidance and attention to the directorate’s programs while the acting CAE was learning his role. In contrast, a U.S. Coast Guard official told us that while there is informal, almost daily communication, their component lead does not have direct access to program level data and relies on the input of the CAE to schedule and prioritize department-level acquisition milestone meetings. Such differences in the PARM component leads’ involvement with programs may be appropriate depending on the type of program or experience of component and program office staff; however, without defined roles and responsibilities, PARM cannot ensure it is providing the appropriate level of oversight or receiving the right information to conduct oversight. GAO, Auditing and Financial Management: Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999). leads are not defined in DHS acquisition policy and it is a challenge that they are trying to determine how to address. Further, while PARM is the lead office responsible for overseeing all major acquisition programs, we found confusion among component officials related to PARM’s role in IT acquisitions, where OCIO-EBMO also has oversight responsibility. Of the 72 Level 1 and Level 2 acquisition or service programs listed on the 2014 MAOL, 57 are designated as IT programs. Per the DHS acquisition policy, the OCIO is responsible for establishing IT policies and procedures and ensuring that approved IT acquisitions comply with technical requirements and departmental management processes, such as Agile development, which calls for producing software in small, short increments. Within OCIO, EBMO has been given primary responsibility for ensuring that the department’s IT investments align with its missions and objectives. However, while DHS acquisition policy outlines responsibilities for PARM and OCIO, there is no guidance that defines how the role of PARM differs from the role of EBMO in the oversight of IT acquisition programs. GAO, Auditing and Financial Management: Framework for Assessing the Acquisition Function At Federal Agencies, GAO-05-218G (Washington, D.C.: Sept.1, 2005). the oversight of major acquisitions could improve coordination, limit overlap of responsibilities, and reduce duplicative efforts at the component level. In September 2014, the USM issued a policy memorandum clarifying the responsibilities of the CAEs, who have an important role in acquisition oversight. To strengthen acquisition oversight within the department, the USM intends to standardize these officials’ acquisition authorities and experience levels. The memo also sets forth oversight responsibilities of the CAEs, particularly for the Level 3 programs for which they are the acquisition decision authority. The memorandum additionally clarifies that for the purposes of acquisition oversight, program managers report to their CAE and the CAEs report to the USM. This clarification is useful, as CAEs we spoke with prior to the issuance of the memorandum noted differences in the roles and responsibilities of the CAEs across components. For example, at U.S. Immigration and Customs Enforcement, it was the component OCIO, rather than the CAE, who was responsible for the execution of acquisitions, and program managers reported directly to the component OCIO. At the U.S. Coast Guard, the CAE is currently the Vice Commandant, who oversees all of the component’s operations and mission support functions, including human resources, budget, and acquisitions. Within mission support is the Assistant Commandant for Acquisitions, who has more direct oversight of the U.S. Coast Guard’s acquisition programs. Given the new requirements for CAE experience levels, PARM’s executive director anticipates that there may be changes in CAE assignments for at least one component. The memo directs PARM to create and provide executive-level acquisition training to the CAEs. The memorandum further outlines the CAEs’ responsibilities for complementing PARM’s oversight activities, such as responding in a timely manner to requests for information. As of March 2014, PARM began working with CAEs to hold monthly forums to discuss topics such as the MAOL, staffing plans, and the CASR. PARM established monthly high visibility meetings to discuss programs that require immediate or additional management attention. In addition, to identify programs for which PARM has oversight responsibility, PARM maintains a list of DHS’s acquisition programs on the MAOL, which is broken down into categories that describe each program’s reporting characteristics. However, DHS has not established a structure for overseeing the costs of 42 programs in sustainment whose acquisition documentation requirements were waived by the USM in 2013. Sustainment costs can account for more than 80 percent of total costs, and all but one of these programs lack an approved cost estimate. PARM’s executive director established high visibility meetings in December 2013 to discuss any acquisition programs that require more immediate attention from DHS management. PARM’s executive director uses these meetings as a management tool. He identifies the programs to be discussed in consultation with component leads. PARM’s executive director told us that the purpose of these meetings is to make sure that senior leadership—including the USM, Chief Financial Officer, Chief Information Officer, Chief Readiness Support Officer, Chief Procurement Officer, and General Counsel—have a common understanding of the acquisition programs’ status and key issues. According to PARM officials, the high visibility meetings have provided better focus through greater senior level involvement and led to a reinvigoration of preparation for Acquisition Review Boards. As of November 2014, 33 programs have been discussed in the high visibility meetings. PARM officials put programs on the meeting agenda based on a variety of considerations: programs with an upcoming Acquisition Review Board meeting, programs with concerns or issues, and programs that PARM is monitoring closely. Officials told us that the last two categories may include programs under GAO or Inspector General review, programs involved in a bid protest, and programs that have experienced schedule slips or a cost increase. For example, PARM officials told us about a program that changed its acquisition strategy to incorporate information technology, but did not involve the Chief Information Officer. PARM included this program in a high visibility meeting to ensure that officials were informed of the change in strategy and were involved as appropriate. In another case, PARM officials told us that they used high visibility meetings to raise early awareness about concerns with a program, which resulted in multiple follow-on meetings among high level headquarters and component officials. The USM directed the component to pause the program and issued an acquisition decision memorandum that described the path forward. DHS acquisition policy provides the overall structure for acquisition management that programs are required to follow. The policy requires PARM to create a list of major acquisition programs, the MAOL, a document approved by the USM. PARM uses the MAOL to identify programs for which it has oversight responsibility and to determine which programs they include in the CASR, an annual report to Congress. In 2014, PARM updated and expanded the MAOL by listing programs in six categories that detail the characteristics of programs. Five categories specifically address acquisition programs (see table 2). In addition, there is one category for a non-acquisition activity that is required to submit an Office of Management and Budget business case. PARM officials stated that they updated the list to more clearly incorporate input of all headquarters organizations, thereby making it a more useful oversight tool. The list has evolved over time as more headquarters organizations have added programs to the MAOL. PARM officials have drafted updates to DHS acquisition policy that include a section on requirements for the MAOL. Specifically, the planned updates will include which headquarters organizations will be involved in the development of the list, and establish a process for removing programs. PARM officials also told us they recently began a process for updating the list more regularly. The updates also provide additional information about the development and use of the MAOL. The draft updates describe the process for determining whether or not a program belongs on the MAOL, which follows a decision tree. PARM officials said that the new process for developing the MAOL more effectively coordinates and tracks the input from other DHS headquarters organizations, like EBMO and the Office of the Chief Financial Officer, as well as CAEs. The draft updates also describe justifications for removal from the MAOL. For example, a program might be removed if it is merged with another program, or if it is no longer considered special interest—meaning that a program was elevated to a higher acquisition level without regard to dollar threshold. Officials were unsure when the draft updates would be approved by DHS management. In addition to the draft policy updates, PARM officials told us that they recently instituted a governing board of officials who will determine changes to the MAOL on a quarterly basis, given its potential to provide important information to department decision makers. PARM officials told us that the next MAOL, expected in February 2015, will use the new process described in draft guidance. DHS does not have a structure in place for overseeing the costs of 42 programs whose acquisition documentation requirements were waived This waiver through a memorandum issued by the USM in May 2013.covered certain programs in sustainment, meaning that these acquisition programs have been developed and delivered and they are being operated and maintained through the disposal phase. Because these programs were in sustainment when MD 102 was instituted in 2008, the USM determined that it would be cost prohibitive and inefficient to recreate documentation for previous phases. However, we found that only one of the 42 waived programs has an approved life-cycle cost estimate, which would include acquisition costs as well as the costs to operate and maintain the system once it is in sustainment. PARM officials could not provide us estimates of the value of the sustainment programs. PARM’s executive director stated that these programs should produce operations and maintenance cost estimates. These estimates would account for the remainder of their life cycles through disposal, but the programs are not currently required to do so, given the 2013 waiver. Further, in the 2014 MAOL, PARM included seven additional programs in sustainment and also noted that documentation was waived for these programs. The 42 programs in sustainment from the USM’s memorandum and the seven programs listed on the MAOL are listed in appendix II. The Office of Management and Budget stated in 2014 that the sustainment phase can account for more than 80 percent of program life-cycle costs, which demonstrates the need for oversight of these programs’ costs. We have previously reported that cost estimates are necessary to support decisions about program funding, develop annual budget requests, and evaluate resource requirements. Furthermore, the management of a cost estimate involves continually updating the estimate with actual data as they become available, revising the estimate to reflect changes, and analyzing differences between the estimated and actual costs. Without knowing the operations and maintenance cost estimates for these programs, DHS will not be able to fully plan for and manage funding requirements across its major acquisition programs. The 2013 waiver did not define which DHS office is responsible for oversight of the sustainment programs. CAEs are responsible for Level 3 programs and PARM officials stated that this also applies to programs in sustainment. A PARM official further told us it is difficult to know who is responsible for oversight of Level 1 and Level 2 programs in sustainment. PARM officials expressed concerns about the lack of oversight of these programs. Specifically, officials noted DHS may decide, on a case-by- case basis, which organization should most appropriately provide oversight to programs in sustainment, which may include more than one office. PARM’s fiscal year 2014 CASR, a report mandated by Congress, provided the status of 82 DHS major acquisition programs but contained data that were inaccurate and out-of-date. PARM primarily drew information for the CASR from nPRS, DHS’s official system of record for acquisition program reporting. However, data issues—including inconsistent participation among the programs responsible for entering data—have led to inaccurate information in nPRS. For example, our analysis found discrepancies between the CASR and nPRS for life-cycle cost estimate data even after efforts to update or fix the data inaccuracies through an extensive adjudication process. Therefore, it was unclear whether congressional CASR recipients received accurate program information. PARM officials have acknowledged ongoing issues with the data reported in both nPRS and the CASR, and noted that they are working to improve the data quality. Officials stated that information in the CASR did not provide a complete picture of program life-cycle costs, which was the result of both incorrect data that programs had reported and limitations in using the nPRS system. Further, component and program officials have also stated that the CASR did not accurately reflect program risks. Finally, DHS provided insufficient information to address certain CASR reporting requirements. For example, the CASR did not include annual planned procurement schedules containing estimates of the units and/or increments for each program, although it was required to do so. For the nine programs in our review, we found that program offices did not consistently enter and verify their data in nPRS. DHS established nPRS as the system of record for acquisition program reporting in 2008, and in 2012 the USM issued a memorandum to CAEs stating that programs should make every effort to ensure that their data in nPRS is complete, accurate, and valid on a monthly basis. According to the memorandum, nPRS was intended to be a key tool for acquisition program management, and help provide the capability to efficiently assess the department’s acquisition portfolio. DHS components have the responsibility to ensure that their respective programs enter the data in nPRS as required, and CAEs are required to ensure that the data is validated and submitted in timely manner. However, we found that this was not done consistently for the nine major acquisition programs in our review, which are overseen by nine different DHS components. We examined nPRS data for the nine programs at two key points: September 2013, the closing date for data for fiscal year 2013, and March 2014, the date when PARM issued its fiscal year 2014 CASR, which was based on fiscal year 2013 program data. We found a number of problems with the data. For example, as of September 2013, three programs we reviewed did not enter expenditure data, the amount the programs actually spent, in nPRS for fiscal year 2013 as required, and two of these programs did not enter historical expenditure data at all. When we compared programs’ entries of expenditure data over time, we found additional discrepancies. As an example, the U.S. Coast Guard’s Fast Response Cutter program’s expenditure entries in nPRS increased by more than $340 million from September 2013 to March 2014, even though both of these entries were supposed to reflect fiscal year 2013 expenditures. A U.S. Coast Guard official stated that this increase was due to a correction in the program’s reported expenditures, to account for all funds spent in fiscal year 2013 regardless of when those funds were received. The official noted that the program’s entry from September 2013 reflected only funds received in fiscal year 2013. However, the reason for this change was not documented in nPRS. In another example, the U.S. Citizenship and Immigration Service’s Verification Modernization program’s entries for total historical expenditures through fiscal year 2012 decreased by almost $240 million when comparing these data from September 2013 and March 2014. Figure 3 shows the differences in reported expenditure data in nPRS for the Fast Response Cutter and Verification Modernization programs. Large nPRS discrepancies such as these call into question the reliability of the underlying data and whether DHS management has the information it needs to provide oversight of major acquisition programs. PARM officials have acknowledged ongoing issues with the data reported in nPRS and noted that they are working to improve its quality. For example, PARM provides a working group to the components to express their views on the nPRS system and its processes. However, PARM officials stated they do not have a mechanism to hold the programs accountable for updating their data. Component and program officials told us that they do not use nPRS for program management—even though that was one intended purpose of the system—because the system is difficult to use and does not meet their needs. For example, the OCIO National Capital Region Infrastructure Operations program manager stated that his program does not work with nPRS. For both September 2013 and March 2014, nPRS data fields for this program that were to be used to populate the fiscal year 2014 CASR, such as the program description and last acquisition review board date, were blank. Component and program officials also stated that they use other internal tools, such as spreadsheets, presentations, or project software for program management purposes and to maintain current information. PARM has not undertaken an effort to ascertain the root causes of why program managers are not populating nPRS as required. As we have previously reported, to be useful, performance information must meet users’ needs for completeness, accuracy, consistency, timeliness, validity, and ease of use. Unless DHS program managers consider nPRS to be a useful tool for their own program management purposes, as intended, the problems we found with inaccurate data are likely to persist. To further understand the reasons for program data inaccuracies in the fiscal year 2014 CASR, we analyzed the steps that PARM undertakes as part of an extensive adjudication process with the components regarding the underlying nPRS data. We found that PARM’s adjudication process did not rectify key inaccuracies in the fiscal year 2014 CASR, specifically regarding programs’ life-cycle cost estimates. As a result, Congress may not have received accurate program information. Prior to its release, PARM conducts an extenstive adjudication process for the CASR information, including reviews with program and various DHS headquarters offices, in order to identify and address potential data inconsistencies between the sources and draft report. This process began in October after the close of the fiscal year and ended when the report was published in March. We reviewed nPRS data from March 2014, the date when PARM issued its fiscal year 2014 CASR (which is comprised of fiscal year 2013 program data) to compare these data to what was presented to Congress in the CASR. Figure 4 shows select elements of the CASR development and adjudication process, along with our assessment of those elements. The fiscal year 2014 CASR reported on a total of 82 major acquisition programs. For four of the nine major acquisition programs in our review, we found discrepancies between the CASR and nPRS for life-cycle cost estimate data after the adjudication process, which should have reconciled such inconsistencies. As an example of these discrepancies, both across nPRS and between nPRS and the CASR, life-cycle cost estimates for two programs differed even though the estimates were associated with the same source and date. Another program, the Electronic Health Record System, had three different life-cycle values ranging from approximately $60 million to $80 million, a difference of over 35 percent, with two of those values presented in the CASR. Our analysis of the data inconsistencies indicated that it was unclear whether congressional CASR recipients received accurate program cost information because there was no way to confirm which estimate was correct or what the different estimates represented. PARM officials stated that they are changing their process for the development of the next CASR, which they expect to issue with the President’s fiscal year 2016 budget submission, in an effort to more effectively match their reported data to nPRS. Table 3 highlights discrepancies between the CASR and nPRS for life-cycle cost estimate data for the four programs that we reviewed. Further, PARM may have incorrectly included or excluded certain programs in the CASR based on DHS’s incomplete information on program life-cycle costs. As we reported in 2014, unreliable cost estimates have been an enduring challenge for DHS. PARM included Level 1 and 2 programs from the MAOL in the CASR, as required, using program life-cycle costs to determine program status. However, PARM officials acknowledged that some programs’ acquisition category levels were incorrect in the CASR, and due to the lack of DHS approved life- cycle cost estimates, they would not know the scope of this issue. For example, the CASR included program life-cycle cost estimate figures, but did not indicate who approved these estimates (i.e., if they were approved at the component or department level), or if anyone approved the estimates at all. Because these cost figures may not accurately reflect the actual life-cycle costs, programs may have been inappropriately included or excluded from the CASR and ultimately not receive the appropriate level of congressional oversight. We also found areas where additional explanation in the CASR would have been helpful. For example, PARM listed the Electronic Health Record System program in the CASR as a Level 2 program, while its reported life-cycle cost estimate of approximately $70 million would designate it a Level 3 program. PARM is not required to include Level 3 programs in the CASR. Electronic Health Record System officials explained that the program was listed as Level 2 because DHS management designated it as a “special interest” program in the MAOL, which did make it eligible for inclusion in the CASR, but PARM did not include this rationale in the CASR. In addition, program officials stated that the inflexibility of nPRS may prevent the department from providing accurate program information in the CASR. For example, officials from the National Protection and Programs Directorate’s Next Generation Network-Priority Service noted difficulties in accurately reporting data on their program’s increments in nPRS. The officials stated that the program has multiple increments, each with its own set of acquisition decision events. However, the program reported one overall life-cycle cost estimate in nPRS, even though it has estimates for each increment, because the system does not allow for the inclusion of multiple estimates. Officials ultimately provided explanatory comments in nPRS that noted the increment 1 estimate included only acquisition costs while not specifying who approved the estimate, and that PARM approved the increment 2 estimate in July 2013. Because these incremental estimates were at different stages in their development, combining them into a single estimate in nPRS, which PARM ultimately reported in the CASR, did not provide Congress with an accurate picture of the program’s costs. Of the 13 CASR reporting requirements, DHS provided insufficient information for in-depth oversight for four of them, and in one case, DHS did not comply with a reporting requirement. The first reporting requirement was a rating of cost risk, schedule risk, and technical risk associated with the program. PARM fulfilled this requirement by reporting programs’ top-five cost, schedule, and technical risks, instead of separate ratings for each. However, this reporting was inconsistent. Programs submitted these risks through DHS’s Investment Management System, but this system can contain more than five risks. As a result, program officials stated that they did not know how PARM selected their top-five risks for inclusion in the CASR. For example, the Strategic Air and Marine Program listed nine risks in the system, but PARM only reported two risks in the CASR. Further, the risk reporting in this section varied across the programs in our review. For example: The Verification Modernization program had five risks, all of which were technical. The Technology Infrastructure Modernization program used four of its own risk categories, which do not track to the required cost, schedule, and technical risks: reliability of systems; dependencies and interoperability between this investment and others; security; and business. The inconsistent risk reporting in this section prevents Congress from making cost, schedule, and performance comparisons across DHS programs. In addition, as part of a separate requirement for independent verification and validation, PARM evaluated the overall risk of each program, assigned each a numerical risk score, and published these scores in the CASR. PARM officials computed these risk scores using a set of weighted criteria. However, component and program officials told us that they did not know how PARM evaluated the risk scores for their respective programs. PARM, component, and program officials have acknowledged that the CASR did not accurately reflect the cost, schedule, and performance risks associated with the programs. PARM officials were unable to provide us with the supporting data used to generate the scores because they did not store this information in nPRS. As a result, we were unable assess how PARM computed these scores or determine the extent to which PARM’s evaluation accurately reflected program risks. Due to PARM’s inability to provide us with supporting data, we reviewed the Science and Technology Directorate’s National Bio and Agro-Defense Facility program’s risk assessment in the CASR and found it lacked details that could be useful to Congress and DHS management. PARM gave the program a high risk score, in part, due to the lack of DHS approval for the program’s acquisition documents. A program official stated, however, that the documents could not go forward for DHS approval due to the program’s lack of funding. The CASR did not contain any clarifying explanation for the documents not being approved. Further complicating the issue, the program’s nPRS data in September 2013 conflicts with its CASR entry, and showed program documents approved by DHS as early as 2009. Discrepancies such as this call into question the value of the information DHS is providing to Congress in the CASR. To gain more visibility into the reasons for these inconsistencies, we reviewed the source documents for the National Bio and Agro-Defense Facility program, provided to us by PARM, and found that the approval dates for five out of six documents do not match what was listed in either nPRS or the CASR. Table 4 compares the National Bio and Agro- Defense Facility program’s reported document status according to nPRS as of September 2013 and the CASR issued in March 2014, and the source documents provided by PARM. In another example, in PARM’s risk assessment of the Federal Emergency Management Agency’s Risk Mapping, Assessment and Planning program, the CASR stated that the program was covered by the USM’s waiver of acquisition documents requirements and thus did not include certain program data. However, an examination of nPRS showed that, according to the system, the program had key documents, including a mission needs statement and an acquisition program baseline approved by DHS, which PARM did not list in the CASR and which could have provided further information to decision makers. A second CASR reporting requirement was a program’s planned procurement schedule, including an estimate of the quantity to be procured annually until completion. PARM did not comply with this requirement. Instead, PARM provided the top-five contracts by dollar value for each program, but these entries did not include procurement quantity information for the programs. Some programs did report total procurement quantities, but did not link these units to a schedule. PARM officials noted that certain programs are not well-suited for reporting procurement quantities, such as IT programs. However, in such cases, the CASR should explain why no procurement quantities were listed. A third requirement was the reason for any significant changes in a program’s acquisition cost, quantity, or schedule from the prior annual CASR. PARM officials interpreted these changes to only be those that resulted in the submission of a new acquisition program baseline. According to DHS acquisition policy, programs need to submit new baselines when they breach defined cost, schedule, and performance parameters defined in their original baseline. However, programs can experience cost, quantity, or schedule changes that do not require a new baseline. For example, the National Bio and Agro-Defense Facility program experienced a delay in its construction schedule. While this program’s baseline remains in place, the construction delay could impact on-time delivery of the facility and is an example of a significant change that could be reported in this section. In addition, the CASR included 38 programs without an approved acquisition program baseline; according to PARM’s guidance, the CASR would not include any cost, schedule, or performance changes for these programs. By defining programs’ significant changes as those that resulted in new baselines, PARM eliminated the need to report on any cost, schedule, or performance changes for almost half of the programs in the CASR, thereby limiting the information available to Congress. Finally, we found that PARM did not include certain key program events in the CASR, such as acquisition decision events or full operating capability schedules. Such data, in addition to the acquisition program baseline approval dates that PARM currently reports, would have provided Congress with more robust information about the program status. Table 5 lists these four CASR requirements and our assessment of the information reported. Effective, on-going oversight of DHS’s broad portfolio of programs is essential to ensure that programs are accountable for their performance and that Congress and DHS decision makers receive useful, accurate, and up-to-date information. DHS has improved aspects of its acquisition management in recent years, including dedicating additional resources to acquisition oversight and clarifying the roles of CAEs. DHS could further enhance its oversight efforts by providing written roles and responsibilities to oversight officials within PARM and among headquarters organizations. Furthermore, a consistent, defined approach to oversight could limit overlap of responsibilities and give DHS more insight into whether its acquisition programs are executing according to cost, schedule, and performance goals. Likewise, as DHS acquisition programs move into the sustainment phase, their costs continue to require monitoring. The USM’s waiving of documentation requirements for the 42 programs in sustainment in 2013 resulted in a lack of oversight of costs for these programs. As of yet, no DHS office has been designated to take over monitoring those programs’ operations and maintenance costs. Without an identified oversight body, DHS lacks insight into those programs’ performance and the execution of their funding, which could potentially be billions of dollars. This is particularly of concern given that only one program had an approved cost estimate at the time of the waiver. Finally, DHS has not effectively communicated program status to Congress through the CASR because it has provided out-of-date and inaccurate information. Programs do not consistently report their own data in nPRS, and components are not validating the information. Although PARM’s adjudication process may address some data issues, data are not corrected in the source systems before being published in the CASR. Further, while PARM has some flexibility in the implementation of the CASR reporting requirements, in one case the requirement was not met. In other cases, such as PARM’s assessment of program risks, there are opportunities for more transparency and clarity in the information being transmitted to Congress. Holding programs accountable for maintaining their cost, schedule, and performance data, and presenting contextual information would help make the CASR a more effective instrument for DHS and congressional oversight. In order to help ensure consistent, effective oversight of DHS’s acquisition programs, we recommend the Secretary of DHS take the following five actions: Direct PARM to develop written guidance that defines roles and responsibilities of its component leads. Direct the USM to: Develop written guidance to clarify roles and responsibilities of PARM and OCIO-EBMO for conducting oversight of major acquisition programs. Produce operations and maintenance cost estimates for programs in sustainment and establish responsibility for tracking sustainment programs’ adherence to those estimates. Determine mechanisms to hold programs accountable for entering data in nPRS consistently and accurately and to hold CAEs accountable for validating the information. Also, evaluate the root causes of why programs are not using nPRS as intended. To make the CASR more useful, starting with the report reflecting fiscal year 2015 program data, adjust the CASR to do the following: Report an individual rating for each program’s cost, schedule, Report a best estimate of procurement quantities or indicate why this is not applicable, as appropriate; Report all programs’ significant changes in acquisition cost, quantity, or schedule from the previous CASR report by determining a means to account for programs that lack acquisition program baselines; Report major program events that are included in acquisition program baselines, such as scheduled acquisition decision events; and Report the level at which the program’s life-cycle cost estimate was approved. We provided a draft of this product to DHS for comment. In its written comments, reproduced in appendix III, DHS concurred with all five of our recommendations and provided plans of action and estimated completion dates for four of them. Regarding the remaining recommendation, that the Secretary of DHS direct PARM to develop written guidance that defines roles and responsibilities for component leads, DHS provided evidence that is has complied with the recommendation, and we agree. Specifically, DHS provided a Component Lead Handbook, signed on February 13, 2015, while our report was out for comment, that provides oversight roles and responsibilities and other guidance to PARM component leads in their job to oversee component programs. DHS also provided technical comments that 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 DHS. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. The objective of this review was to assess the Department of Homeland Security’s (DHS) oversight of its major acquisition programs. Specifically, this review focused on DHS’s Office of Program Accountability and Risk Management (PARM) and its day-to-day program oversight, rather than the oversight it conducts at key points in the acquisition life cycle as defined in policy. We assessed (1) steps DHS has taken to improve oversight and what gaps, if any, exist and (2) whether the data PARM provides to DHS and congressional decision makers to carry out their oversight responsibilities on program cost, schedule, and performance are accurate and up-to-date. To answer these questions, we identified organizations within DHS, in addition to PARM, that are responsible for oversight of major acquisitions and determined their roles and responsibilities by analyzing DHS policies and procedures, reviewing organizational charts, and interviewing policy, budget, and acquisition oversight officials at the headquarters level. Specifically, we reviewed DHS Acquisition Management Directive 102-01 (MD 102) and its associated guidebook—DHS Instruction Manual 102-01- 001—and the guidebook’s 12 appendices. We reviewed draft updates to DHS acquisition policy, as well as draft updates to departmental instructions, such as Agile Development and Delivery for Information Technology and the Systems Engineering Life Cycle Guidebook. We also reviewed DHS acquisition memorandums, including the Secretary’s April 2014 Unity of Effort memorandum; the Office of the Chief Procurement Officer’s Strategic Plan; information technology (IT) policies and guidance, such as DHS Directive 102-04 on IT portfolio management and the Office of the Chief Information Officer (OCIO) Portfolio Governance Concept of Operations. At the department level, we interviewed officials from PARM, OCIO–Enterprise Business Management Office (EBMO), Office of the Chief Procurement Officer, Office of Policy, and Office of the Chief Financial Officer–Office of Program Analysis and Evaluation and Cost Analysis Division. In addition, we reviewed relevant GAO and DHS Inspector General reports to provide context for all of our objectives. To address our first objective, we selected nine DHS components with responsibility for at least one Level 1 acquisition—a program with a reported life-cycle cost estimate exceeding $1 billion—and interviewed their Component Acquisition Executives (CAE) or designees. We reviewed component-specific policies and procedures and charters for program governance groups, as well as other relevant documentation. The 2014 Master Acquisition Oversight List (MAOL) identifies Level 1 acquisition programs for the following nine components: Federal Emergency Management Agency National Protection and Programs Directorate OCIO Science and Technology Directorate Transportation Security Administration U.S. Citizenship and Immigration Services U.S. Coast Guard U. S. Customs and Border Protection U.S. Immigration and Customs Enforcement To collect examples of PARM’s oversight and coordination activities at the program level, we selected a non-generalizable sample of major acquisition programs from each of the nine components. Table 6 lists the nine programs we selected as case studies. We selected programs that were included in the fiscal year 2014 Comprehensive Acquisition Status Report (CASR), which PARM submitted to the House and Senate Appropriations Committees to provide information on DHS major acquisition programs. To the extent possible, we chose programs that have been identified as having “concerns/issues” or as being “monitored closely” in PARM’s high visibility meetings, which include DHS senior leadership. In order to assess acquisition oversight across the spectrum of DHS programs, we selected case study programs with a variety of characteristics. We chose a mix of Level 1 and Level 2 programs, as defined in the fiscal year 2014 CASR, and included both IT and non-IT programs. One of our nine case study programs, the Electronic Health Record System, was classified as a Level 2 program in the fiscal year 2014 CASR, but listed as a Level 3 program on the 2014 MAOL. We chose this program in order to examine the reasons for the change and to determine the extent to which oversight varies for major and non-major acquisition programs. Another factor used to select the case studies was program risk, as measured by CASR risk scores. Risk scores are included in the CASR’s independent verification and validation section and are derived from PARM’s rating of program risk using a standard set of criteria. We chose programs to include a mix of both high and low CASR risk scores. For these case studies, we reviewed relevant program documentation, such as acquisition decision memorandums, and interviewed program officials. For the second objective, we collected and reviewed data from DHS’s official system of record for its acquisition programs, the Next Generation Periodic Reporting System (nPRS), and compared that data to the fiscal year 2014 CASR. All major programs on DHS’s MAOL are required to report in nPRS. PARM then uses the program data in nPRS to help generate its CASR. In order to assess the data reliability of nPRS, we reviewed select acquisition program data from nPRS and compared this data to the information contained in the CASR. Specifically, we used nPRS reports for each of the nine case study programs from the end of fiscal year 2013, when PARM pulled the program data from the system to begin generating the fiscal year 2014 CASR. We then compared the data from those reports to the issued CASR, as well as to the nPRS program reports from March 2014—the date that PARM released the CASR. The comparison of those three sets of information allowed us to note discrepancies, including missing data or outliers, between the system data and the issued data, as well as if corrections were made to the system data following the release of the report. We assessed various data elements from the nPRS program reports that are used to generate the information contained in the CASR. We reviewed data across a range of tabs contained in the nPRS program reports such as general information, Acquisition Review Board history, program status, budget and funding, acquisition program baseline milestones, risk, and key documents. For each of the nine case study programs, we assessed reports from the end of fiscal year 2013, as well as March 2014, for a total of eighteen program reports. In addition, we reviewed documents, such as the nPRS user manual and policies related to data entry, and interviewed agency officials responsible for inputting and reviewing the nPRS data. We determined that the nPRS data were not sufficiently reliable for our purposes; however, we present the data for illustrative purposes only. For example, for certain programs in our review, current and historical expenditure data was missing. Another example from our analysis showed differences in the life-cycle cost estimates for certain programs in nPRS compared to those reported in the CASR. While the Under Secretary for Management (USM) issued a memorandum that programs are to update their nPRS data monthly, PARM officials recognized that this does not happen consistently, and they acknowledged that there are data accuracy issues with nPRS. In addition, when officials made updates or changes to program-reported information due to the pending release of the CASR, the programs were responsible for entering these updates or changes into nPRS. Our analysis confirmed that certain programs in our review did not update nPRS after going through the CASR reporting process. In order to evaluate the effectiveness of nPRS and the CASR as tools for DHS management and congressional oversight, we first reviewed the Department of Homeland Security Appropriations Act, 2014, which established the provision for the USM to submit the CASR with the President’s budget proposal for fiscal year 2015. In addition, we reviewed Conference Report 112-331 for the Consolidated Appropriations Act, 2012, which contained the information requirements for inclusion in the CASR. We then compared the data from nPRS for the nine case study programs to that presented in the fiscal year 2014 CASR to determine discrepancies between the two for certain data elements. We further compared the CASR information to PARM policies and procedures, such as the MAOL and MD 102. In order to review the CASR’s independent verification and validation requirement, we asked PARM officials for supporting documentation for how they generated their independent verification and validation evaluations, but they were unable to provide the documentation because they did not store it in nPRS. Finally, we assessed the information the CASR either did or did not provide compared to its congressional reporting requirements. We conducted this assessment based on the CASR’s congressional reporting requirements, DHS policies, and acquisition practices. We conducted this performance audit from March 2014 to March 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. Table 7 below identifies 42 acquisition programs for which the Department of Homeland Security’s (DHS) Under Secretary for Management waived documentation requirements in a May 2013 memorandum. These programs were already in sustainment prior to 2008, meaning that they were in the last phase of their acquisition life cycle, when DHS issued MD 102. Programs in sustainment have been developed and delivered to their respective components for operation and maintenance through disposal. The memorandum stated that it would be cost prohibitive and inefficient for these programs to recreate the documentation called for under the directive for their previous acquisition life-cycle phases. Table 8 below identifies seven additional major acquisition programs in sustainment for which DHS waived documentation requirements on the 2014 Master Acquisition Oversight List. The Master Acquisition Oversight List stated that having programs provide documents for their previous acquisition life-cycle phases would be costly and provide no positive performance impact for systems already delivered. In addition to the contact named above, Katherine Trimble, Assistant Director; Leigh Ann Haydon, Analyst-in-Charge; Stephen V. Marchesani; Alexis Olson; Sarah Marie Martin; and Daniel Hilger made key contributions to this report. Peter W. Anderson, Jean L. McSween, Ozzy Trevino, and Alyssa Weir also provided assistance. | In fiscal year 2014, DHS reported it planned to spend approximately $10.7 billion on its major acquisition programs. DHS acquires systems to reduce the probability of a terrorist attack, protect against disease, mitigate natural hazards, and secure borders. Partially in response to GAO recommendations, the department has taken steps to improve acquisition management in recent years, but has not yet implemented many of these recommendations. GAO was asked to review DHS's oversight of its major acquisition programs. This report addresses (1) steps DHS has taken to improve oversight and gaps that exist, if any, and (2) whether the data PARM provides to DHS and congressional decision makers are accurate and up-to-date. GAO reviewed DHS policies and procedures and interviewed oversight and acquisition officials from all nine DHS components with at least one major acquisition program with a life-cycle cost estimate exceeding $1 billion. From these components, GAO selected a non-generalizable sample of nine major acquisition programs with a variety of characteristics to compare PARM oversight activities and review program data. The Department of Homeland Security (DHS) has taken steps to improve oversight of major acquisition programs, but it lacks written guidance for a consistent approach to day-to-day oversight. Federal Standards for Internal Control call for organizations to define and document key areas of responsibility in order to effectively plan, direct, and control operations to achieve agency objectives. DHS has defined the role of the Component Acquisition Executive, the senior acquisition official within each component, and established monthly meetings to discuss programs that require management attention. However, DHS has not defined all of the roles and responsibilities of the Office of Program Accountability and Risk Management (PARM)—the lead body responsible for overseeing the acquisition process and assessing the status of acquisition programs—and other headquarters organizations. GAO also found that officials' involvement and relationships with components varied significantly. DHS does not have a structure in place for overseeing the costs of 42 programs in sustainment (that is, programs that have been fielded and are operational) for which acquisition documentation requirements were waived in 2013. Sustainment costs can account for more than 80 percent of total costs, and all but one of these programs lack an approved cost estimate. GAO also previously reported that cost estimates are necessary to support decisions about program funding and resources. The most recent data that PARM provided to DHS and congressional decision makers for oversight were not consistently accurate and up-to-date. Specifically, PARM's fiscal year 2014 Comprehensive Acquisition Status Report (CASR), which was based on fiscal year 2013 data, contained inaccurate information on DHS acquisition programs. To develop the CASR, PARM drew from DHS's official system for acquisition program reporting, the Next Generation Periodic Reporting System (nPRS); however, the system is hampered by data issues, including inconsistent participation by program officials responsible for entering the data. Further, DHS has not provided useful information for certain CASR reporting requirements. DHS interpreted one requirement in a way that eliminated the need to report cost, schedule, or performance changes for almost half of the programs in the CASR. Holding programs accountable for maintaining their data in nPRS and providing decision makers with more in-depth information would enhance future acquisition reports and render the CASR a more effective instrument for DHS and congressional oversight. GAO Assessment of the DHS Comprehensive Acquisition Status Report Development Process GAO recommends that DHS take a number of actions including developing written guidance for a consistent approach to oversight, addressing programs in sustainment, and enhancing data quality and reports to Congress. DHS concurred with GAO's recommendations. |
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As you know, Mr. Chairman, for over two decades, we have reported on problems with DOD’s personnel security clearance program as well as the financial costs and risks to national security resulting from these problems (see Related GAO Reports at the end of this statement). For example, at the turn of the century, we documented problems such as incomplete investigations, inconsistency in determining eligibility for clearances, and a backlog of overdue clearance reinvestigations that exceeded 500,000 cases. More recently in 2004, we identified continuing and new impediments hampering DOD’s clearance program and made recommendations for increasing the effectiveness and efficiency of the program. Also in 2004, we testified before this committee on clearance- related problems faced by industry personnel. A critical step in the federal government’s efforts to protect national security is to determine whether an individual is eligible for a personnel security clearance. Specifically, an individual whose job requires access to classified information must undergo a background investigation and adjudication (determination of eligibility) in order to obtain a clearance. As with federal government workers, the demand for personnel security clearances for industry personnel has increased during recent years. Additional awareness of threats to our national security since September 11, 2001, and efforts to privatize federal jobs during the last decade are but two of the reasons for the greater number of industry personnel needing clearances today. As of September 30, 2003, industry personnel held about one-third of the approximately 2 million DOD-issued clearances. DOD’s Office of the Under Secretary of Defense for Intelligence has overall responsibility for DOD clearances, and its responsibilities also extend beyond DOD. Specifically, that office’s responsibilities include obtaining background investigations and adjudicating clearance eligibility for industry personnel in more than 20 other federal agencies, as well as the clearances of staff in the federal government’s legislative branch. Problems in the clearance program can negatively affect national security. For example, delays reviewing security clearances for personnel who are already doing classified work can lead to a heightened risk of disclosure of classified information. In contrast, delays in providing initial security clearances for previously noncleared personnel can result in other negative consequences, such as additional costs and delays in completing national security-related contracts, lost-opportunity costs, and problems retaining the best qualified personnel. Longstanding delays in completing hundreds of thousands of clearance requests for servicemembers, federal employees, and industry personnel as well as numerous impediments that hinder DOD’s ability to accurately estimate and eliminate its clearance backlog led us to declare the program a high-risk area in January 2005. The 25 areas on our high-risk list at that time received their designation because they are major programs and operations that need urgent attention and transformation in order to ensure that our national government functions in the most economical, efficient, and effective manner possible. Shortly after we placed DOD’s clearance program on our high-risk list, a major change in DOD’s program occurred. In February 2005, DOD transferred its personnel security investigations functions and about 1,800 investigative positions to OPM. Now DOD obtains nearly all of its clearance investigations from OPM, which is currently responsible for 90 percent of the personnel security clearance investigations in the federal government. DOD retained responsibility for adjudication of military personnel, DOD civilians, and industry personnel. Other recent significant events affecting DOD’s clearance program have been the passage of the Intelligence Reform and Terrorism Prevention Act of 2004 and the issuance of the June 2005 Executive Order No. 13381, Strengthening Processes Relating to Determining Eligibility for Access to Classified National Security Information. The act included milestones for reducing the time to complete clearances, general specifications for a database on security clearances, and requirements for greater reciprocity of clearances (the acceptance of a clearance and access granted by another department, agency, or military service). Among other things, the executive order resulted in the Office of Management and Budget (OMB) taking a lead role in preparing a strategic plan to improve personnel security clearance processes governmentwide. Using this context for understanding the interplay between DOD and OPM in DOD’s personnel security clearance processes, my statement addresses two objectives in this statement: (1) key points of a billing dispute between DOD and OPM and (2) some of the major impediments affecting clearances for industry personnel. As requested by this committee, we have an ongoing examination of the timeliness and completeness of the processes used to determine the eligibility of industry personnel to receive top secret clearances. We expect to present the results of this work in the fall. My statement today, however, is based primarily on our completed work and our institutional knowledge from our prior reviews of the steps in the clearance processes used by DOD and, to a lesser extent, other agencies. In addition, we used information from the Intelligence Reform and Terrorism Prevention Act of 2004; executive orders; and other documents, such as a memorandum of agreement between DOD and OPM. We conducted our work in accordance with generally accepted government auditing standards in May 2006. DOD stopped processing applications for clearance investigations for industry personnel on April 28, 2006, despite an already sizeable backlog. DOD attributed its actions to an overwhelming volume of requests for industry personnel security investigations and funding constraints. We will address the issue of workload projections later when we discuss impediments that affect industry personnel as well as servicemembers and federal employees, but first we would like to talk about the issue of funding. An important consideration in understanding the funding constraints that contributed to the stoppage is a DOD-OPM billing dispute, which has resulted in the Under Secretary of Defense for Intelligence requesting OMB mediation. The dispute stems from the February 2005 transfer of DOD’s personnel security investigations function to OPM. The memorandum of agreement signed by the OPM Director and the DOD Deputy Secretary prior to the transfer lists many types of costs that DOD may incur for up to 3 years after the transfer of the investigations function to OPM. One cost, an adjustment to the rates charged to agencies for clearance investigations, provides that “OPM may charge DOD for investigations at DOD’s current rates plus annual price adjustments plus a 25 percent premium to offset potential operating losses. OPM will be able to adjust, at any point of time during the first three year period after the start of transfer, the premium as necessary to cover estimated future costs or operating losses, if any, or offset gains, if any.” The Under Secretary’s memorandum says that OPM has collected approximately $50 million in premiums in addition to approximately $144 million for other costs associated with the transfer. The OPM Associate Director subsequently listed costs that OPM has incurred. To help resolve this billing matter, DOD requested mediation from OMB, in accordance with the memorandum of agreement between DOD and OPM. Information from the two agencies indicates that in response to DOD’s request, OMB has directed them to continue to work together to resolve the matter. The DOD and OPM offices of inspector general are currently investigating all of the issues raised in the Under Secretary’s and Associate Director’s correspondences and have indicated that they intend to issue reports on their reviews this summer. Some impediments, if not effectively addressed, could hinder the timely determination of clearance eligibility for servicemembers, civilian government employees, and industry personnel; whereas other impediments would mainly affect industry personnel. The inability to accurately estimate the number of future clearance requests and the expiration of the previously mentioned executive order that resulted in high-level involvement by OMB could adversely affect the timeliness of eligibility determinations for all types of employee groups. In contrast, an increased demand for top secret clearances for industry personnel and the lack of reciprocity would primarily affect industry personnel. A major impediment to providing timely clearances is the inaccurate projections of the number of requests for security clearances DOD-wide and for industry personnel specifically. As we noted in our May 2004 testimony before this committee, DOD’s longstanding inability to accurately project its security clearance workload makes it difficult to determine clearance-related budgets and staffing requirements. In fiscal year 2001, DOD received 18 percent (about 150,000) fewer requests than it expected, and in fiscal years 2002 and 2003, it received 19 and 13 percent (about 135,000 and 90,000) more requests than projected, respectively. In 2005, DOD was again uncertain about the number and level of clearances that it required, but the department reported plans and efforts to identify clearance requirements for servicemembers, civilian employees, and contractors. For example, in response to our May 2004 recommendation to improve the projection of clearance requests for industry personnel, DOD indicated that it was developing a plan and computer software that would enable the government’s contracting officers to (1) authorize a certain number of industry personnel clearance investigations for any given contract, depending on the number of clearances required to perform the classified work on that contract, and (2) link the clearance investigations to the contract number. Another potential impediment that could slow improvements in personnel security clearance processes in DOD—as well as governmentwide—is the July 1, 2006, expiration of Executive Order No. 13381. Among other things, this executive order delegated responsibility for improving the clearance process to the Director of OMB for about 1 year. We have been encouraged by the high level of commitment that OMB has demonstrated in the development of a governmentwide plan to address clearance-related problems. Also, the OMB Deputy Director met with GAO officials to discuss OMB’s general strategy for addressing the problems that led to our high-risk designation for DOD’s clearance program. Demonstrating strong management commitment and top leadership support to address a known risk is one of the requirements for removing DOD’s clearance program from GAO’s high-risk list. Because there has been no indication that the executive order will be extended, we are concerned about whether such progress will continue without OMB’s high-level management involvement. While OPM has provided some leadership in assisting OMB with the development of the governmentwide plan, OPM may not be in a position to assume additional high-level commitment for a variety of reasons. These reasons include (1) the governmentwide plan lists many management challenges facing OPM and the Associate Director of its investigations unit, such as establishing a presence to conduct overseas investigations and adjusting its investigative workforce to the increasing demand for clearances; (2) adjudication of personnel security clearances and determination of which organizational positions require such clearances are outside the current emphases for OPM; and (3) agencies’ disputes with OPM—such as the current one regarding billing—may require a high-level third party to mediate a resolution that is perceived to be impartial. As we have previously identified, an increase in the demand for top secret clearances could have workload and budgetary implications for DOD and OPM if such requests continue to occur. In our 2004 report, we noted that the proportion of requests for top secret clearances for industry personnel increased from 17 to 27 percent from fiscal years 1995 through 2003. This increase has workload implications because top secret clearances (1) must be renewed every 5 years, compared to every 10 years for secret clearances, and (2) require more information about the applicant than secret clearances do. Our 2004 analyses further showed that the 10-year cost to the government was 13 times higher for a person with a top secret clearance ($4,231) relative to a person with a secret clearance ($328). Thus, if clearance requirements for organizational positions are set higher than needed, the government’s capacity to decrease the clearance backlog is reduced while the cost of the clearance program is increased. When the reciprocity of clearances or access is not fully utilized, industry personnel are prevented from working. In addition to having a negative effect on the employee and the employer, the lack of reciprocity has adverse effects for the government, including an increased workload for the already overburdened staff who investigate and adjudicate security clearances. Problems with reciprocity of clearances or access, particularly for industry personnel, have continued to occur despite the establishment in 1997 of governmentwide investigative standards and adjudicative guidelines. The Reciprocity Working Group, which helped to prepare information for the governmentwide plan to improve the security clearance process, noted that “a lack of reciprocity often arises due to reluctance of the gaining activity to inherit accountability for what may be an unacceptable risk due to poor quality investigations and/or adjudications.” Congress enacted reciprocity requirements in the Intelligence Reform and Terrorism Prevention Act of December 2004, and OMB promulgated criteria in December 2005 for federal agencies to follow in determining whether to accept security clearances from other government agencies. Because of how recently these changes were made, their impact is unknown. We will continue to assess and monitor DOD’s personnel security clearance program at your request. We are conducting work on the timeliness and completeness of investigations and adjudications for top secret clearances for industry personnel and we will report that information to this committee this fall. Also, our standard steps of monitoring programs on our high-risk list require that we evaluate the progress that agencies make toward being removed from the list. Lastly, we monitor our recommendations to agencies to determine whether steps are being taken to overcome program deficiencies. For further information regarding this testimony, please contact me at (202)512-5559 or [email protected]. Individuals making key contributions to this testimony include Jack E. Edwards, Assistant Director; Jerome Brown; Kurt A. Burgeson; Susan C. Ditto; David Epstein; Sara Hackley; James Klein; and Kenneth E. Patton. Managing Sensitive Information: Departments of Energy and Defense Policies and Oversight Could Be Improved. GAO-06-369. Washington, D.C.: March 7, 2006. Managing Sensitive Information: DOE and DOD Could Improve Their Policies and Oversight. GAO-06-531T. Washington, D.C.: March 14, 2006. GAO’s High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Questions for the Record Related to DOD’s Personnel Security Clearance Program and the Government Plan for Improving the Clearance Process. GAO-06-323R. Washington, D.C.: January 17, 2006. DOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD’s Program, But Concerns Remain. GAO-06- 233T. Washington, D.C.: November 9, 2005. Defense Management: Better Review Needed of Program Protection Issues Associated with Manufacturing Presidential Helicopters. GAO-06- 71SU. Washington, D.C.: November 4, 2005. DOD’s High-Risk Areas: High-Level Commitment and Oversight Needed for DOD Supply Chain Plan to Succeed. GAO-06-113T. Washington, D.C.: October 6, 2005. Questions for the Record Related to DOD’s Personnel Security Clearance Program. GAO-05-988R. Washington, D.C.: August 19, 2005. Industrial Security: DOD Cannot Ensure Its Oversight of Contractors under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: July 15, 2005. DOD Personnel Clearances: Some Progress Has Been Made but Hurdles Remain to Overcome the Challenges That Led to GAO’s High-Risk Designation. GAO-05-842T. Washington, D.C.: June 28, 2005. Defense Management: Key Elements Needed to Successfully Transform DOD Business Operations. GAO-05-629T. Washington, D.C.: April 28, 2005. Maritime Security: New Structures Have Improved Information Sharing, but Security Clearance Processing Requires Further Attention. GAO-05-394. Washington, D.C.: April 15, 2005. DOD’s High-Risk Areas: Successful Business Transformation Requires Sound Strategic Planning and Sustained Leadership. GAO-05-520T. Washington, D.C.: April 13, 2005. GAO’s 2005 High-Risk Update. GAO-05-350T. Washington, D.C.: February 17, 2005. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. Intelligence Reform: Human Capital Considerations Critical to 9/11 Commission’s Proposed Reforms. GAO-04-1084T. Washington, D.C.: September 14, 2004. DOD Personnel Clearances: Additional Steps Can Be Taken to Reduce Backlogs and Delays in Determining Security Clearance Eligibility for Industry Personnel. GAO-04-632. Washington, D.C.: May 26, 2004. DOD Personnel Clearances: Preliminary Observations Related to Backlogs and Delays in Determining Security Clearance Eligibility for Industry Personnel. GAO-04-202T. Washington, D.C.: May 6, 2004. Security Clearances: FBI Has Enhanced Its Process for State and Local Law Enforcement Officials. GAO-04-596. Washington, D.C.: April 30, 2004. Industrial Security: DOD Cannot Provide Adequate Assurances That Its Oversight Ensures the Protection of Classified Information. GAO-04-332. Washington, D.C.: March 3, 2004. DOD Personnel Clearances: DOD Needs to Overcome Impediments to Eliminating Backlog and Determining Its Size. GAO-04-344. Washington, D.C.: February 9, 2004. Aviation Security: Federal Air Marshal Service Is Addressing Challenges of Its Expanded Mission and Workforce, but Additional Actions Needed. GAO-04-242. Washington, D.C.: November 19, 2003. Results-Oriented Cultures: Creating a Clear Linkage between Individual Performance and Organizational Success. GAO-03-488. Washington, D.C.: March 14, 2003. Defense Acquisitions: Steps Needed to Ensure Interoperability of Systems That Process Intelligence Data. GAO-03-329. Washington D.C.: March 31, 2003. Managing for Results: Agency Progress in Linking Performance Plans With Budgets and Financial Statements. GAO-02-236. Washington D.C.: January 4, 2002. Central Intelligence Agency: Observations on GAO Access to Information on CIA Programs and Activities. GAO-01-975T. Washington, D.C.: July 18, 2001. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000. DOD Personnel: More Consistency Needed in Determining Eligibility for Top Secret Clearances. GAO-01-465. Washington, D.C.: April 18, 2001. DOD Personnel: More Accurate Estimate of Overdue Security Clearance Reinvestigations Is Needed. GAO/T-NSIAD-00-246. Washington, D.C.: September 20, 2000. DOD Personnel: More Actions Needed to Address Backlog of Security Clearance Reinvestigations. GAO/NSIAD-00-215. Washington, D.C.: August 24, 2000. Security Protection: Standardization Issues Regarding Protection of Executive Branch Officials. GAO/T-GGD/OSI-00-177. Washington, D.C.: July 27, 2000. Security Protection: Standardization Issues Regarding Protection of Executive Branch Officials. GAO/GGD/OSI-00-139. Washington, D.C.: July 11, 2000. Computer Security: FAA Is Addressing Personnel Weaknesses, But Further Action Is Required. GAO/AIMD-00-169. Washington, D.C.: May 31, 2000. DOD Personnel: Weaknesses in Security Investigation Program Are Being Addressed. GAO/T-NSIAD-00-148. Washington, D.C.: April 6, 2000. DOD Personnel: Inadequate Personnel Security Investigations Pose National Security Risks. GAO/T-NSIAD-00-65. Washington, D.C.: February 16, 2000. DOD Personnel: Inadequate Personnel Security Investigations Pose National Security Risks. GAO/NSIAD-00-12. Washington, D.C.: October 27, 1999. Background Investigations: Program Deficiencies May Lead DEA to Relinquish Its Authority to OPM. GAO/GGD-99-173. Washington, D.C.: September 7, 1999. Department of Energy: Key Factors Underlying Security Problems at DOE Facilities. GAO/T-RCED-99-159. Washington, D.C.: April 20, 1999. Performance Budgeting: Initial Experiences Under the Results Act in Linking Plans With Budgets. GAO/AIMD/GGD-99-67. Washington, D.C.: April 12, 1999. Military Recruiting: New Initiatives Could Improve Criminal History Screening. GAO/NSIAD-99-53. Washington, D.C.: February 23, 1999. Executive Office of the President: Procedures for Acquiring Access to and Safeguarding Intelligence Information. GAO/NSIAD-98-245. Washington, D.C.: September 30, 1998. Inspectors General: Joint Investigation of Personnel Actions Regarding a Former Defense Employee. GAO/AIMD/OSI-97-81R. Washington, D.C.: July 10, 1997. Privatization of OPM’s Investigations Service. GAO/GGD-96-97R. Washington, D.C.: August 22, 1996. Cost Analysis: Privatizing OPM Investigations. GAO/GGD-96-121R. Washington, D.C.: July 5, 1996. Personnel Security: Pass and Security Clearance Data for the Executive Office of the President. GAO/NSIAD-96-20. Washington, D.C.: October 19, 1995. Privatizing OPM Investigations: Implementation Issues. GAO/T-GGD-95- 186. Washington, D.C.: June 15, 1995. Privatizing OPM Investigations: Perspectives on OPM’s Role in Background Investigations. GAO/T-GGD-95-185. Washington, D.C.: June 14, 1995. Security Clearances: Consideration of Sexual Orientation in the Clearance Process. GAO/NSIAD-95-21. Washington, D.C.: March 24, 1995. Background Investigations: Impediments to Consolidating Investigations and Adjudicative Functions. GAO/NSIAD-95-101. Washington, D.C.: March 24, 1995. Managing DOE: Further Review Needed of Suspensions of Security Clearances for Minority Employees. GAO/RCED-95-15. Washington, D.C.: December 8, 1994. Personnel Security Investigations. GAO/NSIAD-94-135R. Washington, D.C.: March 4, 1994. Classified Information: Costs of Protection Are Integrated With Other Security Costs. GAO/NSIAD-94-55. Washington, D.C.: October 20, 1993. Nuclear Security: DOE’s Progress on Reducing Its Security Clearance Work Load. GAO/RCED-93-183. Washington, D.C.: August 12, 1993. Personnel Security: Efforts by DOD and DOE to Eliminate Duplicative Background Investigations. GAO/RCED-93-23. Washington, D.C.: May 10, 1993. Administrative Due Process: Denials and Revocations of Security Clearances and Access to Special Programs. GAO/T-NSIAD-93-14. Washington, D.C.: May 5, 1993. DOD Special Access Programs: Administrative Due Process Not Provided When Access Is Denied or Revoked. GAO/NSIAD-93-162. Washington, D.C.: May 5, 1993. Security Clearances: Due Process for Denials and Revocations by Defense, Energy, and State. GAO/NSIAD-92-99. Washington, D.C.: May 6, 1992. Due Process: Procedures for Unfavorable Suitability and Security Clearance Actions. GAO/NSIAD-90-97FS. Washington, D.C.: April 23, 1990. Weaknesses in NRC’s Security Clearance Program. GAO/T-RCED-89-14. Washington, D.C.: March 15, 1989. Nuclear Regulation: NRC’s Security Clearance Program Can Be Strengthened. GAO/RCED-89-41. Washington, D.C.: December 20, 1988. Nuclear Security: DOE Actions to Improve the Personnel Clearance Program. GAO/RCED-89-34. Washington, D.C.: November 9, 1988. Nuclear Security: DOE Needs a More Accurate and Efficient Security Clearance Program. GAO/RCED-88-28. Washington, D.C.: December 29, 1987. National Security: DOD Clearance Reduction and Related Issues. GAO/NSIAD-87-170BR. Washington, D.C.: September 18, 1987. Oil Reserves: Proposed DOE Legislation for Firearm and Arrest Authority Has Merit. GAO/RCED-87-178. Washington, D.C.: August 11, 1987. Embassy Blueprints: Controlling Blueprints and Selecting Contractors for Construction Abroad. GAO/NSIAD-87-83. Washington, D.C.: April 14, 1987. Security Clearance Reinvestigations of Employees Has Not Been Timely at the Department of Energy. GAO/T-RCED-87-14. Washington, D.C.: April 9, 1987. Improvements Needed in the Government’s Personnel Security Clearance Program. Washington, D.C.: April 16, 1985. Need for Central Adjudication Facility for Security Clearances for Navy Personnel. GAO/GGD-83-66. Washington, D.C.: May 18, 1983. Effect of National Security Decision Directive 84, Safeguarding National Security Information. GAO/NSIAD-84-26. Washington, D.C.: October 18, 1983. Faster Processing of DOD Personnel Security Clearances Could Avoid Millions in Losses. GAO/GGD-81-105. Washington, D.C.: September 15, 1981. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of Defense (DOD) is responsible for about 2 million active personnel security clearances. About one-third of the clearances are for industry personnel working on contracts for DOD and more than 20 other executive agencies. Delays in determining eligibility for a clearance can heighten the risk that classified information will be disclosed to unauthorized sources and increase contract costs and problems attracting and retaining qualified personnel. On April 28, 2006, DOD announced it had stopped processing security clearance applications for industry personnel because of an overwhelming volume of requests and funding constraints. GAO has reported problems with DOD's security clearance processes since 1981. In January 2005, GAO designated DOD's program a high-risk area because of longstanding delays in completing clearance requests and an inability to accurately estimate and eliminate its clearance backlog. For this statement GAO addresses: (1) key points in the billing dispute between DOD and OPM and (2) some of the major impediments affecting clearances for industry personnel. The costs underlying a billing dispute between DOD and OPM are contributing to further delays in the processing of new security clearance requests for industry personnel. The dispute stems from the February 2005 transfer of DOD's personnel security investigations function to OPM and associated costs for which DOD agreed to reimburse OPM. Among other things, the two agencies' memorandum of agreement for the transfer allows OPM to charge DOD annual price adjustments plus a 25 percent premium, in addition to the rates OPM charges to other federal government agencies. A January 20, 2006, memorandum from the Under Secretary of Defense for Intelligence to the Office of Management and Budget (OMB) questioned the continued need for the premiums and requested mediation from OMB. According to DOD and OPM, OMB has directed the two agencies to continue to work together to resolve the matter. The inspectors general for both DOD and OPM are expected to report on the results of their investigations into the dispute this summer. Other impediments, if not effectively addressed, could negatively affect the timeliness of clearance-eligibility determinations for one or more of the following employee groups: industry personnel, servicemembers, and civilian government employees. All three groups are affected by DOD's longstanding inability to accurately estimate the size of its security clearance workload. Inaccurate estimates of the volume of clearances needed make it difficult to determine clearance-related budgets and staffing requirements. Similarly, the July 1, 2006, expiration of Executive Order 13381, which delegated responsibility for improving the clearance process to OMB, could potentially slow improvements in personnel security clearance processes DOD-wide as well as governmentwide. GAO has been encouraged by OMB's high level of commitment to activities such as the development of a government plan to improve personnel security clearance processes governmentwide but is concerned about whether such progress will continue after the executive order expires. In contrast, demand for top secret clearances for industry personnel and the lack of reciprocity (the acceptance of a clearance and access granted by another department, agency, or military service) are impediments that mainly affect industry personnel. A previously identified increase in the demand for top secret clearances for industry personnel has workload and budgetary implications for DOD and OPM if such requests continue to occur. Finally, the lack of reciprocity has a negative effect on employees and employers, and increases the workload for already overburdened investigative and adjudicative staff. Reciprocity problems have occurred despite the issuance of governmentwide investigative standards and adjudicative guidelines in 1997. |
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The security situation in Central America has continued to deteriorate in recent years as Mexican drug trafficking organizations, transnational gangs, and other criminal groups have expanded their activities, contributing to escalating levels of crime and violence. Violence is particularly high in the “northern triangle” countries of El Salvador, Guatemala, and Honduras, with homicide rates among the highest in the world. Efforts to counter illicit trafficking in Colombia and Mexico created an environment that became increasingly inhospitable to drug trafficking organizations, forcing criminal groups to displace operations into Central America where they could exploit institutional weaknesses. Recognizing this situation, the United States has sought to develop collaborative security partnerships with Central American countries. As part of this effort, in 2010 the United States split off the Central America portion of the Mérida Initiative and established a new initiative named CARSI. According to State, CARSI is designed as a collaborative partnership between the United States and Central American partner countries. Its focus is on improving citizen security within the region, taking a broad approach to the issues of security beyond traditional counternarcotics activities. Figure 1 shows the CARSI partner countries in Central America. According to State, CARSI’s five primary goals are to disrupt the movement of criminals and contraband to, within, and create safe streets for citizens in the region; between the nations of Central America; support the development of strong, capable, and accountable Central American governments; re-establish effective state presence and security in communities at risk; and foster enhanced levels of security coordination and cooperation among nations in the region. Funding for CARSI activities has come from a combination of four U.S. foreign assistance accounts—the INCLE account; the Economic Support Fund (ESF) account; the Nonproliferation, Anti-Terrorism, Demining, and Related Programs (NADR) account; and the Foreign Military Financing (FMF) account. General descriptions of how these accounts are used globally are provided below. the INCLE account is used to provide assistance to foreign countries and international organizations to assist them in developing and implementing policies and programs that maintain the rule of law and strengthen institutional law enforcement and judicial capabilities, including countering drug flows and combating transnational crime; the ESF account is used to assist foreign countries in meeting their political, economic, and security needs by funding a range of activities, including those designed to counter terrorism and extremist ideology, increase the role of the private sector in the economy, develop effective legal systems, build transparent and accountable governance, and empower citizens; the NADR account is used to fund contributions to certain organizations supporting nonproliferation, and provides assistance to foreign countries for nonproliferation, demining, antiterrorism, export control assistance, and other related activities; and the FMF account is used to provide grants to foreign governments and international organizations for the acquisition of U.S. defense equipment, services, and training to enhance the capacity of foreign security forces. State manages the INCLE, NADR, and FMF accounts, and shares responsibility with USAID to manage and administer the ESF account. Within State, the Bureau for International Narcotics and Law Enforcement Affairs (INL) administers the INCLE account. The Bureau of Political- Military Affairs administers the FMF account, while DOD oversees the actual procurement and transfer of goods and services purchased with these funds. State’s Bureau of International Security and Nonproliferation and its Bureau of Counterterrorism administer their NADR subaccounts. State’s Bureau of Western Hemisphere Affairs administers a portion of ESF. However, USAID oversees the implementation of most CARSI programs funded from ESF. State’s Bureau of Educational and Cultural Affairs also previously administered a onetime use of ESF funds for CARSI activities. State’s Bureau of Western Hemisphere Affairs (WHA) has the lead within State for integrating CARSI activities with State’s broader policy of promoting citizen security in Central America. State’s primary funding source for CARSI activities is the INCLE account and the ESF account is USAID’s primary funding source for CARSI activities. In addition to State and USAID, a number of other U.S. agencies use non-CARSI funding to implement activities in Central America that address various aspects of promoting citizen security that complement CARSI activities—including improving law enforcement and the criminal justice system, promoting rule of law and human rights, enhancing customs and border control, and encouraging economic and social development. DOD, DOJ, DHS, and Treasury are the key agencies involved in these non-CARSI funded activities. Since fiscal year 2008, U.S. agencies have allocated more than $1.2 billion in funding for CARSI activities and non-CARSI funding that supports CARSI goals. As of June 1, 2013, State and USAID had allocated close to $495 million and disbursed at least $189 million in funding for CARSI activities to provide partner countries with equipment, technical assistance, and training to improve interdiction and disrupt criminal networks. As of March 31, 2013, U.S. agencies (State, USAID, DOD, DOJ, and DHS) estimated that they had also allocated approximately $708 million in non-CARSI funding that supports CARSI goals. U.S. agencies, including State, DOD, and DOJ, have used non- CARSI funding to provide additional security-related equipment, technical assistance, and training, as well as infrastructure and investigation assistance to the region. Data on disbursements of non-CARSI funding were not readily available for some agencies because of the complexity and challenges associated with how these agencies track their disbursement data. At the time of reporting, the most recent data available on funding for CARSI were as of June 1, 2013 and the most recent non-CARSI funding data available were as of March 31, 2013. However, we found no change in the total CARSI allocations between March 31, 2013 and June 1, 2013. Thus, it is possible to compare CARSI and non-CARSI funding allocations. As of June 1, 2013, State and USAID had allocated close to $495 million in funding for CARSI activities; the same amount had been allocated as of March 31, 2013, the time frame we use later to report on non-CARSI funding allocations. State and USAID have obligated at least $463 million of the close to $495 million allocated, and have disbursed at least $189 million of the allocated CARSI funds from the INCLE, ESF, and NADR accounts for activities in partner countries. State and USAID disbursed funds to support activities in partner countries that improve law enforcement and maritime interdiction capabilities, support capacity building and training activities, prevent crime and violence, and deter and detect border criminal activity. After reviewing a draft of this report, State officials reported an amount of almost $10.6 million in INCLE funding that was allocated for CARSI activities in fiscal year 2010 that had not been previously reported to GAO. State officials also said that they could not provide obligation or disbursement information related to this amount because these INCLE funds are centrally managed and State’s financial systems do not allow them to track such funds by region or country. According to State officials, this is why these funds were not previously reported to GAO. Although State officials were not able to track the obligation or disbursement of these funds, we have included this amount in the total of the close to $495 million allocated for CARSI activities. Of the seven partner countries, the largest amounts of CARSI funds were allocated to Guatemala, Honduras, and El Salvador. In addition, 17 percent of the total allocations was for regional activities; that is, region- wide activities in Central America that are not tied to an activity in a specific country. Table 1 provides a breakdown of allocated, obligated, and disbursed funds for CARSI activities by country. To demonstrate how funding for CARSI activities has been allocated, obligated, and disbursed by year of appropriation, we are providing this information by account and by country in appendix II. In addition, we present data on how funding for CARSI activities under FMF have been allocated and committed by year of appropriation in appendix III. Since we initially reported on CARSI in January 2013, the amount of funding for CARSI activities disbursed has increased from at least $75 million as of September 30, 2011, to at least $189 million as of June 1, 2013 from the INCLE, ESF, and NADR accounts. According to State officials, disbursements increased because State took steps to alleviate delays associated with program administration in the implementation of CARSI (particularly in the early years), including an insufficient number of staff at embassies in partner countries to manage CARSI activities. For example, in June 2013, the Assistant Secretary of State for INL reported in a congressional hearing that INL had increased staff positions in embassies in CARSI partner countries as INCLE funding represented about 64 percent of total CARSI allocations in these countries. Currently, El Salvador, Guatemala, Honduras, and Panama have INL Sections (formerly known as Narcotics Affairs Sections); and Belize, Costa Rica, and Nicaragua have Narcotics Affairs Offices, according to State officials. State and USAID have 5 years from the time the period of availability for obligation has expired to disburse funds. State and USAID disbursed funds to support various activities in partner countries that improve law enforcement and maritime interdiction capabilities, support capacity building and training activities, prevent crime and violence, and deter and detect border criminal activity. However, there is a slight difference in emphasis between State and USAID in their CARSI-funded activities. State’s efforts focus on capacity building of partner countries, while USAID’s efforts focus on establishing prevention programs for at-risk youth in partner countries. In general, State uses INCLE, ESF, FMF, and NADR funds to support activities such as strengthening the abilities of Central American law enforcement institutions to fight crime, violence, and trafficking in drugs and firearms; implementing high-impact, sustainable activities that focus on at-risk youth (such as job training and after school activities) and communities that are experiencing high levels of crime and violence; preventing the proliferation of advanced conventional weapons by helping to build effective national export control systems in countries that process, produce, or supply strategic items, as well as in countries through which such items are most likely to transit; and building and improving partner nation security force capacity to protect maritime borders and land territory against transnational threats such as illicit narcotics trafficking. USAID uses ESF funds for CARSI activities in the following areas: services for at-risk youth, focusing on vocational training, job placement, after-school activities, community centers, and leadership development; municipal crime prevention activities, including community outreach for local police and support for crime observatories that coordinate data sharing to track crime statistics; and national and regional political reform activities to strengthen rule of law institutions and that reflect partner countries’ commitments to reduce violence while creating the environment needed to institutionalize and sustain USAID efforts under CARSI. Across the region, State and USAID use various CARSI-funded activities to carry out CARSI goals in each of the seven partner countries. Funding for CARSI activities provides partner countries with communication, border inspection, and security force equipment such as radios, computers, X-ray cargo scanners, narcotics identification kits, ballistic vests, and night-vision goggles. Funding for CARSI activities also provides related maintenance for this equipment. Figure 2 below shows examples of crime investigation forensic equipment and vehicles provided with funding for CARSI activities to the Belize Police Department. In addition, funding for CARSI activities provides technical support and training to enhance partner countries’ prosecutorial capabilities; management of courts, police academies, and prisons; and to support law enforcement operations (e.g., training to support narcotics interdiction). Funding for CARSI activities also provides support to partner countries to that form specialized law enforcement units (also known as vetted units)are vetted by, and work with, U.S. personnel to investigate and disrupt the operations of transnational gangs and trafficking networks. Moreover, CARSI provides funding for partner countries to establish prevention activities designed to address underlying conditions (such as insufficient access to educational or economic opportunities and the prevalence of gangs) that leave communities vulnerable to crime and violence. Table 2 provides examples of CARSI activities in the seven partner countries. As of March 31, 2013, U.S. agencies estimated that they had allocated approximately $708 million in non-CARSI funding that supported CARSI goals from fiscal year 2008 through the first half of fiscal year 2013, with State, USAID, and DOD allocating the largest amount of non-CARSI funds to support CARSI goals. U.S. agencies (State, USAID, DOD, DOJ, and DHS) reported using their non-CARSI funding to implement a range of activities that supported CARSI goals, including providing training, technical assistance, equipment, infrastructure, and investigation and operational support to partner countries. To estimate the amount of non-CARSI assistance that has been allocated for partner countries that supported CARSI goals, we collected data from State and USAID as well as DOD, DOJ, DHS, and Treasury for fiscal year 2008 through the second quarter of fiscal year 2013. We did not report data on disbursements of non-CARSI funding because these data were not readily available for some agencies owing to the complexity and challenges associated with how these agencies track their disbursement data. The allocated amount of non-CARSI funding supporting CARSI goals was 43 percent greater than the allocated amount of funds for CARSI activities, as of March 31, 2013. The largest share of non-CARSI funding was allocated to Honduras, Guatemala, and El Salvador, as shown in table 3. According to State officials, the U.S. government has identified CARSI as its primary initiative for addressing citizen security threats in Central America. U.S. agencies developed an interagency strategy to ensure an integrated approach to all U.S. citizen security activities in Central America whether funded through CARSI or other sources. Established in 2012, the strategy sets up CARSI and its five goals as the national policy framework for all U.S. government citizen security efforts in Central America and states that agencies’ activities in the region should link to one or more of the CARSI pillars. Agency officials noted that because the goals of CARSI are broad, a wide array of activities can be seen as supporting the goals, and agencies have sought to align their own strategy documents with the interagency strategy and five pillars of CARSI. Officials from some U.S. agencies, including DOD and the Drug Enforcement Administration (DEA), noted that the CARSI goals reflect the types of activities that their agencies were already undertaking in the region. The largest shares of non-CARSI funds allocated are from State, USAID, and DOD (see table 4). U.S. agencies reported using their non-CARSI funding to implement a range of activities that supported CARSI goals, including providing training, technical assistance, equipment, infrastructure, and investigation and operational support to partner countries. For example, State funds complementary activities from a variety of non-CARSI sources, including security assistance accounts such as the International Military Education and Training account; other foreign assistance accounts, such as the Democracy Fund; and non-foreign assistance sources, such as the Conflict Stabilization Operations account. State identified 11 offices that support complementary citizen security activities in Central America with non-CARSI funds. For example, according to State officials, State’s Bureau of Conflict and Stabilization Operations funded mediation and community dialogue activities in Belize to reduce gang violence that complemented a related CARSI-funded activity. State’s Bureau of Political-Military Affairs used non-CARSI FMF funding to provide boats to Panama’s Coast Guard to assist in conducting drug interdictions in Panama’s territorial waters. USAID used non-CARSI Development Assistance funds to support a variety of activities in the rule of law and human rights, good governance, political competition and conflict resolution, and education areas. For example, USAID is using non-CARSI Development Assistance funds in Guatemala to help strengthen its security and justice sector institutions, according to USAID officials. In addition, DOD, DHS, and DOJ also use funding other than CARSI to implement activities in Central America that support CARSI goals. For example, according to officials, DOD has used funds from its Central Transfer Account for Counternarcotics to help establish an interagency border unit along the Guatemala/Mexico border to support Guatemalan efforts to stop the illicit movement of people and contraband. In Panama, a DOD medical team used non-CARSI funds to work with the Panamanian Ministry of Health in a poor and remote area in Panama to provide medical attention to this community. In Belize, DOD used non-CARSI funds for equipment, training, and infrastructure, including construction of a Belize Coast Guard Joint Operation Center that houses drug interdiction boats provided with funds for CARSI activities (see fig. 3). DHS and its components used non-CARSI funding to support activities such as training by Customs and Border Protection (CBP) on how to conduct searches and seizures at ports of entry that complemented other types of CARSI support. DOJ and its components used non-CARSI funding to support a variety of activities designed to improve partner countries’ law enforcement capabilities. For example, DEA provided funding to support vetted Sensitive Investigative Units in Guatemala, Honduras, and Panama. While not included in our reported non-CARSI allocation totals above, U.S. agencies also used other non-CARSI resources to support CARSI goals in ways other than directly funding activities in partner countries. For example, Treasury has used non-CARSI funding to pay for the salaries and other costs associated with posting its personnel in several partner countries to serve as resident advisors. These advisors work with the partner countries to improve their ability to detect and prevent money laundering and have used funding for CARSI activities to implement regional programs. In addition, the FBI’s Criminal Investigations Division has not directly funded non-CARSI activities in partner countries; however, it has assigned personnel to Transnational Anti-Gang Units that have been set up in El Salvador, Guatemala, and Honduras. Agencies such as CBP, the U.S. Coast Guard, and DOD also support CARSI goals by using their assets, including aircraft and boats, to conduct counternarcotics operations in Central America. For example, U.S. agencies contribute resources to Operation Martillo, which is a joint counternarcotics operation involving the U.S. government, several partner countries, and other international partners. When selecting activities to fund under CARSI, State and USAID took steps to help identify and consider partner country needs, absorptive capacities, and related U.S. and non-U.S. citizen security assistance investments in partner countries. First, State and USAID officials used assessment reports to help identify and consider partner country needs and absorptive capacities. Second, State and USAID officials used outreach meetings with officials from partner country governments, other donor governments, and international organizations to consider partner country needs, absorptive capacities, and non-U.S. citizen security assistance investments in partner countries. Third, State and USAID officials used interagency meetings at embassies in partner countries and in Washington, D.C., to coordinate U.S. efforts, as well as to help identify and consider partner country needs, absorptive capacities, and related non-U.S. investments in partner countries. State officials used assessment reports to help identify and consider partner country needs and absorptive capacities when selecting activities to fund under CARSI. For example, State conducted reviews of the forensic capabilities in six partner countries over the course of 2011 to evaluate the crime scene investigation, prosecution, and forensic science programs and capacities in each country. In a 2011 report, State assessed deficiencies in these areas and developed recommendations to address those deficiencies. According to State, State officials used the conclusions and recommendations from this report to inform their decisions on selecting activities to fund under CARSI. State officials also reported that they used assessment reports produced by interagency partners to determine assistance needs, refine assistance efforts, and avoid absorptive capacity issues. For example, State officials used a series of technical assessment reports on the law enforcement and interdiction capabilities and needs of key Central American land ports of entry produced by CBP. Similarly, State officials reported that they used comprehensive assessment reports on the firearms regulations, oversight, investigative, and forensic capabilities of Central American governments produced by the Bureau of Alcohol, Tobacco, Firearms, and Explosives to determine that firearms interdiction activities could assist in reducing the trafficking of arms into the region. USAID officials also used assessment reports to help identify and consider partner country needs and absorptive capacities when selecting activities to fund under CARSI. For example, USAID officials reported that they used assessment reports to help identify and consider partner country juvenile justice and community policing needs and absorptive capacities; these assessment reports included specific recommendations for designing and selecting juvenile justice and community policing projects in partner countries. According to USAID officials in Washington, D.C., and at U.S. embassies, USAID staff used information from these and other assessment reports to help select and design CARSI activities in partner countries. In addition, both State and USAID officials used country-specific CARSI assessment reports—produced by embassy staff in November 2009 and covering all seven partner countries—to help identify and consider partner country needs and absorptive capacities when selecting activities to fund under CARSI. These country-specific assessment reports included information on (1) the partner country’s security environment, (2) embassy and host government perspectives on the effectiveness of activities implemented to date, (3) partner country strengths and weaknesses and opportunities and threats, and (4) the partner country’s regional and bilateral security engagements. State and USAID officials also used outreach meetings with host government officials to help identify and consider partner country needs, absorptive capacities, and non-U.S. citizen security assistance investments in partner countries when selecting activities to fund under CARSI. Outreach meetings included both routine interactions between U.S. agency and host government officials—at the subject matter expert level—and broader, high-level meetings, typically at the ambassador and head of host government level. At these meetings, topics such as the status of current CARSI activities and the future of CARSI programming, including potential future CARSI activities, can be discussed. For example, embassy officials in one partner country reported that they held an ambassador/head of host government-level meeting with a delegation from the host government in June 2010. At this meeting, the U.S. government and the host government agreed to pursue bilateral, multiagency efforts to combat identified threats from transnational illicit trafficking and criminal organizations. Following this high-level meeting, embassy and host government officials established bilateral working groups to identify and develop activities in the partner country in areas such as border security, counternarcotics operations and strategy, gang prevention and law enforcement, community development, asset seizure, and investigation and prosecution. These bilateral working groups provided input on selecting activities to fund under CARSI and are now coordinating information-sharing efforts and progress updates on those activities. State and USAID officials also used outreach meetings with other donor governments and international organizations to help identify and consider non-U.S. citizen security investments in partner countries when selecting CARSI activities. For example, in one partner country, embassy officials reported that they held numerous meetings with other donor governments. Through these outreach meetings, embassy officials were able to identify one donor government’s investments in police intelligence in the partner country and consequently reduced funding for CARSI activities in that area. Also, through regular outreach meetings, embassy officials in the same partner country reported that they were able to identify another donor government’s investments in ballistic imaging systems in the partner country. Embassy officials subsequently redirected funding for CARSI activities that would otherwise have been spent in that area. State and USAID officials also used meetings with other donor governments through the Group of Friends of Central America’s Security Experts Group to help identify and consider non-U.S. citizen security assistance investments in partner countries when selecting activities to fund under CARSI. For example, through Group of Friends and other donor meetings, State reported that they worked with another donor government to coordinate an anti-crime capacity-building activity for a partner country by de-conflicting donor purchases and leveraging investments between the U.S. and the other donor government. In addition, both USAID and State reported that they utilized a donor database on third-country and multilateral assistance hosted by the Inter- American Development Bank (IDB) to help identify and consider non-U.S. investments. The database includes information on projects sponsored by other donors and international organizations in partner countries, such as when the project started, when it is scheduled to be completed, and the total project cost. State officials said that they are eager for IDB to update the database with more detailed donor information that could increase the effectiveness of U.S. agencies’ efforts to coordinate with other donors. When selecting activities to fund under CARSI, State and USAID officials also used interagency meetings at embassies in all seven partner countries to coordinate U.S. efforts, as well as to help identify and consider partner country needs, absorptive capacities, and related non- U.S. investments in those partner countries. For example, embassy officials in one partner country reported that they used interagency meetings to discuss the partner country’s needs for a digital radio communication network to connect the host government’s police, military, and related agencies and the ability of the partner country to absorb such assistance. State and DOD officials used information from the interagency meetings to help design and select a digital radio communication project using both CARSI and non-CARSI funding. According to agency officials, by involving DOD in the project selection process, embassy officials leveraged DOD’s contribution to help meet the partner country’s needs and help the partner country conduct joint operations with the United States. In another partner country, embassy officials reported that they used interagency meetings to identify and consider partner country needs, absorptive capacities, and related U.S. agency non-CARSI investments to support the host government’s efforts to regain control over a conflict-ridden portion of the country. According to agency officials, through the interagency meetings, U.S. agencies identified and considered these factors and coordinated the use of CARSI and non-CARSI funding to support the host government’s efforts. State and USAID officials also reported that they used high-level interagency meetings, such as those of the Central America Interagency Working Group (IAWG) in Washington, D.C., to help identify and consider partner country needs and coordinate related U.S. agency non-CARSI investments in partner countries when selecting activities to fund under CARSI. The IAWG was launched in February 2012 and includes representatives from State and USAID, as well as representatives from other agencies engaged in citizen security efforts in Central America, including DHS, DOD, DOJ, and Treasury. According to State, from March 2012 through April 2013, the IAWG and its associated subgroups held 21 meetings. Through interagency meetings, State officials were able identify and consider non-CARSI proposed investments when selecting activities to fund under CARSI; for example, according to State, officials identified and considered non-CARSI proposed border management and migration projects for the region. State officials coordinated the disbursement of CARSI and non-CARSI funds to support the implementation of these border management and migration projects, while avoiding duplication among activities. In addition, through interagency meetings, agency officials were able to review various CARSI and non-CARSI land border security and interdiction activities and identified land border security short-to-medium-term capacity deficits. Consequently, agency officials are working to focus U.S. land interdiction security assistance on a limited number of high-impact engagements designed to increase seizures of contraband. By continuing to coordinate CARSI and non-CARSI investments through these interagency meetings, State officials said they will produce a more coordinated and integrated U.S. response to the region, with the goal of increasing seizures of contraband and supporting partner country border security initiatives. Using various mechanisms, State and USAID have reported on some CARSI results at the initiative, country, and project levels. For example, embassies in partner countries produce monthly CARSI implementation reports that identify the impacts of CARSI or related activities in the country. However, U.S. agencies have not assessed or reported their performance using the metrics outlined in a 2012 interagency strategy for Central America that are designed to measure the results of CARSI and complementary non-CARSI programming. USAID is currently implementing an evaluation of selected CARSI activities and State is planning an evaluation of some of its CARSI activities. State and USAID monitored and reported on some CARSI results through a variety of mechanisms at the initiative, country, and project levels. Initiative-level reporting addresses CARSI results across the different CARSI accounts and the seven partner countries. Country-level reporting describes CARSI results in a particular partner country. Project-level reporting describes the results of individual CARSI projects. According to State and USAID officials, the primary source of consolidated information on CARSI results at the initiative level—across accounts and countries—is State’s Bureau of Western Hemisphere Affairs’ (WHA) annual Performance Plan and Report. State and USAID use the annual Performance Plan and Report to monitor the performance of foreign assistance activities in the region. In its 2012 report, WHA provides information on some CARSI-wide results using a number of performance metrics that measure outputs against WHA’s established targets. For example, WHA uses metrics such as narcotics seizures and the establishment of local crime prevention groups to measure CARSI results. To produce the information on CARSI results in the report, WHA aggregated data on activities funded through all CARSI accounts and in all seven partner countries. We do not provide more detailed information on the CARSI results discussed in the 2012 Performance Plan and Report because the document is labeled “Sensitive But Unclassified.” specific metric, State did not establish a fiscal year 2012 target against which to measure CARSI results. WHA noted that in its fiscal year 2012 report there are eight additional metrics that included combined results information on CARSI and other initiatives in the Western Hemisphere, but these metrics did not provide separate results information for CARSI- funded activities. For example, WHA reported that CARSI and other initiatives in the region together exceeded their target for a metric related to the training of foreign law enforcement officers by almost 75 percent in fiscal year 2012. State and USAID also report on CARSI results at the country level. According to State and USAID officials, monthly CARSI implementation reports produced by the embassies in each partner country are one of the key ways in which they monitor and report on CARSI results at the country level. State and USAID officials stated that these implementation reports are part of their ongoing effort to monitor the impact and effectiveness of CARSI and related non-CARSI assistance. State requires embassies to include in the reports a section discussing the impact of CARSI and related activities. These impact sections do not provide information on performance relative to established CARSI metrics or specific goals, but instead consist of descriptions of the results of various activities taking place in the partner countries over the course of the month. For example, one embassy reported in May 2013 that the host government used a body scanner purchased with CARSI funds to successfully detect a man attempting to smuggle narcotics onto a plane bound for the United States. A different embassy reported in April 2013 that a CARSI-supported anti-gang education and training program had been successfully expanded nationwide and had taught over 3,000 children over 3 years of the program. The 55 monthly reports we reviewed included a range of other results from CARSI-funded activities that were identified by embassies, but we also found that some embassies did not always link some of the reported results to specific U.S. assistance activities. For example, a number of reports noted seizures or arrests made by the host government, but the reports did not provide any information on how CARSI or related U.S. non-CARSI assistance had facilitated these efforts. State officials identified INL’s annual end-use monitoring reports as a second mechanism for monitoring and reporting on CARSI activities at the country level, although these end-use monitoring reports are not specific to CARSI. State officials said that these end-use monitoring reports are used to monitor all INCLE-funded items that have been provided to the partner country to ensure that items are accounted for and used in accordance with the terms agreed to by the U.S. government and the partner country. As part of the end-use monitoring reports, State requires embassy officials to include a discussion of the impact of any INCLE-funded equipment, infrastructure, training, or other services that have been provided, including under CARSI. The reports from partner countries for fiscal years 2009 through 2012 identified a number of positive results from CARSI assistance. For example, the embassy in El Salvador stated in its 2012 end-use monitoring report that trucks provided to the national police had a significant impact on the number of cases investigated and improved the national police’s response capabilities. However, the reports also identified some issues related to upkeep, maintenance, and use of CARSI-funded equipment. For example, the embassy in Guatemala reported in 2012 that 11 motorcycles provided to the National Police became inoperable as a result of a lack of proper maintenance and funding; State then covered the cost of refurbishing the motorcycles. Finally, USAID officials noted that annual portfolio reviews conducted by USAID missions in partner countries are an important tool for reporting CARSI results at the country level. USAID first began requiring its missions to conduct such reviews in November 2012. According to USAID guidance, portfolio reviews should, among other things, examine the mission’s progress in achieving its objectives over the past year. The portfolio reviews that we examined included varying levels of information about CARSI results. For example, one review did not provide any results information, but instead provided a general description of the types of activities funded under the USAID mission’s portfolio. However, in other cases, the USAID missions did provide specific results information. For example, one mission reported that one of its programs had provided access to vocational training to improve job competitiveness for 1,763 young people either at risk of becoming gang members or trying to leave gangs. In some cases, the portfolio reviews did not specify whether certain results were from CARSI or related non-CARSI projects. State and USAID officials also stated that they perform certain monitoring and reporting on CARSI results at the project level. State’s INL conducts quarterly desk reviews of INCLE-funded CARSI activities to track the progress of projects over time. INL requires these quarterly desk reviews to include a discussion of the project objectives, measure project results against established performance metrics, and identify success stories. For example, INL reported in the quarterly desk review for one CARSI project that, as of the end of 2012, it had trained 259 host government investigators, prosecutors, and judges on the use of forensic evidence in court proceedings. In another quarterly desk review, INL reported that the project implementer had successfully developed an improved case management system to assist the Costa Rican Attorney General’s Office in conducting drug trafficking prosecutions. USAID also conducts quarterly reporting on its CARSI projects. USAID’s quarterly reports include information on the project’s accomplishments for the quarter and progress that had been made relative to the project’s established performance metrics. For example, in a report for the second quarter of fiscal year 2013, the implementer of USAID’s crime prevention program in Panama reported that it had met or exceeded its targets for 20 of the project’s 26 metrics, including its target for the number of municipalities that had set up municipal crime prevention committees. While State and USAID have reported on some CARSI results, U.S. agencies have not assessed and reported on their results using the performance metrics identified in the February 2012 interagency citizen security strategy for Central America. U.S. agencies developed this strategy to help coordinate and focus the U.S. government’s CARSI and related non-CARSI activities in the region. In the interagency strategy, U.S. agencies outlined five metrics for measuring the performance of U.S. government citizen security programming, including CARSI activities, in achieving the strategy’s objectives. For example, the strategy includes a metric to reduce homicide rates each year from 2012 through 2017. According to State and USAID officials, the strategy and the metrics it identifies were developed through an iterative, interagency process that included other agencies such as DOD, DOJ, and DHS. However, to date, U.S. agencies have not assessed and reported on their performance using the metrics identified in the strategy. GAO-12-1022. that have proven their effectiveness in solving the region’s most pressing problems. USAID is currently conducting an evaluation of some of its CARSI activities, and State is developing an evaluation of INL activities under CARSI, consistent with its evaluation policy. USAID and State have both taken steps to monitor and report on the results of CARSI-funded activities. However, in our previous work we concluded that monitoring activities do not take the place of program evaluations. As we previously concluded, monitoring is ongoing in nature and measures agencies’ progress in meeting established objectives, typically using performance metrics. Evaluations are individual, systematic studies that typically examine a broader range of information on program performance and its context than is feasible to monitor on an ongoing basis. Thus, evaluations allow for overall assessments of whether a program is working and what adjustments need to be made to improve results. USAID officials stated that they will also conduct evaluations of other CARSI activities that meet the criteria established in USAID’s 2011 evaluation policy. USAID’s evaluation policy requires each USAID operating unit to evaluate all projects that equal or exceed the average project size for that operating unit, at least once during the project’s lifetime. preliminary results from El Salvador show that murder and robbery rates have been reduced in communities receiving USAID assistance under the program. USAID officials identified a range of ways that they expect the crime prevention programming evaluation to assist them, once it is completed. For example, they expect the evaluation to provide evidence of the extent to which USAID’s crime prevention program reduced crime victimization and perceptions of insecurity in at-risk communities. USAID officials also anticipated that they would be able to use the evaluation’s findings as a tool to encourage partner countries to make their own investments in crime prevention activities. State officials noted that they are currently working on a scope of work for an evaluation of CARSI activities. In 2012, State issued an evaluation policy that requires bureaus to evaluate two to four programs, projects, or activities every 2 years, starting in fiscal year 2012, with all “large” programs, projects, and activities required to be evaluated at least once in their lifetime or every 5 years, whichever is less. The policy also requires all State bureaus to complete a bureau evaluation plan and to update it annually. According to State officials, given other priority areas, INL did not select CARSI for evaluation in its first bureau evaluation plan, covering fiscal years 2012 through 2014, although CARSI qualifies as a large program for INL. Nevertheless, INL officials stated that they intend to conduct an evaluation of their CARSI activities beginning in fiscal year 2014, as CARSI approaches its 5-year point. INL officials stated that they are currently working on a scope of work for this evaluation, which will cover CARSI programming across the partner countries. INL officials stated that their intention is to issue a solicitation by the end of 2013 for a contractor to conduct the CARSI evaluation. However, INL officials noted that many decisions have not yet been made about the scope or methodology for the evaluation and that funding has not yet been secured for the evaluation. In regard to WHA, State officials noted that the bureau manages only a small percentage of State’s funding for CARSI activities. Given the small percentage of CARSI funding WHA manages, State officials said that WHA does not have any plans to conduct a separate CARSI evaluation from the one INL intends to do. Our guidance on evaluation design indicates that State could increase the value of any future evaluation it conducts by ensuring that it systematically plans the evaluation. As we have previously concluded, systematically planning for evaluations is important to (1) enhance the quality, credibility, and usefulness of evaluations and (2) use time and In our earlier work on evaluation design, we resources effectively.recommended that agencies take five steps to effectively design an evaluation, as shown in table 5. Evaluations of CARSI activities, such as the one that INL has stated it intends to undertake, could provide State with important information to help it manage and oversee CARSI. As State’s evaluation policy notes, evaluations are essential to documenting program impact and identifying best practices and lessons learned. Among other things, an evaluation could help State as it seeks to identify successful CARSI activities and determine how best to replicate them in other locations. State officials noted that designing a CARSI evaluation will be challenging because CARSI involves a diverse set of activities that are being implemented in seven different countries. Thus, State officials stated that one challenge they will face in evaluating CARSI is selecting a mix of activities to evaluate that are sufficiently representative of their various CARSI activities that conclusions can be drawn about the broader impact of their CARSI efforts. Given such challenges, effectively planning any CARSI evaluation would help State ensure that the evaluation provides the types of information it can use to guide future decisions about CARSI programming. CARSI partner countries face significant challenges that threaten the security of their citizens as well as the interests of the United States. U.S. agencies have allocated over $1.2 billion to support a range of activities to help partner countries respond to these threats. While State and USAID have reported on some results from CARSI-funded activities, the agencies have not worked with their interagency partners to assess progress made in meeting performance targets outlined in the 2012 U.S. interagency citizen security strategy for Central America. Without assessing their performance meeting these targets, agencies lack important information on progress made toward achieving the objectives outlined in the interagency strategy that could help guide future decisions. To evaluate some of its CARSI activities, USAID is currently overseeing an evaluation of its CARSI crime prevention programming and intends to use the evaluation to help it better target, design, and prioritize future CARSI programming. State is planning an evaluation of some of its CARSI activities as the initiative approaches its 5-year mark. These evaluations will help agencies better manage and oversee their programs and activities. Among other things, the evaluations can be used to (1) help agencies assess the effectiveness of completed activities, (2) modify the current mix of existing projects to increase program effectiveness, and (3) better prioritize future projects to achieve results. While these are commendable steps, assessing progress made toward achieving the objectives outlined in the U.S. interagency strategy for Central America would provide important information on the performance of CARSI and related U.S. government activities and better guide U.S. decision making. To help ensure that U.S. agencies have relevant information on the progress of CARSI and related U.S. government activities, we recommend that the Secretary of State and the USAID Administrator direct their representatives on the Central America Interagency Working Group to work with the other members to assess the progress of CARSI and related U.S. government activities in achieving the objectives outlined in the U.S. government’s interagency citizen security strategy for Central America. We provided a draft of this report to DHS, DOD, DOJ, State, Treasury, and USAID for their review and comment. DHS, State, and USAID provided technical comments, which we incorporated as appropriate. USAID and State also provided written comments, which are reproduced in appendixes IV and V, respectively. In their written comments, State and USAID both concurred with our recommendation and State noted that GAO’s recommended steps for evaluation design would guide an evaluation of CARSI programming. As discussed 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 DHS, DOD, DOJ, State, Treasury, and USAID, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7331 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. This report (1) provides an updated assessment of U.S. agencies’ funding and activities that support Central America Regional Security Initiative (CARSI) goals; (2) examines whether U.S. agencies took steps to consider partner country needs, absorptive capacities, and related U.S. and non-U.S. investments when selecting activities to fund under CARSI; and (3) examines information on the extent to which U.S. agencies reported CARSI results and evaluated CARSI activities. To assess U.S. agencies’ funding and activities that supported CARSI goals, we obtained data and program documentation from the Department of State (State) and the United States Agency for International Development (USAID) concerning funds allocated to support programs in Central American countries under the Mérida Initiative in fiscal years 2008 and 2009 and under CARSI from fiscal year 2010 to June 1, 2013, through four accounts—International Narcotics Control and Law Enforcement (INCLE); Economic Support Fund (ESF); Nonproliferation, Anti-terrorism, Demining, and Related Programs (NADR); and Foreign Military Financing (FMF). We obtained the data from each bureau at State that administers those accounts: International Narcotics and Law Enforcement Affairs (INL), Western Hemisphere Affairs (WHA), International Security and Nonproliferation, Counterterrorism, and Political-Military Affairs. We also obtained data from USAID, which also allocates and implements the ESF account. In particular, State and USAID provided data on the status of allocations, unobligated balances, unliquidated obligations, and disbursements for the ESF account; State also provided these data for the INCLE and NADR accounts. State’s bureaus and USAID administer the accounts separately and utilize their own data collection systems and budgeting terms. To address differences between their systems, we provided State and USAID with the definitions from GAO’s A Glossary of Terms Used in the Federal Budget Process and requested that State and USAID provide the relevant data according to those definitions. To the extent possible, we worked with agencies to ensure that they provided data that met these definitions. However, the Department of Defense budgets and tracks FMF funds in a different way than the other foreign assistance accounts that support CARSI. The Defense Security Cooperation Agency (DSCA) and the Defense Financing and Accounting Service (DFAS) are responsible for the financial systems that account for FMF funds, as well as tracking the implementation and disbursement of those funds. DSCA’s system can only track FMF uncommitted and committed amounts, not unliquidated obligations or disbursements. DFAS tracks disbursements using the Defense Integrated Finance System; however, there is no direct link between the DSCA and DFAS systems and the DFAS system does not track funding for specific initiatives, such as CARSI. Therefore, State was not able to provide data on unliquidated obligations or disbursements, but it was able to provide us with data on CARSI FMF allocations and commitments. In providing technical comments on a draft of this report, State officials reported an amount of close to $10.6 million in additional INCLE funding that was allocated for CARSI activities in fiscal year 2010 that had not been previously reported to GAO. State officials also said that they could not provide obligation or disbursement information related to this amount because these INCLE funds are centrally managed and State’s financial systems do not allow them to track such funds by region or country. According to State, that is why these funds were not previously reported to GAO. We followed up with State officials to confirm that the funds had been applied to CARSI activities and to document the programs toward which the funds had been applied. Although State officials were not able to provide information for the obligation or disbursement of these funds, we have included this amount in the total allocated for CARSI activities. We made note of this discrepancy in presenting this data in the report. We also interviewed officials from each of State’s bureaus and USAID on their budgeting process and terms to determine the best method for collecting comparable data across accounts. We then reviewed the data and consulted with State and USAID on the accuracy and completeness of the information. When we found discrepancies, we contacted relevant agency officials and worked with them to resolve the discrepancies. We noted any differences in the ways the agencies collected, categorized, or reported their data in notes to the tables in this report. To assess the reliability of the data provided, we requested and reviewed information from agency officials regarding the underlying financial data systems and the checks, controls, and reviews used to generate the data and ensure its accuracy and reliability. We determined that the data provided were sufficiently reliable for the purposes of this report. Furthermore, to identify equipment, training, and other related activities supported by funding for CARSI activities, we reviewed program documentation and interviewed relevant officials from State and USAID regarding the status of program implementation and the types of equipment, training, and other activities provided to partner countries to date. In addition, we visited three partner countries—Belize, Guatemala, and Panama. We selected these three countries as a sample considering the following elements—the scope of the citizen security problem; the amount of funding for CARSI activities received from fiscal years 2008 to 2012, the range of CARSI activities undertaken, the extent of non-CARSI U.S. government activities that support CARSI objectives, and the extent of host government or other donor citizen security efforts in these countries. In these three countries, we met with U.S. agency officials as well as host government, international organization, and other donor government officials. We also visited CARSI and non-CARSI activity locations during these visits. To determine how much non-CARSI assistance has been allocated for partner countries that supported CARSI goals, we collected data from State and USAID as well as DOD, the Department of Justice, the Department of Homeland Security, and the Department of the Treasury for fiscal year 2008 through the second quarter of fiscal year 2013. Data on disbursements of non-CARSI funding were not readily available for some agencies because of the complexity and challenges associated with how these agencies track their disbursement data. In collecting allocation data, we asked agencies to provide funding data only for activities that they determined supported one or more of the five pillars of CARSI. In addition, we asked agencies to provide only data on non-CARSI funding that directly assisted partner countries, such as funding for training, equipment, infrastructure, and operational or investigative support. To avoid double-counting across agencies, we asked agencies to provide data only on activities funded through their own appropriations. We requested non-CARSI data from all the agencies in a standardized format, but given differences in the agencies’ missions, budget processes, and data systems, there were variations in the responses we received. We worked with the agencies to resolve these discrepancies. For example, some agencies provided data on funding for the salaries of U.S. government employees, or the operation of U.S. equipment, such as aircraft. We determined that these types of funding did not constitute direct assistance to the partner countries and did not include these funding amounts in our totals. In addition, in certain cases, agencies reported that they did not allocate non-CARSI funding to activities supporting CARSI goals in advance, but that they disbursed resources to programs that supported CARSI goals as needs arose. In these cases, we worked with the agencies to determine whether or not the disbursed amounts could be considered as equivalent to the allocation amounts given the nature of how the agencies’ programming was executed and made adjustments accordingly. To assess the reliability of the non-CARSI data provided, we collected information from agency officials regarding their methodology for determining what non-CARSI funding to include as supporting CARSI goals and the process they used for generating the data. We worked with agencies to make adjustments to these methodologies if we identified concerns. As part of this effort, we gathered information from the agencies on potential risks of underestimates or overestimates of the allocation amounts they reported and how we might mitigate any potential overestimates. We then took steps to mitigate these issues to the extent possible. For example, some agencies provided us with funding data for regional programs that benefited both partner countries and non-CARSI countries. In these cases, we worked with the agencies to determine if there was an appropriate way of apportioning a percentage of the costs to the partner countries versus the other non-CARSI beneficiary countries. If possible, we adjusted the numbers accordingly; if adjustments were not feasible, we did not include the funding amounts in our totals. As part of our data reliability assessments, we also reviewed information on the underlying data systems used to produce the data and the checks, controls, and reviews the agencies perform to ensure the accuracy and reliability of data in these systems. There are certain inherent limitations in the data we collected because agencies were asked to make determinations, using their own judgments, about what portions of their non-CARSI funding supported CARSI goals. However, we believe that the steps we have taken mitigate these limitations, to the extent possible. Given this, we determined that, for the purposes of this report, the data were sufficiently reliable to provide estimates of agencies’ non-CARSI funding that supported CARSI goals. To determine the types of activities that this non-CARSI assistance funded, we reviewed documentation from U.S. agencies and also conducted interviews with agency officials at headquarters and in our three site-visit countries. To examine whether U.S. agencies took steps to consider partner country needs, absorptive capacities, and related U.S. and non-U.S. investments when selecting activities to fund under CARSI, we interviewed State and USAID officials at headquarters and at the embassies in the three partner countries we visited. In addition, we submitted specific written questions to two bureaus at State and USAID at headquarters and received written response documents on the steps State and USAID officials used to help identify and consider these key factors when selecting activities for funding under CARSI. We also worked with State officials at headquarters to develop written questions for the embassies in all seven partner countries on the steps they used to help identify and consider these key factors when selecting CARSI activities. We received comprehensive written response documents from the embassies in all partner countries with information cleared at the Deputy Chief of Mission level. We reviewed and analyzed the written response documents we received from two bureaus at State and USAID at headquarters and from embassies in all seven partner countries. Using these various data sources, we identified specific steps that State and USAID officials used to consider partner country needs, absorptive capacities, and investments when selecting CARSI activities. We also reviewed additional available written documentation on the steps State and USAID used to help identify and consider key factors, such as various assessment reports produced by State, USAID, and other agency officials; trip reports and status reports produced by agency officials; summary agendas from interagency meetings held at embassies and in headquarters; and documentation on the management and coordination of CARSI activities. We did not assess the extent or effectiveness of the steps that State and USAID took to identify and consider partner country needs, absorptive capacities, or U.S. and non-U.S. investments. To examine information on the extent to which U.S. agencies reported CARSI results and evaluated CARSI activities, we interviewed State and USAID officials at headquarters and U.S. officials at the embassies in the three partner countries we visited. In addition, we submitted questions and received written responses from State and USAID headquarters, as well as from the embassies in all seven partner countries, which provided additional information on agencies’ results reporting and evaluation of CARSI activities. Using this information, we identified the key mechanisms State and USAID use for reporting CARSI results at the program, country, and project level. At the initiative level, we reviewed the WHA annual Performance Plan and Reports for fiscal years 2009 through 2012 and the interagency strategy for citizen security in Central America and assessed the types of CARSI results identified in these documents. At the country level, we analyzed a non-probability sample of 55 monthly CARSI implementation reports produced by embassies in the partner countries. We selected this sample to ensure that we obtained a mix of old and recent reports from all 7 countries. This sample contained eight reports from each of the seven partner countries, except for Nicaragua, which provided seven reports, and included the three most recent reports produced by each embassy as of May 2013, as well as reports from earlier years going back to fiscal year 2009. At the country level, we also reviewed completed INL annual End-Use Monitoring Reports from each of the seven partner countries for fiscal years 2009 to 2012 and a USAID- selected sample of five portfolio reviews from USAID offices in partner countries. Finally, we analyzed five INL Quarterly Desk Reviews and six USAID project reports to determine the types of CARSI results identified in project-level reporting. These reports were selected by State and USAID respectively as examples of their project-level reporting. We also compared U.S. agencies’ actions to assess and report their progress toward achieving the objectives in the interagency strategy for Central America against key considerations that we identified in 2012 for implementing interagency collaboration mechanisms. work, we found that one key feature in the successful implementation of such mechanisms is the development of a system for monitoring and reporting on results. In addition, we compared agencies’ activities against leading practices we identified in 1996 for performance management of federal programs. We developed this list of considerations through a review of relevant literature on collaboration mechanisms, interviews with experts on collaboration, and a review of findings from a number of our previous reports on collaboration in the federal government. See GAO, Managing for Results: Key Considerations for Implementing Interagency Collaborative Mechanisms, GAO-12-1022 (Washington, D.C.: Sept. 27, 2012). ongoing, or planned evaluations of CARSI. From USAID, we gathered information on the scope and methodology, current status, and expected uses of their impact evaluation of their municipal crime prevention program. We also gathered testimonial evidence from State on INL’s planned evaluation of its CARSI activities. In addition, we reviewed State’s 2012 Program Evaluation Policy and determined the extent to which INL and WHA had selected CARSI activities for evaluation in their bureau evaluation plans for fiscal years 2012 through 2014. We conducted this performance audit from August 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. To demonstrate how funding for Central America Regional Security Initiative (CARSI) activities have been allocated, obligated, and disbursed, we are providing the status of funds provided for CARSI activities as of June 1, 2013. The following tables show CARSI funds by account, describing how U.S. agencies have allocated, obligated, and disbursed funds (by year of appropriation) toward activities in partner countries. In addition, the tables show unobligated balances, which is the portion of an obligational authority that has not yet been obligated, and unliquidated obligations (or obligated balance), which is the amount of obligation already incurred for which payment has not yet been made. Funding for CARSI activities has primarily come from the International Narcotics Control and Law Enforcement (INCLE) and Economic Support Fund (ESF) accounts. In earlier years, funding also came from the Nonproliferation, Anti-terrorism, Demining, and Related Programs (NADR) and Foreign Military Financing (FMF) accounts. The Department of State’s (State) Bureau for International Narcotics and Law Enforcement Affairs administers the CARSI INCLE funds. As of June 1, 2013, State had allocated the largest amount of its CARSI INCLE funds to Guatemala, regional programs, Honduras, and El Salvador (see table 6). In addition, State had disbursed approximately $122 million of INCLE funds to support partner countries (see table 7). In providing technical comments on a draft of this report, State officials reported an amount of close to $10.6 million in INCLE funding that was allocated for CARSI activities in fiscal year 2010 that had not been previously reported to GAO. State officials also said that they could not provide obligation or disbursement information related to this amount, because these INCLE funds are centrally managed and State’s financial systems do not allow them to track such funds by region or country. According to State, this is why these funds were not previously reported to GAO. We followed up with State officials to confirm that the funds had been applied to CARSI activities and to document the programs toward which the funds had been applied. Although State officials were not able to provide information on the obligation or disbursement of these funds, we have included this amount in the INCLE funding allocated for CARSI activities. The United States Agency for International Development (USAID) shares responsibility with State to administer the ESF account. USAID oversees the implementation of most programs funded from this account, according to USAID officials; State’s Bureau for Western Hemisphere Affairs administers State’s portion of ESF. As of June 1, 2013, USAID had allocated the largest amounts of its ESF funds for CARSI activities to El Salvador, Guatemala, and Honduras (see table 8). Furthermore, USAID had disbursed approximately $51 million of ESF funds to support CARSI activities (see table 9). For fiscal year 2013, USAID officials explained that the agency has not yet been allocated funds from the Office of Management and Budget that Congress appropriated for fiscal year 2013. Therefore, the disbursement data provided below in table 9 for fiscal year 2013 are of funds allocated only in prior years, and table 8 reflects no allocations for fiscal year 2013. As of June 1, 2013, State had allocated the largest amounts of its ESF funds for CARSI activities to Costa Rica, Belize, and Panama (see table 10). Furthermore, State had disbursed approximately $10 million of ESF funding for CARSI activities (see table 11). In addition, State officials explained that the agency has not yet been allocated funds that Congress appropriated for fiscal year 2013. Therefore, the disbursement data provided below in table 11 for fiscal year 2013 are only of funds allocated in prior years, and table 10 reflects no allocations for fiscal year 2013. State’s Bureau of International Security and Nonproliferation and its Bureau of Counterterrorism administer CARSI NADR funds. NADR funds were allocated for Central American countries under the Mérida Initiative only for fiscal year 2008. NADR Export Control and Related Border Security (EXBS) and Counterterrorism (CT) funds were used to support activities in partner countries. As of June 1, 2013, the largest amount of funds had been allocated for NADR-EXBS activities, and 96 percent of those allocated funds had been disbursed (see table 12). Slightly more than $6 million of CARSI NADR-EXBS and NADR-CT funds were disbursed as of June 1, 2013 (see table 13). According to State officials, it is not possible to provide a country-by-country breakout of CARSI NADR- EXBS funds disbursed because the funds are intended for regional programming. This appendix provides the status of Central America Regional Security Initiative (CARSI) Foreign Military Financing (FMF) funds as of June 1, 2013. Table 1 describes how U.S. agencies have allocated and committed FMF funds (by year of appropriation) toward activities in partner countries. The presentation of FMF allocations and commitments is different from presentations on allocations, obligations, and disbursements on the other CARSI accounts in appendix II because FMF funds are budgeted and tracked in a different way. The Defense Security Cooperation Agency (DSCA) and the Defense Financing and Accounting Service (DFAS) are responsible for the financial systems that account for FMF funds, as well as tracking the implementation and disbursement of those funds. According to DSCA officials, FMF funds are obligated upon apportionment. Further, DSCA’s system can only track FMF uncommitted and committed amounts, not unliquidated obligations or disbursements. DFAS tracks disbursements using the Defense Integrated Finance System; however, there is no direct link between the DSCA and DFAS systems, and the DFAS system does not track funding for specific initiatives, such as CARSI. The Department of State (State) allocated close to $26 million of FMF funds for Central American countries for activities under the Mérida Initiative from fiscal years 2008 to 2010. From fiscal years 2008 to 2010, State allocated the largest amounts of these FMF funds to El Salvador, Costa Rica, and Panama. As of June 1, 2013, approximately 90 percent of the total allocated amount had been committed (see table 14). In addition to the contact named above, Valérie L. Nowak (Assistant Director), Ian Ferguson, Marisela Perez, Ryan Vaughan, and Debbie Chung made key contributions to this report. Martin de Alteriis, Ashley Alley, Lynn Cothern, and Etana Finkler also provided assistance. | Drug trafficking organizations and gangs have expanded in Central America, threatening the security of these countries and the United States. Since 2008, the U.S. government has helped Central America and Mexico respond to these threats and in 2010 established CARSI solely to assist Central America. CARSI's goals are to create safe streets, disrupt criminals and contraband, support capable governments, and increase state presence and cooperation among CARSI partners. GAO reported on CARSI funding in January 2013 and was asked to further review CARSI and related activities in Central America. This report (1) provides an updated assessment of U.S. agencies' funding and activities that support CARSI goals; (2) examines whether U.S. agencies took steps to consider partner country needs, absorptive capacities, and U.S. and non-U.S. investments when selecting CARSI activities; and (3) examines information on the extent to which U.S. agencies reported CARSI results and evaluated CARSI activities. GAO analyzed CARSI and complementary non-CARSI funding; reviewed documents on CARSI activities, partner country needs, and CARSI results; interviewed U.S. agency officials about CARSI and related activities; and observed CARSI activities in three countries. Since fiscal year 2008, U.S. agencies allocated over $1.2 billion in funding for Central America Regional Security Initiative (CARSI) activities and non-CARSI funding that supports CARSI goals. As of June 1, 2013, the Department of State (State) and the United States Agency for International Development (USAID) obligated at least $463 million of the close to $495 million in allocated funding for CARSI activities, and disbursed at least $189 million to provide partner countries with equipment, technical assistance, and training to improve interdiction and disrupt criminal networks. Moreover, as of March 31, 2013, U.S. agencies estimated that they had allocated approximately $708 million in non-CARSI funding that supports CARSI goals, but data on disbursements were not readily available. U.S. agencies, including State, the Department of Defense (DOD), and the Department of Justice, use this funding to provide equipment, technical assistance, and training, as well as infrastructure and investigation assistance to partner countries. For example, DOD allocated $25 million in funding to help Guatemala establish an interagency border unit to combat drug trafficking. State and USAID took a variety of steps--using assessment reports, outreach meetings with host governments and other donors, and interagency meetings--to help identify and consider partner countries' needs, absorptive capacities, and related U.S. and non-U.S. investments when selecting CARSI activities. For example, State used an assessment report on crime scene investigation and forensic programs and capacities of six partner countries to inform decisions on selecting CARSI activities. In addition, USAID officials used assessment reports to help identify and consider partner country juvenile justice and community policing needs and absorptive capacities; these assessment reports included specific recommendations for designing and selecting juvenile justice and community policing projects in partner countries. Also, in one partner country, embassy officials used donor outreach meetings to identify another donor's significant investment in police intelligence in the partner country; the embassy consequently reduced funding for CARSI activities in that area. While U.S. agencies have reported on some CARSI results, they have not assessed progress in meeting interagency objectives for Central America. State and USAID have reported some CARSI results through various mechanisms at the initiative, country, and project levels. For example, one embassy reported that its CARSI-supported anti-gang education project had expanded nationwide and taught over 3,000 children over 3 years of the program. However, U.S. agencies have not assessed their performance using the metrics outlined in a 2012 interagency strategy for Central America that were designed to measure the results of CARSI and related non-CARSI activities. GAO recognizes that collecting performance data may be challenging and that the metrics could require some adjustments. Nevertheless, assessing progress toward achieving the strategy's objectives could help guide U.S. agencies' decisions about their activities and identify areas for improvement. In addition to ongoing assessments of progress, GAO has concluded in prior work that evaluations are important to obtain more in-depth information on programs' performance and context. USAID is conducting an evaluation of its CARSI crime prevention programming to be completed in 2014. State officials said that they are planning to conduct an evaluation of some of their CARSI activities beginning in fiscal year 2014. GAO recommends that State and USAID work with other agencies to assess progress in achieving the objectives of the interagency strategy for Central America. State and USAID concurred with the recommendation. |
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The purpose of the CMS PERM program is to produce a national-level improper payment error rate for Medicaid. CMS developed PERM in order to comply with the requirements of IPIA, which was amended by IPERA. PERM uses a 17-state, 3-year rotation for measuring Medicaid improper payments. Medicaid improper payments are estimated on a federal fiscal year basis through the PERM process. The estimate measures three component error rates: (1) fee-for-service (FFS), (2) managed care, and (3) eligibility. FFS is a traditional method of paying for medical services under which providers are paid for each service rendered. Each selected FFS claim is subjected to a data processing review. The majority of FFS claims also undergo a medical review. Managed care is a system where the state contracts with health plans to deliver health services through a specified network of doctors and hospitals. Managed care claims are subject only to a data processing review. Eligibility refers to meeting the state’s categorical and financial criteria for receipt of benefits under the Medicaid program. States perform their own eligibility reviews according to state and federal eligibility criteria. See appendix II for additional details on these three components. CMS uses its PERM Manual to provide detailed guidance for implementing CMS regulations on PERM. PERM regulations set forth the methodology for states to estimate Medicaid improper payments and outline the requirements for state CAPs. Figure 1 shows the PERM process for estimating and reducing Medicaid improper payments. Through its use of federal contractors, CMS measures the FFS and managed care components while states perform the eligibility component measurement. CMS contracts with two vendors—a statistical contractor and a review contractor—to conduct the FFS and managed care review components of PERM and calculate error rates. The statistical contractor is responsible for (1) collecting and sampling claims and payment data for review, including performing procedures to ensure that the universe is accurate and complete; (2) reviewing state eligibility sampling plans; and (3) calculating state and national error rates. The review contractor is responsible for conducting data processing and medical reviews after the statistical contractor selects the samples of claims. Beginning with the fiscal year 2011 measurement cycle, state-specific sample sizes are calculated based on the prior measurement cycle’s component-level error rates and precision. All payment error rate calculations for the Medicaid program (the FFS component, managed care component, eligibility component, and overall Medicaid error rate) are based on the ratio of estimated dollars of improper payments to the estimated dollars of total payments. The overall Medicaid error rate represents the combination of FFS, managed care, and eligibility error rates. Individual state error rate components and state overall Medicaid error rates are combined to calculate the national component error rates and national overall Medicaid error rate. PERM accounts for the overlap between claims and eligibility reviews by calculating a small correction factor to ensure that Medicaid eligibility errors do not get “double counted” if the sampled item was also tested in either the FFS or managed care components. National component error rates and the national overall Medicaid program error rate are weighted by state size in terms of outlays, so that a state with a $10 billion Medicaid program “counts” 10 times more toward the national rate than a state with a $1 billion Medicaid program. For fiscal year 2011 reporting—the reporting period covered by our audit—CMS reported an estimated national Medicaid improper payment error rate of 8.1 percent or $21.9 billion ($21,448 million in overpayments and $453 million in underpayments). The weighted national component error rates are as follows: for Medicaid FFS, 2.7 percent; for Medicaid managed care, 0.3 percent; and for Medicaid eligibility, 6.1 percent. See appendix III for the state and national error rates for HHS’s fiscal year 2011 reporting of Medicaid improper payments. See appendix IV for the national Medicaid outlays and the estimated improper payment error rate reported in HHS’s AFRs for fiscal years 2007 to 2011. On February 4, 2009, the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA) was enacted. As required under Section 601 of CHIPRA, HHS published a final rule on August 11, 2010, effective September 30, 2010, which requires that PERM eligibility reviews be consistent with the state’s eligibility verification policy rather than reviewing eligibility against a single, federal methodology, which was done in the past. After publication of the final rule, states were allowed to review cases under the new methodology. Figure 2 shows the roll up of the error rate reported for fiscal year 2011. IPIA, as amended, requires the heads of federal agencies to report on the actions the agency is taking to reduce improper payments, including a description of the causes of improper payments identified, actions planned or taken to correct those causes, and the planned or actual completion date of the actions taken to address those causes. This law also requires heads of federal agencies to report on a description of the steps the agency has taken to ensure that agency managers, programs, and, where appropriate, states and localities are held accountable through annual appraisal criteria for (1) meeting applicable improper payment reduction targets and (2) establishing and maintaining sufficient internal controls, including an appropriate control environment that effectively prevents improper payments from being made and promptly detects and recovers improper payments that are made. According to OMB’s implementing guidance for IPERA, agencies should utilize the results of their statistical sampling measurements to identify the root causes of improper payments and implement corrective actions to prevent and reduce improper payments associated with these root causes. Agencies should continuously use their improper payment measurement results to identify new and innovative corrective actions to prevent and reduce improper payments. Agencies should also annually review their existing corrective actions to determine if any existing action can be intensified or expanded, resulting in a high-impact, high return on investment in terms of reduced or prevented improper payments. While CMS has responsibility for interpreting and implementing the federal Medicaid statute and ensuring that federal funds are appropriately spent—including estimating improper payments—the program is administered at the state level with significant state financing. Consequently, CMS relies primarily on states to develop and implement CAPs to address reported PERM errors. Following each measurement cycle, the states included in the measurement are required to complete and submit a CAP based on the errors found during the PERM process. In addition to guidance in the PERM Manual, CMS provides guidance to states on the CAP process upon releasing the PERM error rates and throughout CAP development. CMS’s PERM methodology for reporting a national Medicaid program improper payment estimate is statistically sound and meets OMB requirements. However, the process for accumulating the data used in deriving the reported national estimate does not consider the extent of any significant changes in state-level improper payment data that occurred after the initial year-end cutoff for state reporting. The impact of any such significant changes in states’ PERM reviews that were not concluded by the annual measurement cycle cutoff dates could significantly affect the calculation of the rolling 3-year average national Medicaid error rate reported each year. The design of CMS’s PERM methodology meets OMB requirements. CMS has documented the steps it took to design the sample and the steps taken to construct the sampling frame for the FFS, managed care, and eligibility review samples in its PERM Manual. The documentation also includes CMS’s process for ensuring that each sampling frame was accurate, timely, and complete. For error rate measurement for the FFS and managed care components, as outlined in the PERM Manual, CMS uses a stratified random sample selected quarterly within each state to provide cases for the data processing and medical review testing. For the eligibility component, as outlined in CMS’s PERM Manual, states use a simple random sample of eligible cases and negative cases, which are drawn each month during the measurement cycle. Absent an alternate methodology specifically approved by OMB, agencies must obtain a statistically valid estimate of the annual amount of improper payments in programs and activities for those programs that are identified as susceptible to significant improper payments. The estimates are to be based on the equivalent of a statistically random sample of sufficient size to yield an estimate with a 90 percent confidence interval of not more than plus or minus 2.5 percentage points around the estimate of the percentage of improper payments. CMS reports national Medicaid error rates at this 90 percent confidence interval to be consistent with OMB’s requirements, but CMS’s procedures provide that the sample size for PERM is to conform to OMB optional guidance for estimating payment errors—specifically, the PERM Manual specifies a target precision of plus or minus 3 percentage points at a 95 percent level of confidence within each state. The PERM Manual provides for the sample size for each state to be based upon the previous payment error rate and the OMB optional standard for the precision and confidence level. To estimate the percentage of dollars paid in error, CMS’s PERM Manual provides for using a ratio estimation methodology to produce the PERM estimate. This means the PERM payment error rate is a ratio of the estimated total dollars paid in error divided by the estimated total payments. The choice of ratio estimation methodology under these circumstances is statistically appropriate. The PERM Manual describes the data collection methods for the medical reviews, data processing reviews, and eligibility determinations. The PERM Manual also describes the statistical ratio estimation methodology to be used to produce the estimated percentage of dollars paid in error. CMS’s PERM Manual also provides for the error rates and summary reports to be provided to each state participating in the measurement cycle. We found that CMS’s PERM Manual is consistent with OMB statistical guidance. Although the CMS PERM methodology is statistically sound, CMS did not have procedures for considering the impact of any revisions to state-level error rates in calculating the national error rate after the cutoff date for each of the 3 measurement years. Specifically, the individual state error rates used to calculate the national error rate are not updated to reflect activities occurring after the PERM cycle cutoff. Without a process to consider these more current data on states’ reported improper payment error rates, the reliability of CMS’s reported national estimate may be adversely affected. OMB has identified as a best practice that agencies should establish a policy for handling unscheduled corrections to data, such as including threshold criteria identifying conditions under which data will be corrected and redisseminated. According to the PERM Manual, a state may request a new error rate calculation from CMS after the cycle cutoff date for informational purposes and for determining sample sizes for the next cycle under certain circumstances. For example, states may request a recalculation when information supporting a claim as correctly paid was submitted to CMS after the cycle cutoff date—but CMS’s review contractor did not have time to complete the review—or when a mistake made by the PERM contractor was identified. This request must be made within 60 business days of the posting date of the state’s program error rate on the CMS review contractor’s website. In such instances, CMS will issue a revised rate to the state. However, each state’s official error rate—used in the calculation of the national Medicaid error rate—will not change as a result of this recalculation. According to CMS, official error rates will be calculated based on information received by the cycle cutoff date. While CMS aims for a cycle cutoff date of July 15—4 months prior to the reporting date—the CMS cycle manager may extend the cycle cutoff date depending on the progress of the PERM reviews. CMS officials acknowledged that historically CMS has had to postpone the cycle cutoff to allow the process to be as complete as possible while still permitting CMS to report an improper payment rate timely in HHS’s AFR. However, after the cutoff date, CMS’s PERM Manual does not allow for any revisions to be factored into a state’s official error rate. In reviewing the results of state PERM reviews, we identified some instances where CMS issued revised state Medicaid error rates. For example, CMS issued a revised rate to one state for its eligibility reviews for the fiscal year 2008 measurement cycle because in January 2010, two months after error rate reporting, CMS and the state discovered that the amount of dollars in error was reported incorrectly by the state. This revised overall state error rate estimate decreased from 20.8 percent to 7.8 percent. In another example for the same fiscal year 2008 measurement cycle, in December 2009, 1 month after error rate reporting, CMS issued a post-cutoff date revised rate to a state for its FFS reviews because CMS received additional documentation from providers after the cycle cutoff date for official error rate calculations. This revised overall state error rate estimate decreased from 6.4 percent to 5.9 percent. These revised percentages were not included in the official error rates used to calculate the national estimate of Medicaid improper payments. While these were both smaller states and the actual impact on the national error rate would be minimal, CMS’s PERM Manual does not provide for CMS to consider the impact and it is possible that these types of changes would have had an impact on the national error rate reported in the subsequent 2 years if the changes were significant and were for states with larger levels of outlays. Because the national error rate is based on 3 years of data and corrections to the 2 years of older data after the cutoff date are not officially recognized by CMS, the entire 3-year cycle could be affected. As a result, the reported estimate of Medicaid improper payments may be adversely affected if needed corrections are significant. This potentially affects CMS’s ability to accurately report on the extent of improper payments, evaluate program performance, and utilize its own resources, as well as state resources, effectively to identify and reduce improper payments. CMS and state agencies developed CAPs that were generally responsive to identified payment errors. However, CMS’s PERM Manual does not provide for addressing all nonpayment errors either by identifying specific corrective actions or by analyzing these errors to determine whether actions, if cost effective, are needed. Also, CMS’s PERM Manual does not identify conditions under which corrective action for an error should not be undertaken because the cost of state corrective actions would outweigh the benefit. In addition, not all required elements of the CAPs are being completed by all states and CMS’s written guidance on these required elements is not clear or consistent. Further, CMS’s internal guidance on monitoring state CAPs is not sufficient to help ensure that states’ CAPs contain all of the required elements and that states prevent and reduce improper payments going forward. States are responsible for developing, executing, and evaluating CAPs to address specific errors identified during the PERM reviews, and CMS has reported on other initiatives to supplement state corrective actions and help reduce errors. We found that state CAPs were generally responsive to the types of payment errors identified in the PERM reviews. Through PERM, CMS identifies and classifies types of errors and shares this information with each state. States are then to analyze and determine the root causes for their specific improper payments. According to CMS, in addition to the PERM Manual, it provides guidance to state contacts on the CAP process upon providing the PERM error rates and throughout the CAP development. As reported by CMS, and shown in figure 3, overall, the majority of the errors reported in fiscal year 2011 (about 54 percent) for the Medicaid program—based on the fiscal years 2008 to 2010 measurement cycles— were a result of cases reviewed for eligibility, where recipients were either not eligible (25.3 percent) or where their eligibility status could not be determined (28.2 percent). The most common causes of cases in error for the FFS medical review was insufficient documentation (9.2 percent) or no documentation (4.3 percent). Our analysis of error types is shown in appendix VI. As shown in figure 3, almost 42 percent of reported PERM review errors resulted from documentation deficiencies, including either a lack of or insufficient documentation, or because a definitive review decision could not be made because of a lack of or insufficient documentation (undetermined). As these are common types of errors, CMS has reported on certain corrective actions that states have developed to address them. Specifically: No documentation and insufficient documentation. In about 14 percent of all PERM errors, reviewers identified errors because either the provider did not respond to the request for records within the required time frame (no documentation—4.3 percent) or there was not enough documentation to support the service (insufficient documentation—9.2 percent). According to CMS, because much of the error rate in the past was due to missing or insufficient documentation, the majority of states focused on provider education and communication methods to improve the providers’ responsiveness and timeliness. Undetermined. In about 28 percent of all PERM errors over the 3-year period, reviewers were unable to determine whether or not a beneficiary was eligible for Medicaid because the case record lacked or contained insufficient documentation. The PERM Manual outlines the due diligence a state must take before citing the case as “undetermined.” According to CMS, specific corrective action strategies implemented by the states to reduce these types of eligibility errors have included leveraging technology and available databases to obtain eligibility verification information without client contact; providing additional caseworker training, particularly in areas determined by the PERM review to be error prone; and providing additional eligibility policy resources through a consolidated manual and web-based training. In addition to the state-specific CAPs that are developed in response to the PERM findings, CMS has reported on other initiatives to lower error rates in HHS’s fiscal year 2011 AFR. For example, to help address the insufficient documentation errors found in medical reviews, CMS reported that it increased its efforts to reach out to providers and to obtain medical records to help resolve this problem. CMS also reported that it gives states more information on the potential impact of these documentation errors and more time for the states to work with providers to resolve them. Table 1 outlines CMS’s reported overall strategies to reduce improper payments and strategies targeted at specific PERM error types. Although all states developed CAPs that were generally responsive to the payment errors identified through PERM reviews, we were unable to assess the CAPs’ impact on the improper payment error rate because of limited comparative data between PERM measurement cycle years. State CAPs did not always address errors identified during PERM reviews that did not have a payment error amount associated with them. Specifically, we identified three types of these nonpayment errors through our analysis of the PERM process that are not consistently addressed in all state CAPs—negative case errors, deficiencies, and technical errors. A negative case error occurs when a state incorrectly denies an application or terminates eligibility. A deficiency is generally defined as an action or inaction on the part of the state or the provider that could have resulted in a dollar error but did not. A technical error is an error where the eligibility caseworker did not act in accordance with state or federal policy, but this did not result in an erroneous eligibility determination or result in a difference between the amount that was paid and the amount that should have been paid. CMS’s PERM Manual requires that states test negative cases as part of their eligibility reviews. However, it does not clearly require that states address negative case errors in their CAPs. While a payment error rate is not calculated because there are no payments associated with negative cases, a negative case error rate is calculated to estimate the percentage of the decisions in which eligibility was incorrectly denied or terminated. Our analysis showed that for fiscal year 2011 reporting, approximately 40 percent of the states where negative case errors were identified did not address negative case errors in their CAPs. According to CMS officials, these negative errors should be included in state CAPs. While deficiencies do not result in a dollar amount in error and therefore had no impact on the payment error rate for fiscal year 2011, they may represent issues that need to be addressed to prevent future payment errors. Although not considered payment errors, some deficiencies were noted during PERM data processing and medical reviews. Examples of deficiencies identified in FFS and managed care reviews include the following: A data processing deficiency in which a male was coded as a female in the system but because the service provided could have been appropriate for either sex, it did not result in a dollar difference. A medical deficiency wherein although a provider billed for the wrong procedure code, the correct procedure code would have paid the same rate per unit. Therefore, it did not result in a dollar difference but could have under other circumstances. Our analysis showed that deficiencies identified in PERM reviews represented approximately 8 percent of the total FFS and managed care errors identified for the fiscal year 2011 reporting, and that approximately 67 percent of these deficiencies were not included or analyzed in state CAPs. In addition, only 10 of the 43 states with deficiencies addressed these deficiencies in their CAPs. While the PERM Manual does not clearly state that CAPs are to address deficiencies, CMS officials told us that states should address deficiencies in their CAPs. During eligibility reviews, states may identify technical errors. An example of a technical error is a failure to follow state administrative procedures that do not affect eligibility if acceptable documentation is otherwise obtained that supports beneficiary eligibility. According to the PERM Manual, states are not currently required to report these technical errors to CMS and may document technical errors as appropriate during the PERM reviews. Furthermore, the PERM Manual suggests but does not require that states include an analysis of technical errors and related corrective actions in their CAPs. Although these nonpayment errors did not result in improper payment amounts, they represent internal control deficiencies that could have prevented eligible beneficiaries from receiving Medicaid benefits or may result in improper payments in future years if not addressed. Not clearly requiring states to address nonpayment errors, or to document that sufficient analysis was performed to determine if corrective actions, if cost effective, are needed, may reduce the effectiveness of CAPs for addressing the underlying causes of improper payments. Further, this may inhibit ongoing efforts to prevent and reduce improper payments and to ensure that Medicaid is provided to all eligible beneficiaries. OMB’s implementing guidance for IPERA requires agencies to implement corrective actions to prevent and reduce improper payments. In addition, CMS’s PERM regulations and its PERM Manual require each state to complete and submit a CAP based on errors found during the PERM process. However, while specifically allowing states to exclude eligibility technical errors, the PERM Manual does not clearly identify whether the states should consider or include deficiencies or negative case errors in their CAPs. While the PERM Manual does not clearly state that CAPs are to address both deficiencies and negative case errors, CMS officials told us that states should address both of these in their CAPs. Although CMS’s PERM Manual requires each state to complete and submit a CAP based on the errors found during the PERM process, this guidance makes no exception for small errors—sometimes caused by rounding—which may result in states incurring costs to implement corrective actions that exceed the benefits of those actions. In its PERM Manual, CMS encourages states to use the most cost-effective corrective actions that can be implemented to best correct and address the root causes of the errors; however, it does not acknowledge that states can address errors by documenting situations where they determined that the costs of implementing the corrective action exceed the benefits. Officials at one state we visited told us that the cost of implementing a system to correct some of its errors that were less than a dollar would outweigh the benefits of this action. A PERM review in this state identified 11 pricing errors resulting from incorrect rounding that netted to $0.53. State officials informed us that they were aware of this rounding issue, as it had been identified in the previous PERM cycle and CMS also identified and reported this type of error for the fiscal year 2011 measurement cycle. According to this state, the original estimate for a system solution to correct these rounding errors was $575,000 to $1,150,000. State officials told us they did not believe that the cost to address this issue was justified as the return on investment for the system solution to correct the condition might never be realized. According to CMS, in e-mail communication with this state, it told state officials that if the state determines that the cost of implementing a corrective action outweighs the benefits then the final decision of implementing the corrective action is the state’s decision. The state continued to pursue corrective actions and was ultimately able to obtain a revised estimate of $115,000 for changes to the system, based on further detailed analysis of the necessary solution. The state now plans to redesign its system in order to avoid these types of PERM errors going forward. According to Standards for Internal Control in the Federal Government, management should design and implement internal controls—in this case, controls to prevent and reduce improper payments—based on the related costs and benefits. Further, PERM regulations require states to evaluate their corrective action plans by assessing, among other things, the efficiencies that they create. However, the lack of clear written guidance for states on how to address situations where the cost of corrective actions identified by states may outweigh the benefits because of the low dollar amounts associated with these types of errors may result in an unnecessary burden on state resources. Although we found that states have generally been engaged in the PERM CAP process and developed CAPs to address improper payment errors, not all required elements of the CAPs are being completed by all states. When developing CAPs, CMS’s PERM regulations require states to perform five key steps to reduce improper payment errors identified through the PERM reviews. For CAPs subsequent to the initial measurement year, CMS’s PERM regulations also require an update on the previous CAP. These requirements are summarized in figure 4. Not all required elements of the CAPs—such as the evaluation step or the update on the previous CAP—were consistently reported on by all states. For example, for fiscal year 2011 reporting, 8 of the 51 states did not submit the required evaluation element of the CAP. An additional 9 states submitted the evaluation element for some, but not all PERM components. Furthermore, for fiscal year 2011 reporting, only 24 of the 34 states required to submit an update of the previous CAP complied with this requirement. Another 5 states submitted updates for some, but not all, of the PERM components, and of the 29 states that submitted complete or partial updates of their previous CAPs, only 19 submitted them by the due date required by CMS. The other 10 were submitted after CMS followed up with the states. CMS officials acknowledged that some state CAPs are missing certain elements, and they are in the process of finalizing specific procedures to outline CMS’s role in reviewing state CAPs and following up with states to obtain any missing elements, as discussed later in this report. CMS’s PERM Manual, updated in September 2011, provides guidance for state CAP development, but it does not include specific instructions for completing the evaluation element or on how to report the update on the previous CAP. Furthermore, the CAP template included in the PERM Manual does not include these two required elements. However, on its PERM website, CMS has provided a separate example of a CAP for the states to utilize that includes examples of the evaluation element and a separate report for the update on the previous CAP. Inconsistencies between the PERM Manual—which includes a CAP template—and the example CAP on the PERM website may cause confusion regarding what states are to include in their CAPs. As of August 2012, CMS had updated its PERM Manual and the CAP template to include instructions and a template for reporting on the update of the previous CAP. However, the updated template still did not include the evaluation element, and the separate example of a CAP on the PERM website was not updated to be consistent with the updated PERM Manual guidance and template. Clear, consistent written guidance and instructions on all required elements for CAPs would assist the states in submitting complete CAPs, and increase the likelihood that CMS has the information necessary for analyzing the progress and effectiveness of state CAPs. The lack of clear, consistent guidance in the PERM Manual and the related template on the PERM website on how to develop key elements of the state CAP may have contributed to the missing elements we describe in this report. CMS lacked a formal policy describing its role in monitoring state CAPs to ensure that (1) the CAPs contained all of the required elements and completely addressed errors identified in the PERM reviews and (2) states were making progress on implementing corrective actions. In our high-risk series update, we reported that CMS needs to ensure that states develop appropriate corrective action processes to address vulnerabilities to improper Medicaid payments. Our analysis of state CAPs continues to identify issues regarding CMS’s coordination with states in developing and implementing their CAPs. Specifically, during our review and analysis of state CAPs for the fiscal years 2008 to 2010 PERM measurement cycles, we found that CMS had not conducted sufficient oversight to ensure that states submitted complete CAPs, took the five required steps in developing CAPs, and updated the status of previous CAPs. As discussed previously, not all required elements of the CAPs—such as the evaluation step or the update on the previous CAP—were being completed by all states. Once the CAPs are submitted, officials in the seven states we visited noted that there was minimal monitoring of implementation by CMS. For example, officials in one state told us that CMS did not follow-up with the state on the implementation of the corrective actions until the state submitted the CAP related to its next error rate measurement 3 years later. According to CMS officials, they do not track the progress of the states’ implementation of CAPs and are not required to do so. However, CMS officials told us that they review the implementation information that the states provide in their CAPs, specifically in the update of their previous CAPs, and hope to see a reduction in error rates as the CAPs are implemented. Additionally, based on our analysis of state CAPs for fiscal year 2011 reporting, we also noted that approximately 5 percent of all payment errors identified during the PERM reviews were not fully addressed by all states in their CAPs. Improved monitoring by CMS would help ensure that state CAPs contain all of the required elements and are addressing all types of errors identified through the PERM process, and that the actions identified are appropriate to reduce those types of errors going forward. The responsibility for oversight of the states’ development, implementation, and evaluation of their CAPs rests with the Division of Error Rate Measurement (DERM) within CMS’s Office of Financial Management. These efforts include coordinating the CAP process with the states and other agency offices. The Medicaid Integrity Group (MIG) within CMS’s Center for Program Integrity is responsible for reviewing the state CAPs, with assistance from the agency’s regional offices. According to CMS, MIG reviews the state CAPs to (1) ensure the plans address the errors identified during the PERM reviews, (2) provide feedback to the states for improvements, and (3) review the implementation status of the state’s previous CAP. Oversight through continuous monitoring helps ensure that actions are taken to effectively work toward reducing improper payments. According to OMB’s implementing guidance, agencies must ensure that their managers and accountable officers, program and program officials, and where applicable states and local partners are held accountable for reducing improper payments. Therefore, although the states are responsible for developing, implementing, and monitoring their CAPs, CMS should be responsible for monitoring states’ compliance with CMS’s regulations related to the PERM process. We also found that the roles and responsibilities of DERM and MIG are not formally outlined in policies and procedures for the PERM review and corrective action process. CMS officials told us that they are in the process of developing protocols to address the CAP review process. Specifically, CMS officials told us that they have developed a draft policy describing each party’s role in the different stages of the PERM CAP process as well as a review guide to outline CMS’s procedures for coordinating reviews of state CAPs. CMS plans to review state CAPs submitted in February 2013 using this new collaborative process for the first time for the states that are part of the fiscal year 2011 measurement cycle and were reported on in HHS’s fiscal year 2012 AFR. According to CMS officials, they plan to review the CAPs to ensure that all of the attributes outlined in the PERM regulations are addressed and, as needed, notify the states of any missing elements. After reviewing the fiscal year 2011 cycle CAPs, CMS officials told us that they plan to further refine the standard operating procedures and CAP review guide before the documents are finalized. CMS’s draft policy and review guide were not finalized before the completion of our fieldwork, and we did not examine any interim drafts. Thus, we are unable to determine whether the planned revisions to existing procedures will fully address the deficiencies we identified concerning CMS’s monitoring of state CAPs. Monitoring is CMS’s opportunity to ensure that states are appropriately implementing the corrective actions that they have identified to help reduce improper payments. If states are not addressing all applicable issues or are not effectively implementing the actions outlined in their CAPs, future reductions in the Medicaid error rate may be limited. Additional monitoring by CMS would help hold the states accountable for developing, implementing, and evaluating corrective action strategies in support of CMS’s efforts to prevent and reduce Medicaid improper payments. The design of CMS’s PERM methodology is statistically sound. However, refining the required PERM process for estimating and reporting national Medicaid improper payments so that the impact of corrections to the data after the cutoff date is considered would help ensure that the reported estimates are reasonably accurate and complete. As CMS reports its estimated Medicaid improper payments based on a rolling 3-year estimate, adjustments made to any of these 3 years can affect yearly reporting and potentially affect the accuracy of the reported national estimate. Given the importance of providing HHS management, OMB, and the Congress with accurate information on the extent of improper payments in federal programs, it is imperative that CMS ensure that its reported estimates of Medicaid improper payments are reliable. Corrective actions are critical for preventing and reducing improper payments. While states have developed corrective action plans to address payment errors identified in PERM reviews, not all nonpayment errors were addressed in these plans, which could hinder the prevention of future improper payments. Also, while states are currently required to address all errors, clear written guidance that permits states to document why an action is not being implemented would help ensure the most efficient and effective use of state resources for errors that do not pose a risk of significantly affecting future improper payments. Further, ensuring that states have clear written guidance for developing corrective action plans is key to CMS’s ability to oversee states’ corrective action processes. Strengthening CMS’s required procedures for monitoring the state-level corrective actions is critical to help ensure that states make progress in preventing and reducing improper payments. In order to ensure the accuracy of reported improper payment estimates for the Medicaid program, we recommend that the Secretary of HHS direct the CMS Administrator to take the following action: Update PERM Medicaid improper payment reporting procedures to provide for considering any corrections to state-level improper payment error data subsequent to the cutoff date that would have a significant impact on any of the 3 years used to develop the rolling average for the reported national Medicaid improper payment estimate. To help ensure that corrective action strategies effectively address identified types of improper payments and reduce Medicaid improper payments in a cost-effective manner, we recommend that the Secretary of HHS direct the CMS Administrator to take the following three actions: Revise the PERM Manual to provide that states (1) analyze all deficiencies, negative case errors, technical errors, and minimal dollar errors identified in PERM reviews to determine if any corrective actions, if cost effective, are needed to prevent such errors in the future and (2) document the results of their analysis. Clarify guidance in the PERM Manual, and on the PERM website, on the required elements to be included in a CAP and the specific actions states are to take each measurement cycle to (1) effectively prepare and evaluate their current cycle’s CAPs and (2) provide updates to their previous cycle’s CAPs. Finalize draft policies and procedures to clarify specific CMS officials’ roles and responsibilities for monitoring states’ corrective actions to ensure, at a minimum, that (1) the CAPs contain all of the required elements and completely address errors identified in the PERM reviews and (2) states are making progress on implementing corrective actions. We provided a draft of this report to the Secretary of HHS for comment. In its written comments, reprinted in appendix VII, HHS concurred with the four recommendations in our report. HHS cited a number of actions already taken and other initiatives planned or under way related to our recommendations. For example, with respect to our three recommendations to help ensure that corrective action strategies effectively address identified types of improper payments and reduce Medicaid improper payments in a cost-effective manner, HHS cited CMS’s plans to update its PERM Manual and other relevant documents consistent with our recommended actions to clarify and standardize guidance. HHS also cited action under way to finalize policies and procedures related to monitoring states’ corrective actions. HHS also concurred with our recommendation to update procedures for considering the impact of any corrections to state-level improper payment errors on reported national error rates. HHS stated that it will consider revising its procedures in this area. HHS also expressed concern that the draft suggests that past reported national Medicaid error rates were unreliable. We acknowledged in our draft report that the prior year post- cutoff date error rate revisions we reviewed were not sufficient to have had an impact on the national error rate for fiscal year 2011 reporting. Rather, our recommendation is focused on augmenting procedures to help ensure the reliability of future national error rate reporting. HHS also expressed concern about our suggestion that OMB’s Standards and Guidelines for Statistical Surveys should be used to determine how to handle PERM-related data corrections. In our draft report, we characterized this as a best practice. HHS noted, and we agree, that OMB did not include guidance for handling unscheduled corrections to data in its implementing guidance for IPERA. However, taking action, as we recommended, to establish procedures to consider the extent to which any corrections to state-level improper payment data subsequent to the cutoff date would affect the reported national Medicaid improper payment estimate would best ensure the reliability of reported national error rates going forward. HHS also expressed concern about our suggestion that states may request a recalculation of the state-level error rate when records for a medical claim were received prior to the cycle cutoff date but CMS’s review contractor did not have time to complete the review. HHS cited that CMS’s review contractors will complete all reviews for claims where the documentation was received prior to the cycle cutoff date and that states may request a recalculation when information supporting a claim as correctly paid was submitted to CMS after the cycle cutoff date. We agreed with HHS’s point and modified the report accordingly. HHS also expressed concern about including the state error rates identified in appendix III of the draft. HHS commented that readers may use the rates to make state-to-state comparisons that are inappropriate because of variations in states' sizes and programs and in states’ implementation and administration of their programs. We acknowledged HHS’s concerns in our draft report by including language in appendix III to caution readers about using these state-level rates to make state-to-state comparisons. However, it is important to present these state-level error rates for transparency regarding the results of state PERM reviews. In addition, HHS provided technical comments that we incorporated as appropriate and discussed in our additional evaluation in appendix VII. 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 appropriate congressional committees, the Secretary of Health and Human Services, 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) 512-2623 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix VIII. The objectives of this report were to determine the extent to which (1) the Centers for Medicare & Medicaid Services’ (CMS) methodology for estimating Medicaid improper payments follows Office of Management and Budget (OMB) guidance and produces reasonable national and state-level estimates and (2) corrective action plans (CAP) have been developed to reduce Medicaid payment error rates and whether these plans addressed the types of payment errors identified. To address these objectives, we reviewed the Improper Payments Information Act of 2002 (IPIA), the Improper Payments Elimination and Recovery Act of 2010 (IPERA), and related OMB guidance effective for fiscal year 2011. We also reviewed CMS regulations on Payment Error Rate Measurement (PERM) and CMS’s internal written guidance on PERM. In addition, we reviewed results from state PERM reviews for fiscal years 2006 through 2011, prior GAO and Department of Health and Human Services (HHS) Office of Inspector General reports, and internal control standards. Further, we reviewed improper payment information reported in the Improper Payments Section of HHS’s fiscal year 2011 agency financial report (AFR). We reviewed these documents to understand CMS’s efforts to address IPIA and IPERA requirements and to identify previously reported issues with CMS’s improper payment reporting. To further determine the extent to which CMS’s methodology for estimating Medicaid improper payments follows OMB guidance and produces reasonable national and state-level estimates, we compared the following components of CMS’s methodology for estimating the fiscal year 2011 payment error rate with related OMB guidance: (1) sampling methods, including the sample size, sample selection, sample representation, and precision of the estimates, and (2) statistical methods used to estimate the error rates and precision. As part of this assessment, we did the following: Conducted interviews with CMS officials and its contractors to clarify our understanding of both the sampling and estimation methodologies. Reviewed the program manuals for both the payment error and eligibility payment error components of PERM to assess the statistical validity of CMS’s methodology. Reviewed professional statistical literature to validate the suitability of stratified random sampling and ratio estimation to address the particular characteristics of the payment and eligibility data in the state-administered Medicaid program. Reviewed state-level payment error rates from the most recent year available to determine whether the sample sizes assigned to states met the precision level for payment error sampling in OMB statistical guidance. We also used the results of these reviews and analyses to identify and assess the reasons for any weaknesses in the estimation methodology and their potential effects on identifying and reporting Medicaid improper payment estimates for fiscal year 2011 and going forward. In addition to reviewing the statistical methodology, we obtained actual payment error data from CMS for the seven states selected for our site visits and independently calculated the payment error rates to confirm the calculations done by CMS using the statistical methodology specified in the program manuals. The basis for our site visit selection is discussed later in this appendix. The scope of our review did not include an assessment of individual states’ processes or payment systems. We assessed the reliability of the claims and error rate data by gaining an understanding of the processes the contractors or states use to perform their reviews, including any use of data sharing to determine eligibility, and their quality controls. We determined that the data were sufficiently reliable for our purposes. To further determine the extent to which CAPs have been developed to reduce Medicaid payment error rates and whether these plans addressed the types of errors identified, we did the following: Reviewed agency policies and procedures related to the development of PERM CAPs and CAPs for all 50 states and the District of Columbia, which are used to address the root causes of improper payments identified from the PERM reviews. Conducted interviews with officials from CMS related to its oversight role and its own initiatives for reducing Medicaid improper payments. Reviewed CMS’s error rate reduction plans and initiatives to reduce Medicaid improper payments. Reviewed the reported causes of improper payments as outlined in HHS’s fiscal year 2011 AFR. Assessed CMS’s process for monitoring state corrective actions and its methodology for measuring the effectiveness of corrective actions to reduce improper payments. As part of our review of states’ CAPs, we assessed whether they addressed issues identified in fee-for-service, managed care, and evaluated the effectiveness of implemented corrective actions. eligibility reviews; included the required elements as outlined by CMS; and The scope of our review did not include an assessment of individual states’ implementation of their CAPs. In addition, we conducted site visits at seven state Medicaid offices (California, Florida, Illinois, Michigan, Pennsylvania, South Carolina, and Texas). During these site visits, we interviewed state personnel involved in the PERM process to gain an understanding of how states compile the universes of claims and beneficiaries that are sampled for the PERM reviews, how eligibility reviews are conducted, and how the states develop corrective action plans and work with CMS on corrective actions. We selected these states based on criteria such as the states’ federal share of Medicaid payments and errors identified in PERM reviews. The seven states we visited collectively claimed about 37 percent of the total federal share of Medicaid payments made in fiscal year 2010, the most recent data available at the time of our review for site visit selection. We also selected these states to achieve variation in the error rates found during PERM reviews included in the fiscal year 2011 reporting of the Medicaid improper payment estimate. One state had the highest error rate for eligibility reviews as well as the highest combined error rate. This selection also allowed us to focus on certain states with noted vulnerabilities in program integrity efforts, as well as states with possible best practices. Although it does not allow us to generalize findings to all states and thus the program as a whole, we believe these state visits, combined with our analysis of CAPs for all states, enable us to determine if states’ corrective actions are addressing the types of improper payment errors that have been identified. We conducted this performance audit from February 2012 to March 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. The Payment Error Rate Measurement (PERM) program uses a 17-state, 3-year rotation for measuring Medicaid improper payments. Medicaid improper payments are estimated on a federal fiscal year basis through the PERM process. The estimate measures three component error rates: (1) fee-for-service (FFS), (2) managed care, and (3) eligibility. FFS is a traditional method of paying for medical services under which providers are paid for each service rendered. Managed care is a system where the state contracts with health plans to deliver health services through a specified network of doctors and hospitals. The health plan is then responsible for reimbursing providers for specific services delivered. States submit quarterly adjudicated claims data from which a randomly selected sample of FFS and managed care claims are drawn each quarter. Each selected FFS claim is subjected to a data processing review. The majority of FFS claims also undergo a medical review. Managed care claims are subject only to a data processing review. A data processing error is a payment error that can be determined from the information available from the claim or from other information available in the state Medicaid system, other related systems, as well as outside sources of provider verification (except medical reviews and eligibility reviews). Data processing errors include, but are not limited to, the following: payment for duplicate items, payment for noncovered services, payment for FFS claims for managed care services, payment for services that should have been paid by a third party but were inappropriately paid by Medicaid, pricing errors, logic edit errors, data entry errors, and managed care payment errors. A medical review error is an error that is determined from a review of the medical documentation in conjunction with state and federal medical policies and information presented on the claim. Medical review errors include, but are not limited to, the following: lack of documentation, insufficient documentation, procedure coding errors, diagnosis coding errors, number of unit errors, medically unnecessary services, policy violations, and administrative errors. Eligibility refers to meeting the state’s categorical and financial criteria for receipt of benefits under the Medicaid program. States perform their own eligibility reviews according to state and federal eligibility criteria. An eligibility error occurs when a person is not eligible for the program or for a specific service and a payment for the service or a capitation payment covering the date of service has been made. An eligibility error can also occur when a beneficiary has paid the incorrect amount toward an assigned liability amount or cost of institutional care. The results from the eligibility reviews will include eligibility errors based on erroneous decisions as well as payment errors. The Centers for Medicare & Medicaid Services (CMS) combines the state-reported eligibility component payment error rates to develop a national eligibility error rate for Medicaid. This rate is calculated from the active case payment review findings. For fiscal year 2011 reporting, CMS estimated that the active case error rate was 8.2 percent while the weighted eligibility component error rate was 6.1 percent. Eligibility reviews are also performed on a sample of negative cases. Negative cases contain information on a beneficiary who applied for benefits and was denied or whose program benefits were terminated based on the state agency’s eligibility determination in the month that eligibility is reviewed. CMS calculates only a case error rate for negative cases, because no payments were made. The negative case error rate estimates the percentage of the decisions in which eligibility was incorrectly denied or terminated. For fiscal year 2011 reporting, CMS estimated that the negative case error rate was 4.9 percent. The results of all PERM reviews, including the negative case reviews, are used to determine future sample sizes. According to the Centers for Medicare & Medicaid Services (CMS), states’ Medicaid improper payment error rates identified through the Payment Error Rate Measurement (PERM) program may vary because of multiple factors related to differences in how states implement and administer their programs and should be considered in the context of these differences and operational realities. CMS provides each state its specific error rate and data analysis reports to use to develop corrective actions designed to reduce major error causes and to identify trends in errors or other factors for purposes of reducing improper payments. Also, according to CMS, because of the variation of states’ sizes, overall program variations, and different ways that each state’s rate affects the national rate, CMS does not encourage comparisons based solely on error rates. PERM is designed to produce precise error rates at the national level. Therefore, according to CMS, sample sizes per state are relatively small and the precision of state-specific error rates varies significantly. In addition, during the fiscal years 2008 and 2009 measurement cycles, CMS noted instances where some states’ policies differed from CMS’s policies for determining PERM errors. For example, according to CMS, in the review of some eligibility cases, policy and operational differences among states may have affected the degree to which states and providers could obtain documentation to validate payments and eligibility decisions for PERM purposes. According to CMS, states that have simplified eligibility documentation rules through use of self-declaration and administrative renewal often found it harder to obtain necessary documentation for PERM reviews, which were treated as errors for PERM. In its fiscal year 2011 agency financial report (AFR), the Department of Health and Human Services (HHS) reported that as required under Section 601 of the Children’s Health Insurance Program Reauthorization Act of 2009, it published a final rule on August 11, 2010, effective September 30, 2010, which required the eligibility reviews to be consistent with the state’s eligibility verification policy rather than reviewing eligibility against a single, federal methodology, which was done in the past. After publication of the final rule, states were allowed to review cases under the new methodology. HHS also reported that based on current regulations, certain cases from the fiscal years 2008 and 2009 measurement cycles, included in the error rates below, would no longer be considered as errors. Table 2 provides a list of state error rates used to determine HHS’s fiscal year 2011 reporting of national Medicaid improper payments. Table 3 provides a list of Medicaid outlays and estimated improper payment error rates reported in the Department of Health and Human Services’ (HHS) agency financial reports (AFR). Table 4 provides the margins of error at the 90 percent confidence level for error rate data presented in figure 2. Table 5 provides a list of error types identified during the fiscal years 2008 to 2010 Payment Error Rate Measurement (PERM) measurement cycles. The following are GAO’s comments on the Department of Health and Human Service’s (HHS) letter dated March 13, 2013. 1. See the “Agency Comments and Our Evaluation” section of this report. 2. We agree with HHS’s comment and modified the report as appropriate. 3. We agree in part with HHS’s comment and incorporated clarifying language to the figure source and Payment Error Rate Measurement (PERM) process details. Also, we added a figure note to acknowledge that certain year 1 and year 2 activities may be delayed until years 2 and 3, respectively. 4. We clarified the report to acknowledge that the Centers for Medicare & Medicaid Services’ (CMS) written guidance does not indicate that states could address an error by stating why an action is not being implemented. This relates to our second recommendation, with which HHS concurred, that such guidance should be formally documented in CMS’s PERM Manual. In addition to the contact named above, Phillip McIntyre (Assistant Director), Gabrielle Fagan, Kerry Porter, and Carrie Wehrly made key contributions to this report. Also contributing to this report were Carl Barden, Sharon Byrd, Francine DelVecchio, Patrick Frey, Wilfred Holloway, Jason Kelly, and Jason Kirwan. | Medicaid has the second-highest estimated improper payments of any federal program that reported such data for fiscal year 2011. Also, the Congress has raised questions about reporting and corrective actions related to the Medicaid program's improper payments. The objectives of this report were to determine the extent to which (1) CMS's methodology for estimating Medicaid improper payments follows OMB guidance and produces reasonable national and state-level estimates and (2) corrective action plans have been developed to reduce Medicaid payment error rates and whether these plans address the types of payment errors identified. To address these objectives, GAO analyzed CMS's policies and procedures against federal guidance and standards for estimating improper payments and developing related corrective actions to address errors. GAO also reviewed the results of all state-level reviews and conducted site visits at selected states that either received relatively large amounts of Medicaid payments or had varying rates of estimated improper payments, including states with possible best practices. GAO also met with cognizant CMS officials and contractors. The Centers for Medicare & Medicaid Services' (CMS) methodology for estimating a national improper payment rate for the Medicaid program is statistically sound. However, CMS's procedures did not provide for updating state data used in its methodology to recognize significant corrections or adjustments after the cutoff date. The Office of Management and Budget (OMB) requires that federal agencies establish a statistically valid methodology for estimating the annual amount of improper payments in programs and activities susceptible to significant improper payments. CMS developed the Payment Error Rate Measurement (PERM) program in order to comply with improper payment estimation and reporting requirements for the Medicaid program. Under the PERM methodology, CMS places states in one of three cycles, and each year one of the cycles reports new state-level data based on the previous year's samples. CMS then calculates the national Medicaid program improper payment estimate using these new data for one-third of the states and older data for the other two-thirds of the states. CMS's estimated national improper payment error rate for fiscal year 2011 for the Medicaid program was 8.1 percent, or $21.9 billion. However, CMS's procedures did not provide for considering revisions to state-level Medicaid program error rates used in the CMS methodology for calculating its national Medicaid program error rate. Because corrections to the 2 years of older data after the cutoff date are not officially recognized by CMS, the entire 3-year cycle could be affected. OMB has identified as a best practice that agencies should establish a policy for handling unscheduled corrections to data. Until CMS establishes procedures for considering changes to initially reported state-level error rates that would be significant to the national error rate, CMS is impaired in its ability to ensure that its reported estimate of the extent of national Medicaid improper payments is reliable. CMS and state agencies developed corrective action plans (CAP) related to identified PERM payment errors. However, GAO identified the following areas where improvements were needed in CMS's written guidance to states on CAPs to ensure efficient and effective actions to reduce improper payments. CMS's PERM Manual did not clearly identify the circumstances under which states should consider, and if cost effective include, nonpayment errors (such as certain coding errors that could have but did not result in a payment error) and minimal dollar errors in their CAPs. The PERM Manual and the associated website did not provide complete and consistent information on the required elements to include in a state CAP. CMS guidance did not clearly delineate CMS officials' roles and responsibilities for conducting oversight of (1) state CAP submissions to ensure that they contained all of the required elements and adequately addressed errors identified in the PERM reviews and (2) states' progress in implementing CAP corrective actions. Although the nonpayment errors identified in PERM reviews did not result in improper payments, the underlying issues may result in improper payments in future years if not addressed. Also, complete information in state CAPs is necessary for CMS to analyze the progress and effectiveness of the CAPs. Further, clear accountability for continuous monitoring helps ensure that actions are taken to effectively reduce Medicaid improper payments. GAO is making four recommendations to help improve CMS's reporting of estimated Medicaid improper payments and its related corrective action process. The Department of Health and Human Services concurred with GAO's recommendations and cited a number of actions under way and planned. |
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Bank holding companies are companies that own or control one or more banks. In the United States, most banks insured by FDIC are owned or controlled by a bank holding company. In addition to bank subsidiaries engaged in traditional banking activities of deposit-taking and lending, many U.S. bank holding companies also own or control nonbank subsidiaries, such as broker-dealers and insurance companies. The Bank Holding Company Act of 1956, as amended, establishes the legal framework under which bank holding companies operate and establishes their supervision, with the Federal Reserve Board having authority over bank holding companies and their banking and nonbanking interests. The Bank Holding Company Act also limits the types of activities that bank holding companies may conduct, either directly or through their nonbank affiliates. The restrictions, which are designed to maintain the general separation of banking and commerce in the United States, allow bank holding companies to engage only in banking activities and those activities that the Federal Reserve Board has determined to be “closely related to banking,” such as extending credit, servicing loans, and performing appraisals of real estate and tangible and intangible personal property, including securities. Under amendments to the Bank Holding Company Act made by the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, a bank holding company can elect to become a financial holding company that can engage in a broader range of activities that are financial in nature. The Gramm- Leach-Bliley Act defined a set of activities as financial in nature and authorized the Federal Reserve Board, with the agreement of Treasury, to determine whether an additional activity is financial in nature or incidental or complementary to a financial activity. For example, financial holding companies are permitted to engage in securities underwriting and dealing, but would be prohibited, for example, from selling commercial products. Large U.S. bank holding companies typically are registered as financial holding companies and own a number of domestic bank subsidiaries, as well as nonbank and foreign subsidiaries. The largest U.S. bank holding companies have grown substantially in size and scope in recent decades. Since 1990, in part due to waves of mergers, the share of total bank holding company assets controlled by the largest 10 firms increased from less than 30 percent to more than 60 percent, as of July 2012. Some bank holding companies grew to become large financial conglomerates that offer a wide range of products that cut across the traditional financial sectors of banking, securities, and insurance. Following the enactment of the Gramm-Leach-Bliley Act in 1999, the assets held in nonbank subsidiaries or at the holding company level grew to account for a progressively larger share of total bank holding company assets. Greater involvement by bank holding companies in nontraditional banking businesses has been accompanied by an increase in the proportion of bank holding company income that is generated by fee income, trading, and other noninterest activities. As large bank holding companies have broadened the scope of their activities and their geographic reach, they have become more organizationally complex. A simple indicator of organizational complexity is the number of separate legal entities within the bank holding company; the largest four U.S. bank holding companies each had at least 2,000 as of June 30, 2013. The 2007-2009 financial crisis raised concerns that some U.S. bank holding companies—as well as some nonbank financial institutions—had grown so large, interconnected, and leveraged that their failure could threaten the stability of the U.S. financial system and the global economy. The Dodd-Frank Act includes several provisions intended to reduce the risk of a failure of a large, complex financial institution, the damage that such a failure could do to the economy, and the likelihood that a failing institution would receive government support. For example, the act directs the Federal Reserve Board to impose enhanced prudential standards and oversight on bank holding companies with $50 billion or more in total consolidated assets and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) for supervision by the Federal Reserve Board. The federal government maintains programs—frequently referred to as safety nets—to reduce the vulnerability of depository institutions to runs that could threaten the health of the banking system and the broader economy. Following a series of banking crises in the early 1900s, the government created two programs generally considered to form the core of these safety nets: the Federal Reserve System’s discount window and FDIC deposit insurance. By making emergency liquidity available to solvent depository institutions through the discount window and reducing incentives for depositors to withdraw their funds, these safety nets were intended to help ensure that depository institutions could continue to lend and provide other important services, even during turbulent economic conditions. In addition to the discount window and deposit insurance, the Federal Reserve Board and FDIC have other emergency authorities related to maintaining financial stability. Moreover, the Federal Home Loan Bank System serves to provide liquidity to the banking system that helps to foster stability. In part because access to federal safety nets potentially reduced incentives for insured depositors to monitor and restrain the risk-taking of banks, banks were also subjected to federal supervision and regulation. The Federal Reserve System, in its role as the lender of last resort, operates discount window programs, which provide a backup source of liquidity through collateralized loans for depository institutions to help ensure the stable flow of credit to households and businesses. During normal market conditions, banks and other depository institutions in generally sound financial condition can obtain discount window loans to address short-term funding needs arising from unexpected funding pressures. In a financial crisis, discount window lending can provide broader liquidity support to the banking system that can help mitigate strains in financial markets. The Federal Reserve Board authorizes the Reserve Banks to offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own terms. The primary credit program is the principal discount window program and extends credit to depository institutions in generally sound condition on a very short-term basis (usually overnight). The secondary credit program is available to extend credit on a very short- term basis for depository institutions that are not eligible for primary credit, with the purpose of helping institutions to return to market sources of funds. The seasonal credit program generally extends loans to small depository institutions that face seasonal fluctuations in their funding needs. Section 10B of the Federal Reserve Act provides the statutory framework for these programs and, among other things, requires all discount window loans to be secured to the satisfaction of the lending Reserve Bank. FDIC deposit insurance covers deposit accounts—including checking and savings accounts, money market deposit accounts, and certificates of deposit—at insured depository institutions up to the insurance limit and is backed by the full faith and credit of the U.S. government. Federal deposit insurance was created to reduce the incentive for depositors to withdraw funds from banks during a financial panic and maintain stability and confidence in the nation’s banking system. During the 1800s and early 1900s, a number of states adopted different versions of deposit insurance to insure bank obligations in response to a wave of bank failures. However, these state insurance funds were later unable to cope with economic events during the 1920s, which led to calls for a system of federal deposit insurance to maintain financial stability. The Banking Act of 1933, which created FDIC by an amendment to the Federal Reserve Act, authorized FDIC to provide deposit insurance to banks and went into effect on January 1, 1934. The deposit insurance fund, administered by FDIC to resolve failed banks and thrifts, protects depositors from losses due to institution failures up to a limit. The deposit insurance fund is primarily funded by fees from assessments on insured depository institutions. If necessary, FDIC can borrow from Treasury, the Federal Financing Bank, and the Federal Home Loan Banks. As discussed later in this report, the Dodd-Frank Act permanently increased the deposit insurance limit from $100,000 to $250,000 and changed the base used to determine an insured depository institution’s risk-based assessment to be paid into the deposit insurance fund. In addition to the discount window and deposit insurance, during the 2007-2009 financial crisis the Federal Reserve Board and FDIC used their emergency authorities to assist individual failing institutions. As discussed later in this report, the Dodd-Frank Act changed these authorities so that emergency lending can no longer be provided to assist a single and specific firm but rather can only be made available through a program with broad-based eligibility—that is, a program that provides funding support to institutions that meet program requirements and choose to participate. Federal Reserve emergency lending authority. Prior to the Dodd- Frank Act, emergency lending authority under Section 13(3) of the Federal Reserve Act permitted the Federal Reserve Board, in unusual and exigent circumstances, to authorize a Reserve Bank to extend credit to individuals, partnerships, or corporations, if the Reserve Bank determined that adequate credit was not available from other banking institutions, and if the extension of credit was secured to the satisfaction of the lending Reserve Bank. During the financial crisis of 2007-2009, the Federal Reserve Board invoked this authority on a number of occasions to authorize one or more Reserve Banks to provide emergency assistance to particular institutions or to establish new programs to provide liquidity support to important credit markets. FDIC open bank assistance. The FDIC Improvement Act of 1991 included a systemic risk exception to the requirement that FDIC resolve failed banks using the least costly method. Under this exception, FDIC could provide assistance to a failing bank if compliance with its requirements to resolve the bank using the least costly approach would have “serious adverse effects on economic conditions and financial stability”—that is, would cause systemic risk—and if such assistance would “avoid or mitigate such adverse effects.” FDIC could act under the exception only under a process that included recommendations from the FDIC Board of Directors and Federal Reserve Board and approval by the Treasury Secretary. The agencies invoked this authority during the crisis to authorize FDIC to provide guarantees to particular banks and to introduce new guarantee programs with broad-based eligibility. As discussed later in this report, the Dodd-Frank Act effectively removed FDIC’s authority to provide assistance to failing banks outside of a receivership. The Federal Home Loan Bank (FHLB) System also serves to provide funding support to depository institutions during normal and strained market conditions. The FHLB System is a government-sponsored enterprise (GSE) that consists of 12 Federal Home Loan Banks (FHLB) and is cooperatively owned by member financial institutions, which include banks, thrifts, insurance companies, and credit unions. The primary mission of the FHLB System is to promote housing and community development by making loans, known as advances, to member financial institutions. These institutions are required to secure FHLB advances with high-quality collateral (such as single-family mortgages) and may use FHLB advances to fund mortgages. To raise the funds necessary to carry out its activities, the FHLB System issues debt in the capital markets at favorable rates compared to commercial borrowings due to market perceptions that the federal government would intervene to support the FHLB System in a crisis, thereby reducing its risk of default. When credit markets become strained, as they did during the most recent crisis, the FHLB System can serve as an important backup source of liquidity for member institutions that meet the FHLBs’ collateral and other requirements. The 2007-2009 financial crisis was the most severe that the United States has experienced since the Great Depression. The dramatic decline in the U.S. housing market that began in 2006 precipitated a decline in the price of financial assets that were associated with housing, particularly mortgage-related assets based on subprime loans. Some institutions found themselves so exposed to declines in the values of these assets that they were threatened with failure—and some failed—because they were unable to raise the necessary capital as the value of their lending and securities portfolios declined. Uncertainty about the financial condition and solvency of financial entities led banks to dramatically raise the interest rates they charged each other for funds and, in late 2008, interbank lending effectively came to a halt. The same uncertainty also led money market funds, pension funds, hedge funds, and other entities that provide funds to financial institutions to raise their interest rates, shorten their terms, and tighten credit standards. As their funding became increasingly difficult to obtain, financial institutions responded by raising the prices and tightening their credit standards for lending to households and nonfinancial businesses. The liquidity and credit crisis made the financing on which businesses and individuals depend increasingly difficult to obtain as cash-strapped banks tightened underwriting standards, resulting in a contraction of credit to the economy. By late summer of 2008, the potential ramifications of the financial crisis included the continued failure of financial institutions, increased losses of individual wealth, reduced corporate investments, and further tightening of credit that would exacerbate the emerging global economic slowdown that was beginning to take shape. Because financial crises can result in severe damage to the economy and the road to recovery can be long, governments and monetary authorities have historically undertaken interventions, even though some of the resulting actions raise concerns about moral hazard and can pose a risk of losses to taxpayers. Given its severity and systemic nature, the recent global financial crisis prompted substantial interventions starting in late 2007, after problems in the subprime mortgage market intensified. As discussed further in the next section of this report, these interventions included the creation of temporary government programs to support important credit markets and financial institutions that intermediate credit in the economy by channeling funds from savers to borrowers. From 2007 through 2009, the federal government’s actions to stabilize the financial system provided funding support and other benefits to bank holding companies and their bank and nonbank financial subsidiaries. The Federal Reserve Board, Treasury, and FDIC introduced new programs with broad-based eligibility that provided funding support to institutions that met program requirements and chose to participate. Selected programs—for which eligibility was not restricted exclusively to institutions that were part of a bank holding company—included Federal Reserve System lending programs, Treasury capital investment programs, and FDIC programs that guaranteed uninsured deposits and new debt issues. Isolating the impact of individual interventions is difficult, but collectively these actions likely improved financial conditions by enhancing confidence in financial institutions and the financial system. Bank holding companies and their subsidiaries also accrued benefits specific to their own institutions, including liquidity benefits from programs that allowed them to borrow at lower interest rates and at longer maturities than might have been available in the markets. Programs generally were made available to institutions of various sizes, and differences in the use of programs by institutions of various sizes were driven in part by differences in how institutions funded themselves. For example, compared to smaller bank holding companies, larger bank holding companies relied less on deposits as a source of funding and more on short-term credit markets and participated more in programs created to stabilize these markets. At the end of 2008, use of these programs—measured for each institution as the percentage of total assets supported by the programs—was larger on average for larger banking organizations—those with $50 billion or more in total assets— than for smaller banking organizations. The six largest bank holding companies were significant participants in several emergency programs but exited most of the programs by the end of 2009. Differences in program use across banking organizations of various sizes diminished as institutions exited the programs. In addition to programs that provided broad-based support, the Federal Reserve Board granted a number of regulatory exemptions to allow banks to provide liquidity support to their nonbank affiliates and for other purposes. Finally, some large bank holding companies benefitted from individual institution assistance or regulatory relief. For example, government assistance to prevent the failures of large institutions benefited recipients of this assistance and other market participants. During the financial crisis, the Federal Reserve System, Treasury, and FDIC introduced new programs with broad-based eligibility to provide general funding support to the financial sector and to stabilize the financial system. Given this report’s focus on bank holding companies, this section focuses on the financial stability programs that provided the most significant funding support directly to bank holding companies or their bank or nonbank subsidiaries. Table 1 provides an overview of the size, purpose, terms, and conditions of these programs, which included: the Federal Reserve System’s Term Auction Facility (TAF); Primary Dealer Credit Facility (PDCF); Term Securities Lending Facility (TSLF); and Commercial Paper Funding Facility (CPFF); Treasury’s Capital Purchase Program (CPP); and FDIC’s Temporary Liquidity Guarantee Program (TLGP), which had two components: the Debt Guarantee Program (DGP) guaranteed certain newly issued senior unsecured debt, and the Transaction Account Guarantee Program (TAGP) guaranteed certain previously uninsured deposits. Institutions eligible for these programs included both entities that were part of a bank holding company structure and entities that were not. The Federal Reserve System designed its emergency programs to address disruptions to particular credit markets and to assist participants in these markets. For example, the Federal Reserve System’s programs that targeted support to repurchase agreement markets provided assistance to securities firms that were subsidiaries of bank holding companies and securities firms that were not. The Federal Reserve System’s CPFF purchased commercial paper from participating bank holding companies and other financial and nonfinancial firms that met the program’s eligibility requirements. Treasury’s CPP and FDIC’s TLGP provided support primarily to insured depository institutions (banks and thrifts) and bank and savings and loan holding companies. Bank holding companies also benefited from other government programs, such as programs that targeted support to other market participants. For example, in the absence of Treasury and Federal Reserve System programs to guarantee and support money market mutual funds, respectively, such funds may have reduced their purchases of money market instruments issued by subsidiaries of bank holding companies and other firms, thereby exacerbating funding pressures on these firms. Other significant government programs included the Term Asset-Backed Securities Loan Facility (TALF), which was created by the Federal Reserve System to support certain securitization markets, and other programs created by Treasury under TARP authority. While the Federal Reserve System and FDIC provided expanded support through traditional safety net programs for insured banks during the crisis, some of the emergency government programs provided funding support at the bank holding company level—where it could be used to support both bank and nonbank subsidiaries—or directly to nonbank entities. In late 2007, the Federal Reserve Board took a series of actions to ease strains in interbank funding markets, including lowering the target federal funds rate, easing terms at the discount window, and introducing a new program—TAF—to auction term loans to banks. However, in part due to statutory and regulatory restrictions on the ability of insured banks to provide funding support to their nonbank affiliates, agencies determined that emergency government support to insured banks was not sufficient to stem disruptions to important credit markets. Nonbank credit markets— such as repurchase agreement and debt securities markets—had grown to rival the traditional banking sector in facilitating loans to consumers and businesses, and agencies determined that actions to address disruptions to these markets were needed to avert adverse impacts to the broader economy. For example, in March 2008, the Federal Reserve Board authorized PDCF and TSLF to address strains in repurchase agreement markets by providing emergency loans to broker-dealers, a few of whom were owned by U.S. bank holding companies. When the crisis intensified in September 2008 following the failure of Lehman Brothers Holdings Inc.—a large broker-dealer holding company—the Federal Reserve Board modified terms for its existing programs and took other actions to expand funding support for both bank and nonbank entities. In September 2008, Treasury and the Federal Reserve System introduced new temporary programs to address liquidity pressures on money market funds and to help ensure that these funds could continue to purchase money market instruments issued by bank holding companies and other firms. In addition, in October 2008, Congress enacted legislation under which Treasury provided capital investments to banks, bank holding companies, and other institutions; the legislation also temporarily increased FDIC’s deposit insurance limit from $100,000 to $250,000. Also that month, the Federal Reserve System created CPFF to support commercial paper markets, and FDIC introduced TLGP, under which it guaranteed previously uninsured transaction accounts and certain newly issued senior unsecured debt for participating insured depository institutions, bank and savings and loan holding companies, and approved affiliates of insured depository institutions. For a more detailed discussion of the circumstances surrounding the creation of these programs, see appendix II. Isolating the impact of individual government interventions is difficult, but collectively these interventions helped to improve financial conditions by enhancing confidence in financial institutions and the financial system overall. Bank holding companies and their subsidiaries, in addition to the financial sector and the economy as a whole, benefited from improved financial conditions. Bank holding companies and their subsidiaries also experienced individual benefits from participating in particular programs. Individually and collectively, government lending, guarantee, and capital programs provided important liquidity and other benefits to bank holding companies and their subsidiaries including: Access to funding in quantities and/or at prices that were generally not available in the markets. Government entities generally sought to set prices for assistance through these programs to be less expensive than prices available during crisis conditions but more expensive than prices available during normal market conditions. In some credit markets assisted by government programs—such as commercial paper and repurchase agreement markets—conditions had deteriorated such that many institutions faced substantially reduced access to these markets or had no access at all. As discussed below, we compared program pricing to relevant indicators of market pricing where available and found that emergency lending and guarantee programs generally were priced below market alternatives that may have been available. The availability of funding support at this pricing in predictable quantities was also beneficial. Even at times when eligible institutions did not access the available programs, these programs diversified the sources of funds that could be available to them if they faced increased funding pressures. Access to funding at longer maturities. By providing and standing ready to provide funding support for terms of 1 month or longer, government programs helped to reduce rollover risk—the risk that an institution would be unable to renew or “rollover” funding obligations as they came due—for individual institutions and their counterparties. At times during the crisis, bank holding companies and their subsidiaries faced difficulties borrowing at terms of 1 month or longer in several important credit markets, including interbank, repurchase agreement, and commercial paper markets. Government programs mitigated funding pressures for borrowers in these markets by reducing the risk that funding sources would rapidly disappear for an institution or its counterparties. Because participants in these programs were also lenders of funds, these programs helped to encourage these institutions to continue to lend funds to support the economy. Stabilizing deposit funding. FDIC’s TAGP, which temporarily insured certain previously uninsured deposits for a fee, helped to stabilize deposit funding by removing the risk of loss from deposit accounts that were commonly used to meet payroll and other business transaction purposes and allowing banks, particularly smaller ones, to retain these accounts. Deposits are the primary source of funding for most banks, and smaller banks tend to fund themselves to a greater extent with deposits. Funding support for a broad range of collateral types. A few Federal Reserve System programs provided important liquidity benefits to individual institutions and credit markets by allowing institutions to obtain liquidity against a broad range of collateral types. TAF provided 1-month and 3-month loans to eligible banks against collateral types that could also be used to secure discount window loans. While TAF collateral requirements were based on discount window requirements, TAF provided emergency credit on a much larger scale, with TAF loans outstanding peaking at nearly $500 billion, compared to peak primary credit outstanding during the crisis of just over $100 billion. In March 2008, the Federal Reserve System began providing liquidity support to certain nonbank financial firms—the primary dealers—for less liquid collateral types through PDCF and TSLF. Through PDCF, the Federal Reserve Bank of New York (FRBNY) allowed primary dealers to obtain overnight cash loans against harder-to-value collateral types, such as mortgage-backed securities. Through TSLF, FRBNY auctioned loans of Treasury securities to primary dealers in exchange for less-liquid collateral types to increase the amount of high-quality collateral these dealers had available to borrow against in repurchase agreement markets. When pressures in repurchase agreement markets intensified in September 2008, the Federal Reserve Board expanded the types of collateral it accepted for both PDCF and TSLF. Although imperfect, one indicator of the extent to which an institution directly benefited from participation in an emergency program is the relative price of estimated market alternatives to the program. To determine how pricing of the emergency assistance compared to market rates, we compared pricing for programs to the pricing for market alternatives that might have been available to program participants. First, we compared the interest rates and fees charged by the Federal Reserve System and FDIC for participation in the emergency lending and guarantee programs with available market alternatives. We considered a number of potential indicators of market interest rates available to financial institutions, including a survey of interbank interest rates (the London Interbank Offered Rate or LIBOR), commercial paper interest rates published by the Federal Reserve Board, spreads on bank credit default swaps (CDS) and interest rates on repurchase agreements. These interest rates provide a general indication of market alternatives that could have been available to participants, but for a number of reasons the rates are unlikely to reflect available alternatives for all participants at all points in time during the crisis and cannot be used to produce a precise quantification of the benefits that accrued to participating financial institutions. For example, participants’ access to market alternatives may have been limited, data on the relevant private market may be limited, or market alternatives could vary across participants in ways that we do not observe in the data. The markets targeted by emergency programs had experienced significant strains, such as a substantial drop in liquidity, a sharp increase in prices, or lenders restricting access only to the most credit worthy borrowers or accepting only the safest collateral. Also, our indicators do not capture all of the benefits associated with participation in the relevant programs. Furthermore, once programs were introduced, they probably influenced the price of market alternatives, making it difficult to interpret differences between emergency program and market prices while programs were active. Second, to determine the extent to which Treasury capital investment programs were priced more generously than market alternatives, we reviewed estimates of the expected budget cost associated with equity funding support programs as well as a valuation analysis commissioned by the Congressional Oversight Panel. For more details on our methodology for these analyses, see appendix III. Based on our analysis, we found that emergency assistance provided through these programs was often priced below estimated market alternatives that might have been available to program participants. This result is consistent with a policy goal of these programs to stabilize financial markets and restore confidence in the financial sector. The pricing of emergency assistance below estimated market alternatives is also evidenced by the significant participation in these programs. Specifically, we found that emergency lending and guarantee programs were generally priced below certain indicators of market alternatives that could have been available. In addition, based on analyses we reviewed, Treasury paid prices above estimated market prices for emergency equity support programs. For selected programs that we analyzed, we also found that program pricing would likely have become unattractive in comparison to market pricing during normal and more stable credit conditions. Federal Reserve System programs. Federal Reserve System emergency lending programs during the crisis provided sources of both secured and unsecured funding at rates that were often below those of potential market alternatives and at terms that reduced rollover risk for participants. These characteristics are consistent with a policy goal to stabilize financial conditions by providing funding support for financial institutions that relied on wholesale funding markets. At the time, the markets targeted by the Federal Reserve emergency programs had experienced strains, such as a drop in volume or a significant increase in prices or collateral standards. TAF. Interest rates on TAF loans, on average, were between 22 and 39 basis points lower than three market interest rates that could have represented alternatives for participants. TAF auctioned collateralized loans—generally at terms of either 28 or 84 days—to insured banks to help alleviate strains in term funding markets. We compared interest rates for 28-day TAF loans with 1-month LIBOR, 30-day asset-backed commercial paper (ABCP) rates, and interest rates on very large 1- month unsecured certificates of deposit. We chose these interest rates because they are all indicators of the cost of borrowing for financial institutions in term funding markets. However each differs from TAF in important ways. For example, LIBOR is based on unsecured loans (TAF loans were secured by collateral) and ABCP, despite being secured, has other features that differ from TAF, including the mix of underlying collateral. We found that LIBOR exceeded TAF interest rates by an average of 22 basis points. ABCP interest rates exceeded TAF interest rates by on average 39 basis points and interest rates on very large certificates of deposit exceeded TAF interest rates by on average 29 basis points while the program was active. Because of differences between TAF and these measures of market interest rates, these spreads are an imperfect measure of the extent to which banks derived benefits from participating in TAF. PDCF. Our analysis suggests that PDCF provided secured overnight funding on more favorable terms for some types of collateral (such as corporate debt) than market alternatives that some primary dealers might have relied upon in the absence of PDCF. Because PDCF operated in a similar manner to repurchase agreement markets, we compared PDCF terms to available data for triparty and bilateral repurchase agreement transactions. One important term for repurchase agreement loans is the haircut, which is the amount of additional collateral the lender requires over the value of the loan. Repurchase agreement lenders generally require higher haircuts on riskier and less liquid collateral types. PDCF offered loans at the same interest rate (the discount rate charged on discount window loans) for all collateral types and applied a haircut schedule that assigned progressively higher haircuts to riskier assets. We compared PDCF haircuts to market haircuts for selected asset classes in the triparty repurchase agreement market. We found that the haircut required by PDCF was consistently greater than the median haircut in the triparty repurchase agreement market for comparable asset classes. Thus, borrowers who faced the median haircut on their collateral in the triparty market were better off borrowing in the triparty market than through PDCF, all else being equal. However, the PDCF haircut was smaller than the 75th percentile haircut in the triparty market for a variety of collateral types. This implies that higher-risk borrowers were better off borrowing through PDCF than through the triparty market, at least for certain types of collateral. Smaller haircuts would have allowed these PDCF participants to borrow more against the same collateral than in private repurchase agreement markets. TSLF. TSLF allowed primary dealers to obtain funding for the most commonly pledged collateral types at 32 basis points below an estimated market alternative. When TSLF was created in March 2008, repurchase agreement lenders were requiring higher interest rates and haircuts for loans against a range of less-liquid collateral types and were reluctant to lend against mortgage-related securities. Through TSLF, primary dealers paid an auction-determined interest rate to exchange harder-to-finance collateral for more liquid Treasury securities—which were easier to borrow against in repurchase agreement markets—generally for a term of 28 days. TSLF held separate auctions of Treasury securities against two different schedules of collateral to apply a higher interest rate to riskier collateral. Schedule 1 collateral included higher quality assets, such as agency debt and agency mortgage-backed securities (MBS), and Schedule 2 collateral included Schedule 1 collateral and a broader range of asset types, such as highly-rated private-label MBS. We compared TSLF interest rates to the difference between lower interest rates primary dealers might have paid on repurchase agreements secured by Treasury securities and the higher interest rates they could have paid on repurchase agreements secured by TSLF-eligible collateral. Due to limited availability of interest rate data for repurchase agreements collateralized by other lower-quality collateral eligible for TSLF, such as private-label MBS, we compared TSLF interest rates to the difference or spread between interest rates on repurchase agreements collateralized by agency MBS and repurchase agreements collateralized by Treasury securities. We found that the spread between repurchase agreement interest rates on agency MBS (the most commonly-pledged collateral for TSLF) and Treasury securities exceeded TSLF interest rates by on average 32 basis points while the program was active. CPFF. CPFF purchased 3-month commercial paper at prices that were lower than market rates during the crisis on instruments that could have represented alternative funding sources but were more expensive than average commercial paper rates during normal market conditions. CPFF controlled for changes in short-term interest rates by setting the price of commercial paper issuance to CPFF at a fixed spread above the daily 3-month overnight indexed swap rate, a rate that tracks investor expectations about the future federal funds rate. Table 2 summarizes the pricing structure for CPFF. We compared all- in borrowing costs (an interest rate plus a credit surcharge for unsecured borrowing) for CPFF borrowers with 3-month LIBOR. To determine how CPFF pricing compared to borrowing costs in crisis conditions, we compared CPFF pricing terms to 3-month LIBOR for the period from the failure of Lehman Brothers Holdings Inc. (Sept. 14, 2008) through the date on which CPFF became operational (Oct. 27, 2008). We found that average CPFF pricing terms were lower than the average LIBOR rate by 92 basis points and 44 basis points for CPFF purchases of unsecured commercial paper and collateralized ABCP, respectively. To determine how unsecured CPFF rates compared to benchmarks for borrowing costs in normal market conditions, we applied the CPFF pricing rule for unsecured commercial paper to a 2-month period in 2006 and found that CPFF pricing would have been more expensive than AA unsecured commercial paper interest rates by roughly 200 basis points and LIBOR by over 190 basis points. This analysis suggests that CPFF would have become less attractive to participants as market conditions improved. Treasury capital investments. Analyses we reviewed suggest that the prices Treasury paid for equity in financial institutions participating in TARP exceeded estimated market prices that private investors might have paid for comparable investments in these institutions during the crisis. This pricing is consistent with a policy goal to stabilize financial conditions by improving the equity capitalization of banks. In late 2008, before CPP was announced, banks had difficulty issuing sufficient new equity to investors. We reviewed estimates of the expected budget cost associated with Treasury’s equity funding support programs under TARP, CPP and the Targeted Investment Program (TIP), as well as a valuation analysis commissioned by the Congressional Oversight Panel. Some of the benefits that accrued to banks from participation in equity funding support programs are likely to be proportional to the expected budgetary cost (also known as subsidy rates) estimated for accounting purposes. Treasury and Congressional Budget Office estimates of subsidy rates are based on a net present value analysis—the price and terms which are offered by a federal agency are compared to the lifetime expected cost (net present value) of the equity, and the difference is known as a subsidy. The valuation analysis commissioned by the Congressional Oversight Panel explicitly compared the prices received by Treasury with market-based valuations of securities it determined to be comparable. Estimates of subsidy rates by Treasury, the Congressional Budget Office, and the Congressional Oversight Panel were generally similar for CPP, while the Congressional Budget Office’s estimates for TIP were substantially lower than those of Treasury and the Congressional Oversight Panel (see fig. 1). Based on these three analyses, these estimated subsidy rates suggest that the prices Treasury paid for equity in financial institutions were 18 to 27 percent over estimated market prices for CPP and 26 to 50 percent over estimated market prices for TIP equity. Estimates reflect differences in timing, methodology, and institutions included in the analyses, which we discussed previously and in the note to figure 1. FDIC’s DGP. For the DGP guarantees that we analyzed, the fees for FDIC’s DGP were on average 278 basis points below the private cost of similar guarantees during crisis conditions, but more expensive than similar guarantees that were available in the private market during normal credit conditions. This pricing is consistent with a policy goal to promote financial stability by improving access to sources of debt funding. FDIC’s DGP provided guarantees for certain newly issued senior unsecured debt for banks, bank holding companies, and other eligible institutions. When DGP was created in October 2008, lending to financial institutions in public debt markets had dropped dramatically. The fees for participation in DGP were based on the maturity of guaranteed liabilities (the longer the maturity the higher the fee) and the type of financial institution. We analyzed the 100-basis point fee that DGP charged to guarantee debt with a maturity of 1 year, plus the 10-basis point premium charged to bank holding companies. We compared the total DGP fee with the weighted average price of 1-year bank CDS for certain bank holding companies because the guarantee is essentially similar to a private party insuring against the risk of default using a CDS. Our analysis covered the period from the failure of Lehman Brothers (in September 2008) through the date DGP became operational (in October 2008). We found that the cost of insuring against bank default on the private market exceeded the FDIC fee terms by on average 278 basis points, with considerable variation across users—varying from over 1,000 basis points above the DGP fee terms to a few basis points below. We also applied the DGP pricing rule for guaranteeing bank holding company debt to a 2-month period in 2006, before the crisis, and found that DGP pricing would have exceeded the private cost of guarantees by roughly 100 basis points. This pricing suggests that DGP would have become less attractive to participants as market conditions improved. For more detail on our analysis of the prices and terms of all of the emergency programs, please see appendix III. Emergency government programs to stabilize financial markets provided funding support to bank holding companies and insured depository institutions (collectively, banking organizations) of various sizes. This section also focuses on the programs that provided the most significant funding support directly to bank holding companies and their subsidiaries (listed previously in table 1). Agencies made these programs available to specific types of institutions regardless of their size, and institutions of various sizes participated in these programs. Differences in the level of program use by institutions of various sizes were driven in part by differences in how institutions funded themselves. For example, compared to smaller bank holding companies, larger bank holding companies relied to a greater extent on short-term credit markets that were the most severely disrupted during the crisis and participated more in programs intended to address disruptions in these markets. Smaller banking organizations relied more on deposits to fund their activities. To compare the extent to which banking organizations of various sizes used emergency programs, we calculated the percentage of banking organization assets that were supported by emergency programs—either through capital injections, loans, or guarantees—at quarter-end dates for 2008 through 2012. Capital provided by emergency programs includes capital investments by Treasury under CPP and TIP. Loans provided by emergency programs include TAF, TSLF, PDCF, and CPFF loans from the Federal Reserve System. Funding guaranteed by emergency programs includes deposits guaranteed by FDIC through TAGP and debt guaranteed by FDIC through DGP. We then calculated each of these three types of liabilities as a percentage of assets for banking organizations by size for quarter-end dates from mid-2008 to the end of 2012. Finally, for each of the three types of liabilities, we decomposed average liabilities as a percentage of assets for banking organizations of different sizes into two components: (1) the rate of participation in emergency programs by banking organizations of different sizes and (2) the average liabilities as a percentage of assets for those participants. We found that the extent to which banking organizations of different sizes used emergency programs varied over time and across programs. For example, the largest bank holding companies—those with more than $500 billion in assets as of June 30, 2013—used the programs to varying degrees but had exited most of the programs by the end of 2009. Moreover, as of December 31, 2008, average use of emergency programs generally was higher for banking organizations with $50 billion or more in assets than it was for banking organizations with less than $50 billion in assets. Total loans outstanding from Federal Reserve System programs (TAF, TSLF, PDCF, and CPFF) combined were at least 2 percent of assets on average for banking organizations with $50 billion or more in assets but less than 1 percent of assets on average for smaller banking organizations. CPP and TIP capital investments were at least 1.5 percent of assets on average for banking organizations with $50 billion or more in assets and less than 1 percent of assets on average for smaller organizations. Finally, DGP-guaranteed debt and TAGP-guaranteed deposits together were at least 6 percent of assets on average for banking organizations with $50 billion or more in assets and were less than 4 percent of assets on average for smaller banking organizations. However, by December 31, 2010, the Federal Reserve System’s loan programs had closed, and differences in use of remaining programs by banking organizations of different sizes had diminished. For a more detailed discussion of our analysis of utilization of these programs by banking organizations of various sizes, see appendix IV. Several factors influenced the extent to which eligible institutions used emergency programs. As explained above, one factor driving an institution’s level of participation in a program was the extent to which it relied on the type of funding assisted by the program. In addition, market conditions and the speed with which eligible firms recovered affected the amount and duration of use of the programs by different firms. Agencies generally designed program terms and conditions to make the programs attractive only for institutions facing liquidity strains. Use of several of the programs peaked during the height of the financial crisis and fell as market conditions recovered. Federal Reserve Board officials told us that even as markets recovered, funding conditions improved for certain borrowers but not others. As a result, in PDCF, TSLF, and CPFF, several participants remained in the programs while others exited. Participants in CPP required the approval of their primary federal regulator before exiting the program. In addition, several of the programs included limits on the amount of assistance an entity could receive. Under CPP, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. To prevent excessive use of CPFF that would be inconsistent with its role as a backstop, the Federal Reserve Board limited the maximum amount a single issuer could have outstanding at CPFF to the greatest amount of U.S.-dollar-denominated commercial paper the issuer had had outstanding on any day between January 1 and August 31, 2008. The Federal Reserve Board also set limits on the maximum amount that institutions could bid in each TAF and TSLF auction. Finally, in some cases, institutions accepted emergency government assistance at the encouragement of their regulators. For example, several institutions accepted TARP capital investments at the encouragement of Treasury or their regulator. However, participation in other programs appears to have been driven by market conditions and other factors. During the financial crisis, the Federal Reserve Board granted a number of exemptions to requirements under Section 23A of the Federal Reserve Act for a range of purposes, such as allowing banks to provide greater liquidity support to the nonbank sector. The number of exemptions granted increased significantly during the crisis, and the majority of these exemptions were granted to U.S. bank holding companies and other firms with $500 billion or more in total assets (see fig. 2). Section 23A of the Federal Reserve Act imposes quantitative limits on certain transactions between an insured depository institution and its affiliates, prohibits banks from purchasing low-quality assets from their nonbank affiliates, and imposes collateral requirements on extensions of credit to affiliates. In letters documenting its approval of exemptions to Section 23A, the Federal Reserve Board has indicated that the twin purposes of Section 23A are (1) to protect against a depository institution suffering losses in transactions with its affiliates, and (2) to limit the ability of a depository institution to transfer to its affiliates the subsidy arising from the institution’s access to the federal safety net. In other words, these restrictions are intended to protect the safety and soundness of banks and to prevent them from subsidizing the activities of nonbank affiliates by passing on any benefits they may receive through access to deposit insurance and the discount window. The Federal Reserve Act granted the Federal Reserve Board authority to exempt transactions and relationships from Section 23A restrictions if such exemptions were in the public interest and consistent with statutory purposes. Prior to the Dodd-Frank Act, the Federal Reserve Board had exclusive authority to grant exemptions to Section 23A. During the financial crisis, the Federal Reserve Board granted a number of exemptions from the requirements of Section 23A, for a range of purposes that included, but were not limited to, the following: Facilitating Liquidity Support for Holders of Mortgage-Related Assets. In August 2007, the Federal Reserve Board issued three similar exemption letters granting Section 23A exemptions to three of the largest U.S. bank holding companies (Citigroup Inc., Bank of America Corporation, and JP Morgan Chase & Co.) to allow their bank subsidiaries (Citibank, N.A.; Bank of America, N.A.; and JPMorgan Chase Bank, N.A.) to engage in securities financing transactions with their affiliated broker-dealers. The purpose of these exemptions was to allow each of these banks to extend up to $25 billion of credit (using their broker-dealer affiliates as conduits) to unaffiliated market participants in need of short-term liquidity to finance their holdings of certain mortgage loans and other assets. The Federal Reserve Board’s letters noted that these exemptions would provide significant public benefits by allowing banks to provide a substantial amount of liquidity into the market for these mortgage-related assets. Facilitating Liquidity Support for Holders of Auction-Rate Securities. In December 2008 and January 2009, the Federal Reserve Board granted exemptions to allow four large banks (Fifth Third Bank, BB&T Company, Northern Trust Company, and Wachovia Bank, N.A.) to purchase auction-rate securities and variable rate demand notes from their securities affiliates or parent company. The Federal Reserve Board’s letters noted that these exemptions were intended to facilitate the provision of liquidity by these banks to customers of their affiliates that were holding illiquid auction-rate securities or variable rate demand notes. The securities affiliates of banks had been active in underwriting and selling auction-rate securities and when these securities became illiquid, the affiliates repurchased them from clients that sought to liquidate their positions. In this case, 23A exemptions allowed banks to provide financing for these purchases. The size of transactions permitted under these exemptions ranged from $600 million for The Northern Trust Company to approximately $7 billion for Wachovia Bank, N.A. Facilitating Liquidity Support to Money Market Funds and Repurchase Agreement Markets. In addition to exemptions granted to individual institutions, the Federal Reserve Board granted broad-based exemptions from Section 23A to enable banks to provide liquidity support to repurchase agreement markets and money market mutual funds (MMMF). First, on September 14, 2008, concurrent with the decision to expand eligible collateral types for PDCF and TSLF, the Federal Reserve Board adopted an interim final rule granting a temporary exemption to allow banks to provide their securities affiliates with short-term financing for assets that they ordinarily would have financed through the repurchase agreements markets. The purpose of this exemption was to improve the ability of broker-dealers to continue financing their securities and other assets despite the liquidity shortage in the triparty repurchase agreement market. Several days later, on September 19, the Federal Reserve Board amended Regulation W to grant a temporary exemption from Section 23A requirements for member banks’ purchases of ABCP from affiliated money market funds, subject to certain conditions. The purpose of this exemption was to enable banks to take full advantage of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), a program authorized by the Federal Reserve Board to provide loans to banks to fund the purchase of ABCP from MMMFs. Facilitating Acquisitions of Failing Firms. The Federal Reserve Board also granted Section 23A exemptions in connection with its efforts to facilitate private acquisitions of firms whose failure could have destabilized financial markets. Such acquisitions included JP Morgan Chase & Co.’s acquisition of Bear Stearns and Wells Fargo & Company’s acquisition of Wachovia Corporation. JP Morgan Chase & Co. received exemptions that allowed JP Morgan Chase Bank, N.A. to, among other things, extend credit to, and issue guarantees on behalf of, former Bear Stearns entities and to purchase a derivatives portfolio valued at approximately $44 billion from Bear Stearns. In November 2008, the Federal Reserve Board granted an exemption to allow Wells Fargo Bank, N.A., to extend up to $17 billion in credit to Wachovia Bank, N.A. to assist it in meeting its short-term funding obligations until the merger was completed. For many of these cases, the Federal Reserve Board granted an exemption to help facilitate liquidity support to nonbank entities as part of its actions to reduce systemic risk and promote financial stability. In granting exemptions, the Federal Reserve Board imposed conditions that were intended to mitigate risks to the bank that would be providing credit, purchasing assets, or engaging in other transactions with affiliates. However, one expert has raised concerns that such conditions might not offer sufficient protection for an insured depository institution during crisis conditions and that these exemptions in aggregate resulted in a large- scale transfer of safety net benefits created for banks to the nonbank, or “shadow banking,” system. As discussed in the next section of this report, the Dodd-Frank Act made changes to Section 23A of the Federal Reserve Act. In addition to introducing emergency programs with broad-based eligibility, federal government agencies took special actions with respect to individual financial institutions on several occasions in 2008 and 2009. While these actions were intended to benefit a range of market participants and the broader financial system, some large U.S. bank holding companies received substantial direct benefits from these actions. Such actions included (1) assistance from multiple agencies to rescue or facilitate the acquisition of troubled firms whose failures posed significant risks to the financial system, and (2) the Federal Reserve Board granting bank holding company status to several nonbank financial companies and providing liquidity support to the London broker-dealers of a few of the largest bank holding companies. On several occasions in 2008 and early 2009, the federal government provided extraordinary support to or facilitated the acquisition of large financial institutions, which benefitted recipients of this assistance and other market participants, such as firms that had large risk exposures to these institutions. Assistance to Facilitate JP Morgan’s Acquisition of Bear Stearns. In 2008, the Federal Reserve Board authorized emergency assistance to avert the failure of Bear Stearns Companies, Inc. (Bear Stearns) and facilitate the acquisition of the firm by JP Morgan Chase & Co. On Friday, March 14, 2008, the Federal Reserve Board voted to authorize FRBNY to provide a $12.9 billion loan to Bear Stearns to enable the firm to avoid bankruptcy and to provide time for potential acquirers, including JP Morgan Chase & Co, to assess its financial condition. On Sunday, March 16, 2008, the Federal Reserve Board announced that FRBNY would lend up to $30 billion against certain Bear Stearns assets to facilitate JP Morgan Chase & Co’s acquisition of Bear Stearns. During the following week, the terms of this assistance were renegotiated, resulting in the creation of a new lending structure under which a $28.82 billion FRBNY senior loan and a $1.15 billion JP Morgan Chase & Co subordinated loan funded the purchase of certain Bear Stearns’s assets. FRBNY also provided certain regulatory exemptions to JP Morgan Chase & Co. in connection with its agreement to acquire Bear Stearns. For example, the Federal Reserve Board granted an 18-month exemption to allow JP Morgan Chase & Co to exclude certain Bear Stearns assets from its risk- weighted assets for purposes of applying risk-based capital requirements. Assistance to Government-Sponsored Enterprises. Extraordinary government support to Fannie Mae and Freddie Mac helped to stabilize mortgage markets and the broader financial markets and provided specific benefits to bank holding companies and other firms that likely would have incurred losses if the federal government had allowed these government-sponsored enterprises to fail. On September 6, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into conservatorship out of concern that their deteriorating financial condition threatened their safety and soundness and their ability to fulfill their public mission. Treasury’s investments in Fannie Mae and Freddie Mac under the Senior Preferred Stock Purchase Agreements program represent the federal government’s single largest risk exposure remaining from its emergency actions to assist the financial sector. As of June 30, 2013, cumulative cash draws by the GSEs under this program totaled $187.4 billion and cumulative dividends paid by the GSEs to Treasury totaled $131.6 billion. Assistance to AIG. Federal government actions to prevent the failure of AIG benefitted AIG and its counterparties—which included some of the largest U.S. and foreign financial institutions—and were intended to benefit the broader financial system. In September 2008, the Federal Reserve Board and Treasury determined that market events could have caused AIG to fail, which would have posed systemic risk to financial markets. The Federal Reserve Board and Treasury collaborated to make available up to $182.3 billion in assistance to AIG. This assistance, which began with a revolving credit facility of up to $85 billion from FRBNY, was provided in several stages and was restructured over time. In November 2008, the Federal Reserve Board authorized the creation of two special-purpose vehicles— Maiden Lane II LLC and Maiden Lane III LLC—to purchase certain AIG-related assets. Maiden Lane II was created to alleviate capital and liquidity pressures arising from a securities lending portfolio operated by certain AIG subsidiaries by purchasing residential MBS held in this portfolio. Maiden Lane III helped to fund the purchase of collateralized debt obligations from AIG counterparties that had purchased CDS from AIG to protect the value of those assets. AIG repaid all loans and capital investments it received from government entities during the crisis. In December 2012, Treasury sold its remaining investments in AIG, resulting in a total positive return of $22.7 billion for Treasury and FRBNY. Extraordinary Assistance to Citigroup. On November 23, 2008, Treasury, the Federal Reserve Board, and FDIC announced a package of additional assistance to Citigroup Inc. (Citigroup) that included $20 billion of capital from TIP and a loss-sharing agreement with the government entities that was intended to assure market participants that Citigroup would not fail in the event of larger-than- expected losses on certain of its assets. As discussed in our April 2010 report on Treasury’s use of the systemic risk determination, Treasury, FDIC, and the Federal Reserve Board said they provided emergency assistance to Citigroup because they were concerned that a failure of a firm of Citigroup’s size and interconnectedness would have systemic implications. As of September 30, 2008, Citigroup was the second largest banking organization in the United States, with total consolidated assets of approximately $2 trillion. In June 2009, Treasury entered into an agreement to exchange the $25 billion in Citigroup preferred shares purchased in its initial CPP investment for Citigroup common shares to help improve Citigroup’s capital position. In December 2009, Citigroup repaid the $20 billion TIP investment. On December 23, 2009, Citigroup announced that it had entered into an agreement with FDIC, FRBNY, and Treasury to terminate the loss- sharing agreement. As part of the termination agreement, Citigroup agreed to pay a $50 million termination fee to FRBNY. Extraordinary Assistance to Bank of America. On January 16, 2009, Treasury, the Federal Reserve Board, and FDIC announced a similar package of assistance to Bank of America Corporation (Bank of America). The additional assistance included capital through TIP and a loss-sharing agreement that was similar to the one executed for Citigroup. While Bank of America received $20 billion in capital through TIP, the government entities never finalized the announced loss-sharing agreement with Bank of America. In September 2009, the agencies agreed to terminate the loss-sharing agreement with Bank of America. As part of the agreement to terminate the agreement-in-principle, Bank of America paid fees of $276 million to Treasury, $57 million to the Federal Reserve Board, and $92 million to FDIC. Bank of America repaid its $20 billion TIP investment in December 2009. In late 2008, at the height of the financial crisis, the Federal Reserve Board approved applications by several large nonbank financial firms to convert to bank holding company status. Becoming bank holding companies provided these firms with greater access to emergency government funding support, while subjecting them to oversight by the Federal Reserve System and other requirements under the Bank Holding Company Act. Eligibility for TARP capital investments under CPP and debt guarantees through TLGP were generally restricted to depository institutions and their holding companies, and several large firms that became bank holding companies in late 2008 subsequently participated in one or both of these programs. Among the largest firms converting to bank holding companies during the crisis were two investment banks (Goldman Sachs Group, Inc. and Morgan Stanley), two companies that were large providers of credit card products and other services (American Express Company and Discover Financial Services), and two other financial firms (CIT Group Inc. and GMAC LLC). In many cases, obtaining bank holding company status involved firms converting an industrial loan corporation (ILC) into a bank. Federal Reserve Board officials noted that these firms already had access to the discount window through their ILCs and converting these ILCs to banks did not change their access to the discount window, but their access to discount window liquidity was limited by the amount of assets these subsidiaries—first as ILCs and later as banks—could pledge to the discount window as collateral. According to Federal Reserve Board documents, deposits held by these firms were a small fraction of their total consolidated assets at the time they became bank holding companies. While bank holding companies are subject to restrictions on nonbanking activities under the Bank Holding Company Act, Federal Reserve Board orders approving bank holding company applications described nonbanking activities of the companies that were permissible under the act and noted that the act provides each newly formed bank holding company 2 years to conform its existing nonbanking investments and activities to the act’s requirements. On September 21, 2008, the Federal Reserve Board announced that FRBNY would extend credit—on terms similar to those applicable for PDCF loans—to the U.S. and London broker-dealer subsidiaries of Goldman Sachs Group, Inc., Morgan Stanley, and Merrill Lynch & Co. to provide support to these subsidiaries as they became part of bank holding companies that would be regulated by the Federal Reserve System. On November 23, 2008, in connection with other actions taken by Treasury, FDIC, and the Federal Reserve Board to assist Citigroup, the Federal Reserve Board authorized FRBNY to extend credit to the London-based broker-dealer of Citigroup on terms similar to those applicable to PDCF loans. Enacted in July 2010, the Dodd-Frank Act contains provisions intended to modify the scope of federal safety nets for financial firms, place limits on agency authorities to provide emergency assistance, and strengthen regulatory oversight of the largest firms, among other things. FDIC and the Federal Reserve Board have finalized certain changes to traditional safety nets for insured banks, but impacts of the act’s provisions to limit the scope of financial transactions that benefit from these safety nets will depend on how they are implemented. The act also prohibits regulators’ use of emergency authorities to rescue an individual institution and places other restrictions on these authorities. For example, the act effectively removes FDIC’s authority to provide assistance to a single, specific failing bank outside of receivership and grants FDIC new authority to resolve a large failing institution outside of bankruptcy. FDIC has made progress toward implementing its new resolution authority and continues to work to address potential obstacles to the viability of its resolution process as an alternative to bankruptcy, such as challenges that could arise when resolving more than one large institution concurrently. The act also places new restrictions and requirements on the Federal Reserve Board’s emergency lending authority. However, the Federal Reserve Board has not yet completed its process for drafting policies and procedures required by the act to implement these changes or set timeframes for doing so. Finalizing such procedures would help ensure that any future use of this authority complies with Dodd-Frank Act requirements. Finally, the Federal Reserve Board has made progress towards implementing certain enhanced regulatory standards that are intended to reduce the risks that the largest financial institutions pose to the financial system. The Dodd-Frank Act instituted a series of reforms related to the traditional safety nets for insured banks, including changes to deposit insurance and discount window reporting requirements. In addition, the act contains provisions intended to limit the scope of financial transactions that benefit from access to these traditional safety nets. These provisions include revisions to the Federal Reserve Board’s authority to permit certain transactions between banks and their affiliates under Section 23A of the Federal Reserve Act, restrictions on the ability of bank holding companies to engage in proprietary trading; and restrictions on the ability of insured banks to engage in certain derivatives transactions. FDIC has implemented Dodd-Frank Act provisions that increased the deposit insurance limit and required FDIC to change the calculation for premiums paid by insured depository institutions. Section 335 of the Dodd-Frank Act permanently raised the standard maximum deposit insurance amount from $100,000 to $250,000 for individual deposit accounts, as previously discussed. FDIC issued and made effective a final rule instituting the increase in August 2010 and required insured depository institutions to comply by January 2011. Section 343 of the act provided temporary unlimited deposit insurance coverage for certain uninsured deposits from December 2010 through December 2012. This coverage expired on December 31, 2012, and transaction accounts can now only be insured to the $250,000 ceiling. Section 331 of the Dodd- Frank Act required FDIC to amend its regulation and modify the definition of an insured depository institution’s assessment base, which can affect the amount of deposit insurance assessment the institution pays into the deposit insurance fund. Under the Dodd-Frank Act, the assessment base changed from total domestic deposits to average consolidated total assets minus average tangible equity (with some possible exceptions). FDIC issued a final rule changing the assessment base in February 2011, and the rule became effective in April 2011. According to FDIC, the change in the assessment base calculation shifted some of the overall assessment burden from community banks to larger institutions that rely less on domestic deposits for their funding than smaller institutions, but without affecting the overall amount of assessment revenue collected. In the quarter after the rule became effective, those banks with less than $10 billion in assets saw a 33 percent drop in their assessments (from about $1 billion to about $700 million), while those banks with over $10 billion in assets saw a 17 percent rise in their assessments (from about $2.4 billion to about $2.8 billion). The Dodd-Frank Act made changes to the Federal Reserve Board’s reporting requirements to increase the transparency for discount window transactions. During and after the crisis, some members of Congress and others expressed concern that certain details of the Federal Reserve System’s discount window and emergency lending activities, including the names of borrowers receiving loans, were kept confidential. Section 1103 of the Dodd-Frank Act requires the Federal Reserve Board to disclose transaction-level details for discount window loans and open market transactions on a quarterly basis after a 2-year delay. The Dodd-Frank Act established similar reporting requirements for the Federal Reserve Board’s Section 13(3) authority, as discussed later. No rulemaking was required, and the Federal Reserve Board began to post the data publicly on its website in September 2012. The first set of releases covered loans made between July and September 2010, and data for subsequent periods are being published quarterly with a 2-year lag. The Dodd-Frank Act also grants GAO authority to audit certain aspects of discount window transactions occurring after July 21, 2010. The Dodd-Frank Act made numerous changes to Section 23A of the Federal Reserve Act that both significantly expanded the scope of activities covered by Section 23A’s restrictions and created new requirements for participation by FDIC and the OCC in granting exceptions. As previously discussed, the Federal Reserve Board granted a number of exemptions to Section 23A during the crisis. Some observers have raised concerns that these exemptions in aggregate resulted in a large scale transfer of federal safety net benefits to the nonbank, or “shadow banking,” system. The changes listed below, with the exception of changes related to investments in private funds, did not require rulemakings and became effective on July 21, 2012. The Dodd-Frank Act gave FDIC and OCC, jointly with the Federal Reserve Board, the authority to grant Section 23A exemptions by order for institutions they supervise. The Dodd-Frank Act requires the regulators to notify FDIC of any proposed exemption and give FDIC 60 days to object in writing, should FDIC determine the proposed exemption constitutes an unacceptable risk to the deposit insurance fund. The Federal Reserve retains the authority to grant exemptions by regulation. The Dodd-Frank Act expanded the scope of activities that are covered by Section 23A by amending the definition of covered transactions to include derivatives transactions with affiliates and transactions with affiliates that involve securities lending and borrowing that may cause a bank to face credit exposure to an affiliate. The Dodd-Frank Act also removed the exception from the 10 percent quantitative limit for certain covered transactions between a bank and its financial subsidiary and extended section 23A and 23B to cover permitted investments in certain private funds. The Dodd-Frank Act changed the collateral requirements for 23A transactions by requiring banks to maintain the correct level of collateral at all times for covered transactions subject to collateralization. Previously, banks only had to post collateral at the time of entrance into the covered transaction. This change was designed to strengthen the protection granted to banks extending credit to their affiliates by ensuring that the collateral remains correctly valued and simultaneously shields the bank’s interest from fluctuations in market prices of collateralized assets. As of October 2013, the Federal Reserve Board has granted only two exemptions since the enactment of the Dodd-Frank Act, according to available information on its website. How the Federal Reserve Board, FDIC, and OCC might respond to requests for exemptions in the future is uncertain. Representatives from one large bank told us that their primary regulator advised them that that because of FDIC’s required approval, they should not expect exemptions to be available going forward. However, one academic has expressed concern about how exemptions might be applied under different circumstances, such as in periods of economic stress. Proprietary Trading (Volcker Rule) Agencies have not yet issued final rules to implement the Dodd-Frank Act’s restrictions on proprietary trading—trading activities conducted by banking entities for their own account as opposed to those of their clients. A number of market participants and researchers with whom we spoke maintain that the ability of banking entities to use federally insured deposits to seek profits for their own account provides incentives for them to take on excessive risk. To address these concerns, Section 619 of the Dodd-Frank Act (also known as the Volcker Rule) generally prohibits proprietary trading by insured depository institutions and their affiliates and places restrictions on sponsorship or investment in hedge and private equity funds. An FSOC study noted that implementing the act’s restrictions on proprietary trading will be challenging because certain trading activities exempted from the act’s restrictions may appear very similar to proprietary trading activities that the act seeks to restrict. While regulators issued proposed rules in November 2011 and February 2012, no final or interim final rules have been issued. Section 716 of the Dodd-Frank Act requires banks that are registered dealers of derivatives known as swaps to transfer certain swap activities to nonbank affiliates, or lose access to deposit insurance and the Federal Reserve System liquidity provided through the discount window for certain activities taken in connection with the swap entity’s swap business. Section 716’s prohibition on federal assistance to swaps entities became effective in July 2013, but the law allowed for an initial 2- year extension as well as an additional 1-year extension. Several banks applied for and were granted 2-year extensions by the Federal Reserve Board and OCC, and those financial institutions now have until July 2015 to comply, with the additional option of applying for another 1-year exemption. The Dodd-Frank Act restricts emergency authorities used by financial regulators during the most recent financial crisis, such as FDIC’s open bank assistance authority; provides FDIC with new resolution authority to resolve a large, complex failing firm in a manner that limits the disruption to the financial system; and establishes a requirement for certain firms to develop and submit to regulators resolution plans (known as living wills) for their resolution under bankruptcy. The Dodd-Frank Act restricts FDIC’s authority to provide open bank assistance to an individual failing bank outside of receivership and replaces it with a new authority, subject to certain restrictions and a joint resolution of congressional approval, to create a debt-guarantee program with broad-based eligibility. Previously, FDIC could provide open bank assistance upon a joint determination by FDIC, the Federal Reserve Board, and the Secretary of the Treasury that compliance with certain cost limitations would result in serious adverse effects on economic conditions or financial stability and that such assistance could mitigate these systemic effects. Sections 1104 through 1106 of the Dodd-Frank Act provide permanent authority for FDIC to establish a widely available program to guarantee certain debt obligations of solvent insured depository institutions or solvent bank holding companies during times of severe economic distress, upon a liquidity event finding. In addition, institutions would have to pay fees for these guarantees as they did under TLGP during the crisis. In order for FDIC to exercise the authority, the Dodd-Frank Act requires the Secretary of the Treasury (in consultation with the President) to determine the maximum amount of debt outstanding that FDIC can guarantee, and the guarantee authority requires congressional approval. Furthermore, the Dodd-Frank Act amendments to the Federal Deposit Insurance Act that provided for temporary unlimited deposit insurance for noninterest-bearing transaction accounts were repealed as of January 1, 2013. The FDIC may not rely on this authority or its former systemic risk exception authority to provide unlimited deposit insurance for transaction accounts in a future crisis. The Dodd-Frank Act includes two key reforms intended to facilitate the orderly resolution of a large failing firm without a taxpayer-funded rescue: (1) the Orderly Liquidation Authority (OLA), through which FDIC can liquidate large financial firms outside of the bankruptcy process; and (2) requirements for bank holding companies with $50 billion or more in assets and nonbank financial companies designated by FSOC to formulate and submit to regulators resolution plans (or “living wills”) that detail how the companies could be resolved in bankruptcy in the event of a material financial distress or failure. OLA gives FDIC the authority, subject to certain constraints, to liquidate large financial firms, including nonbanks, outside of the bankruptcy process. This authority allows for FDIC to be appointed receiver for a financial firm if the Secretary of the Treasury determines that the firm’s failure and its resolution under applicable federal or state law, including bankruptcy, would have serious adverse effects on U.S. financial stability and no viable private sector alternative is available to prevent the default of the financial company. While the Dodd-Frank Act does not specify how FDIC must exercise its OLA resolution authority and while a number of approaches have been considered, FDIC’s preferred approach to resolving a firm under OLA is referred to as Single Point-of-Entry (SPOE). Under the SPOE approach, FDIC would be appointed receiver of a top- tier U.S. parent holding company of the financial group determined to be in default or in danger of default following the completion of the appointment process set forth under the Dodd-Frank Act. Immediately after placing the parent holding company into receivership, FDIC would transfer some assets (primarily the equity and investments in subsidiaries) from the receivership estate to a bridge financial holding company. By taking control of the firm at the holding company level, this approach is intended to allow subsidiaries (domestic and foreign) carrying out critical services to remain open and operating. One key factor for the success of the SPOE approach is ensuring that the holding company builds up sufficient loss-absorbing capacity to enable it to recapitalize its subsidiaries, if necessary. In a SPOE resolution, at the parent holding company level, shareholders would be wiped out, and unsecured debt holders would have their claims written down to reflect any losses that shareholders cannot cover. Under the Dodd-Frank Act, officers and directors responsible for the failure cannot be retained. FDIC expects the well-capitalized bridge financial company and its subsidiaries to borrow in the private markets and from customary sources of liquidity. The new resolution authority under the Dodd- Frank Act provides a back-up source for liquidity support, the Orderly Liquidation Fund, which could provide liquidity support to the bridge financial company if customary sources of liquidity are unavailable. The law requires FDIC to recover any losses arising from a resolution by assessing bank holding companies with $50 billion or more in consolidated assets, nonbank financial holding companies designated for supervision by the Federal Reserve System, and other financial companies with $50 billion or more in consolidated assets. Progress has been made to implement the reforms related to resolving large, complex financial institutions. FDIC has largely completed the core rulemakings necessary to carry out its systemic resolution responsibilities. For example, FDIC approved a final rule implementing OLA that addressed the priority of claims and the treatment of similarly situated creditors. The FDIC plans to seek public comment on its resolution strategy by the end of 2013. In addition, FDIC has worked with other financial regulatory agencies, both domestic and foreign, to make extensive preparations and to conduct planning exercises in order to be as prepared as possible to successfully resolve a firm whose failure could threaten the stability of the financial system. Although progress has been made, FDIC and others have acknowledged that OLA is new and untested, and several challenges to its effectiveness remain. For example, FDIC could face difficulties in effectively managing the failure of one or more large bank holding companies or credibly imposing losses on the creditors of those holding companies. These challenges include the following: Financial stability concerns. FDIC may find it difficult to impose losses on all creditors of failing financial institutions because of concerns about financial stability. FDIC could in principle transfer certain bank holding company liabilities to a bridge holding company in order to protect those creditors. This concern has been subject to debate. For example, a report by the Bipartisan Policy Center, a think-tank, emphasized the importance of protecting short-term creditors of systemically important firms, while an industry association report emphasized the importance of imposing losses on short-term creditors in order to maintain market discipline. While the Dodd- Frank Act allows FDIC to treat similarly situated creditors differently, it places restrictions on FDIC’s ability to do so. Any transfer of liabilities from the receivership to the bridge financial company that has a disparate impact upon similarly situated creditors will only be made if such a transfer will maximize the return to those creditors left in the receivership and if such action is necessary to initiate and continue operations essential to the bridge financial company. Global cooperation. Some experts have questioned how FDIC would handle issues related to the non-U.S. subsidiaries of a failed firm. For example, if a global U.S. firm were at risk of being placed in receivership under OLA, foreign regulators might act to ring-fence assets of a non-U.S. subsidiary to prevent these assets from being transferred abroad where they would not be available to protect counterparties in their jurisdiction. Such a development could increase financial instability by reducing the assets available to a U.S. firm to satisfy creditors’ claims. Because SPOE involves losses borne only by holding company creditors, some observers have suggested this approach would avoid potential challenges associated with the failure of foreign subsidiaries or actions of foreign regulators to ring-fence the assets of a subsidiary. For example, if subsidiary liabilities were guaranteed under SPOE, foreign regulators would not need to ring- fence foreign subsidiaries in order to protect foreign customers or creditors. Multiple, simultaneous insolvencies. Experts have questioned whether FDIC has sufficient capacity to use OLA to handle multiple failures of systemically important firms and thus prevent further systemic disruption. In addition, FDIC may find it more difficult to impose losses on creditors when multiple large institutions are failing at once, which could reduce the credibility of OLA. According to a survey of investors, few respondents believed that FDIC could effectively use OLA to handle the resolution of multiple firms simultaneously. Title I of the Dodd-Frank Act requires bank holding companies with $50 billion or more in consolidated assets and nonbank financial companies designated by FSOC to formulate and submit to FDIC, the Federal Reserve Board, and FSOC resolution plans (or “living wills”) that detail how the companies could be resolved in the event of material financial distress or failure. The Federal Reserve Board and FDIC finalized rules relating to resolution plans, and the large financial institutions that were the first firms required to prepare such plans submitted these to regulators as expected in July 2012. Regulators reviewed these initial plans and developed guidance on what information should be included in 2013 resolution plan submissions. Experts have expressed mixed views on the usefulness of the living wills. Some experts have noted that resolution plans may provide regulators with critical information about a firm’s organizational structure that could aid the resolution process or motivate complex firms to simplify their structures, and this simplification could help facilitate resolution. However, other experts have told us that resolution plans may provide limited benefits in simplifying firm structures, in part because tax, jurisdictional, and other considerations may outweigh the benefits of simplification. Furthermore, some experts commented that although resolution plans may assist regulators in gaining a better understanding of the structures and activities of complex financial firms, the plans may not be useful guides during an actual liquidation—in part because the plans could become outdated or because the plans may not be helpful during a crisis. The Dodd-Frank Act creates new restrictions and requirements associated with the Federal Reserve Board’s Section 13(3) authority. Generally, the act prohibits use of Section 13(3) authority to assist an individual institution (as the Federal Reserve Board did with Bear Stearns and AIG). While the act continues to allow the Federal Reserve Board to use 13(3) authority to authorize programs with broad-based eligibility, it sets forth new restrictions and requirements for such programs. For example, the act prohibits a Reserve Bank from lending to an insolvent firm through a broad-based program or creating a program designed to remove assets from a single and specific institution’s balance sheet. According to Federal Reserve Board staff, under its current Section 13(3) authority, the Federal Reserve Board could re-launch emergency programs to assist the repurchase agreement, commercial paper, and other credit markets, if these markets became severely strained and if the program is broad-based and meets the other requirements imposed by the Dodd-Frank Act. The Dodd-Frank Act also includes additional transparency and reporting requirements should the Federal Reserve Board exercise its Section 13(3) authority. Although the Dodd-Frank Act requires the Federal Reserve Board to promulgate regulations that establish policies and procedures governing any future lending under Section 13(3) authority, Federal Reserve Board officials told us that they have not yet completed the process for drafting these policies and procedures. Federal Reserve Board staff have made progress in drafting these policies and procedures by regulation, but have not set time frames for completing and publicly proposing a draft regulation. While there is no mandated deadline for completion of the procedures, the Dodd-Frank Act does require the Federal Reserve Board to establish the policies and procedures “as soon as is practicable.” According to a Federal Reserve Board official, in implementing its regulatory responsibilities under the Dodd-Frank Act, the Federal Reserve Board has focused first on the required regulations that have statutory deadlines and the regulations which are specifically directed at enhancing the safety and soundness of the financial system. Although the act did not set a specific deadline, the Federal Reserve Board can better ensure accountability for implementing rulemaking and more timely completion of these procedures by setting internal timelines for completing the rulemaking process. Furthermore, finalizing these policies and procedures could help the Federal Reserve Board to ensure that any future emergency lending does not assist an insolvent firm and complies with other Dodd-Frank Act requirements. Completing these policies and procedures could also address prior recommendations we made with respect to the Federal Reserve System’s emergency assistance programs. For example, in our July 2011 report, we recommended that the Chairman of the Federal Reserve Board direct Federal Reserve Board and Reserve Bank staff to set forth the Federal Reserve Board’s process for documenting its justification for each use of section 13(3) authority. We noted that more complete documentation could help the Federal Reserve Board ensure that it is complying with the Dodd-Frank Act’s requirement on its use of this authority. The Federal Reserve Board agreed that this prior report’s recommendations would benefit its response to future crises and agreed to strongly consider how best to respond. The Dodd-Frank Act also introduced a number of regulatory changes designed to reduce the risks that the largest financial institutions pose to the financial system. A notable change is a set of new prudential requirements and capital standards designed to strengthen the regulatory oversight and capital base of large financial institutions. The Federal Reserve Board has made progress towards implementing these enhanced regulatory standards. The Dodd-Frank Act requires the Federal Reserve Board to create enhanced capital and prudential standards for bank holding companies with $50 billion or more in consolidated assets and nonbank financial holding companies designated by FSOC. The act’s provisions related to enhanced prudential standards for these covered firms include the following: Risk-based capital requirements and leverage limits. The Federal Reserve Board must establish capital and leverage standards, which as proposed would include a requirement for covered firms to develop capital plans to help ensure that they maintain capital ratios above specified standards, under both normal and adverse conditions. In addition, the Federal Reserve Board has announced its intention to apply capital surcharges to some or all firms based on the risks firms pose to the financial system. Liquidity requirements. The Federal Reserve Board must establish liquidity standards, which as proposed would include requirements for covered firms to hold liquid assets that can be used to cover their cash outflows over short periods. Single-counterparty credit limits. The Federal Reserve Board must issue rules that, in general, limit the total net credit exposure of a covered firm to any single unaffiliated company to 25 percent of its total capital stock and surplus. Risk management requirements. Publicly traded covered firms must establish a risk committee and be subject to enhanced risk management standards. Stress testing requirements. The Federal Reserve Board is required to conduct an annual evaluation of whether covered firms have sufficient capital to absorb losses that could arise from adverse economic conditions. Debt-to-equity limits. Certain covered firms may be required to maintain a debt-to-equity ratio of no more than 15-to-1. Early remediation. The Federal Reserve Board is required to establish a regulatory framework for the early remediation of financial weaknesses of covered firms in order to minimize the probability that such companies will become insolvent and the potential harm of such insolvencies to the financial stability of the United States. Some of these rules have been finalized, while others have not. For example, in October 2012, the Federal Reserve Board issued a final rule implementing the supervisory and company-run stress test requirements. In December 2012, the Federal Reserve Board issued proposed regulations designed to implement enhanced prudential standards and early remediation requirements for foreign banking organizations and foreign nonbank financial companies. The Federal Reserve Board intends to satisfy some aspects of the Dodd- Frank Act’s heightened prudential standards rules for bank holding companies with total consolidated assets of $50 billion or more through implementation of the new Basel Committee on Banking Supervision standards, known as Basel III. The new standards seek to improve the quality of regulatory capital and introduce a new minimum common equity requirement. Basel III also raises the quantity and quality of capital required and introduces capital conservation and countercyclical buffers designed to better ensure that banks have sufficient capital to absorb losses in a future crisis. In addition, Basel III establishes for the first time an international leverage standard for internationally active banks. Consistent with that intention, in July 2013 FDIC, the Federal Reserve Board, and OCC finalized a rule that revised risk-based and leverage capital requirements for banking organizations. The interim final rule implements a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement, a higher minimum Tier 1 capital requirement, and a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. In addition, in July 2013 FDIC, the Federal Reserve Board, and OCC proposed a rule to establish a new leverage buffer. Specifically, the proposed rule requires bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a Tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent. In addition to the leverage buffer for covered bank holding companies, the proposed rule would require insured depository institutions of covered bank holding companies to meet a 6 percent supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposed rule would take effect beginning on January 1, 2018. During the 2007-2009 financial crisis, federal agencies determined that expanding support to insured banks through traditional safety nets—the discount window and deposit insurance—would not be sufficient to stem disruptions to important credit markets. The Federal Reserve System, Treasury, and FDIC introduced new programs to provide general funding support to the financial sector, and some of these programs provided support at the bank holding company level or directly to nonbank financial institutions. These programs helped to improve financial conditions, and bank holding companies and their subsidiaries also experienced individual benefits from participating in particular programs, including liquidity benefits from programs that allowed them to borrow at lower interest rates and at longer maturities than might have been available in the markets. In addition, the Federal Reserve Board granted exemptions to allow banks to channel additional funding support to nonbank financial firms that lacked direct access to the federal safety nets for insured depository institutions. Government assistance to prevent the failures of large financial institutions—such as Fannie Mae, Freddie Mac, and AIG— also benefited bank holding companies, their subsidiaries, and other firms that had large risk exposures to these institutions. While these actions collectively helped to avert a more severe crisis, they raised concerns about moral hazard and the appropriate scope of federal safety nets for the financial sector. The Dodd-Frank Act contains provisions that aim to restrict future government support for financial institutions, but the effectiveness of these provisions will depend in large part on how agencies implement them. Among other things, the act places new restrictions on the Federal Reserve Board and FDIC’s emergency authorities and grants FDIC new resolution authority to resolve a large failing institution outside of the bankruptcy process. While the act continues to allow the Federal Reserve Board to use its authority under Section 13(3) of the Federal Reserve Act to authorize programs with broad-based eligibility, it sets forth new restrictions and requirements for such programs, including a requirement that lending not assist insolvent firms. The act also requires the Federal Reserve Board to establish policies and procedures governing future actions under this authority. As of the date of this report, the Federal Reserve Board has not yet completed its process for drafting these policies and procedures and has not set time frames for doing so. A Federal Reserve Board official indicated that the Board of Governors has focused first on completion of other required regulations that have statutory deadlines and the regulations that are specifically directed at enhancing the safety and soundness of the U.S. financial system. While the act did not set a specific deadline, setting time frames could help ensure more timely completion of these policies and procedures. Moreover, finalizing these procedures could help the Federal Reserve Board to ensure that any future emergency lending does not assist a failing firm and complies with other new requirements. Consistent with the changes to Federal Reserve Board authorities, the act removes FDIC’s authority to provide open bank assistance under the systemic risk exception while allowing FDIC (subject to congressional approval) to provide certain assistance through a broadly available program. FDIC continues to work to implement its new resolution authority. The viability and credibility of its resolution process as an alternative to placing a systemically important firm into bankruptcy is a critical part of removing market expectations of future extraordinary government assistance. The act also contains provisions to limit the scope of financial transactions that benefit from access to federal safety nets, although it remains to be seen how these provisions will be implemented. For example, the act could result in fewer regulatory exemptions allowing banks to provide additional funding to their nonbank affiliates. Finally, certain provisions of the act that require the Federal Reserve Board to subject the largest financial firms to heightened prudential standards have not been fully implemented but could reduce the risks that those institutions pose to the financial system. To better ensure that the design and implementation of any future emergency lending programs comply with Dodd-Frank Act requirements in a timely manner, we recommend that the Chairman of the Board of Governors of the Federal Reserve System set timeframes for completing the process for drafting policies and procedures governing the use of emergency lending authority under Section 13(3) of the Federal Reserve Act. We provided copies of this draft report to the FDIC, the Federal Reserve Board, FSOC, OCC, and Treasury for their review and comment. We also provided excerpts of the draft report for technical comment to the Federal Housing Finance Agency. All of the agencies provided technical comments, which we have incorporated, as appropriate. In its written comments, which are reprinted in appendix V, the Federal Reserve Board accepted our recommendation and noted that it has made progress toward completing draft policies and procedures governing the use of its emergency lending authority under Section 13(3) of the Federal Reserve Act. The Federal Reserve Board’s letter referred to its Chairman’s July 2013 remarks on the status of these efforts. The Chairman said that he was hopeful that a final product would be completed relatively soon, perhaps by the end of this year. He further noted that in the meantime, the law is clear about what the Federal Reserve Board can and cannot do. Based on these remarks, we conducted further audit work at the Federal Reserve Board and revised our draft to include additional information about the Federal Reserve Board’s progress towards drafting the required policies and procedures. While the Federal Reserve Board has made progress on a draft regulation, it has not set timeframes for completing the drafting process and issuing a final regulation. Setting timeframes for completing draft and final policies and procedures would help to ensure more timely completion of the rulemaking process. Furthermore, while certain restrictions outlined in the act may not require clarification by rulemaking, the Dodd-Frank Act explicitly directs the Federal Reserve Board to draft policies and procedures to help ensure that it complies with the full set of new restrictions and requirements the act imposes on its emergency lending authority. In its response, the Federal Reserve Board also noted that Federal Reserve System and FDIC assistance was repaid with interest and suggested that it would be helpful for GAO, perhaps in a future report, to analyze the offsetting costs paid by financial institutions assisted through the emergency programs. We note that our draft report contained some information and analyses related to such offsetting costs. In table 1 on pages 14 through 16, we describe the key terms of selected broad-based programs, including interest, fees, and dividends that participating institutions were required to pay for this assistance. Furthermore, our draft report noted that one indicator of the extent to which an institution benefitted from participation in an emergency government program is the relative price of estimated market alternatives to the program. On pages 21 through 29, we report the results of our analyses of the pricing terms of some of the largest programs that provided funding support to bank holding companies and other eligible financial institutions. While past GAO reports have reported on the income earned by the Federal Reserve System, FDIC, and Treasury on their crisis interventions, this information is not relevant to this report’s discussion of the support that bank holding companies received during the government’s attempt to stabilize the financial system. As we discussed, these government interventions helped to avert a more severe crisis, but raised questions about moral hazard as market participants may expect similar emergency actions in future crises. Treasury also provided written comments, which are reprinted in appendix VI. Treasury noted that the emergency programs discussed in the report were necessary to prevent a collapse of the financial system and that they created economic benefits not only for individual firms, large and small, but also for the financial system and the broader economy. Treasury also observed that the Dodd-Frank Act reforms discussed in our draft report were consistent with its commitment to ending “too big to fail.” In separate comments provided via email, Treasury and FSOC provided suggestions related to the report’s analyses of the pricing and utilization of selected emergency programs. In response to these suggestions, we added additional information about the exclusion of observations from our pricing analyses, and added data on average assets per institution to Table 3 in appendix IV, among other changes. Treasury and FSOC also suggested that GAO consider using different benchmarks for analyzing the pricing for the Federal Reserve System’s CPFF and FDIC’s DGP. While analyses of these suggested benchmarks (short-dated bond prices for CPFF and 2-3 year bond prices for DGP borrowers) could provide useful insights into the robustness of our results, these analyses also have limitations and would not necessarily improve on the analyses of the benchmarks that we conducted. We concluded that the analyses included in our report are appropriate. As noted in the report, while these analyses have limitations, we determined that they are sufficient for our purposes. We note that Federal Reserve System and FDIC staff with whom we discussed our selected benchmarks for these programs agreed that the benchmarks we used in our pricing analysis are appropriate. We are sending copies of this report to FDIC, the Federal Reserve Board, FSOC, OCC, Treasury, interested congressional committees, members, and others. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions 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 VII. The objectives of our report were to examine: (1) support banks and bank holding companies received as a result of government efforts to stabilize financial markets during the financial crisis of 2007-2009; and (2) recent statutory and regulatory changes related to government support for banks and bank holding companies and factors that could impact the effectiveness of these changes. In terms of scope, the first section of this report addresses benefits that bank holding companies and their subsidiaries received during the crisis from actual government support provided through emergency actions. It does not address benefits that some financial institutions may have received and may continue to receive from perceived government support. In a second report to be issued in 2014, we will report the results of our examination into whether the largest bank holding companies have received funding cost or other economic advantages as a result of expectations that the government would not allow them to fail. To address our first objective, we reviewed documents from financial regulatory agencies—the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), and the Department of the Treasury (Treasury) and analyzed agency data on emergency government actions to stabilize financial markets. Our review focused on (1) emergency government programs that provided funding support to bank holding companies or their subsidiaries as well as other eligible financial institutions, (2) government actions that provided extraordinary assistance to individual financial institutions, and (3) regulatory exemptions that allowed banks to engage in certain transactions with their nonbank affiliates. To identify the programs that provided the most significant funding support directly to bank holding companies or their subsidiaries, we reviewed program eligibility rules and data on program participation for programs created during the 2007-2009 financial crisis by Treasury, FDIC, and the Federal Reserve System. Specifically, we identified a set of emergency programs created during the crisis that provided at least $10 billion in direct funding support to bank holding companies or their subsidiaries. We determined that these programs included Treasury’s Capital Purchase Program (CPP); FDIC’s Temporary Liquidity Guarantee Program (TLGP); and the Federal Reserve System’s Term Auction Facility (TAF), Primary Dealer Credit Facility (PDCF), Term Securities Lending Facility (TSLF), and Commercial Paper Funding Facility (CPFF). To describe the purpose, terms, and conditions of these programs and other emergency government actions discussed in our first objective, we reviewed agency documents and included information and analyses from prior GAO work on the Troubled Asset Relief Program (TARP), the Federal Reserve System’s emergency programs, and other emergency assistance provided to the financial sector. To obtain perspectives on the benefits that bank holding companies received from emergency government actions, we reviewed papers by staff of regulators and other subject-matter experts and interviewed federal financial regulators, representatives of bank holding companies that received emergency government assistance, and academics. For the Federal Reserve System and FDIC programs that were among the programs that provided the most significant funding support, we compared the pricing and terms of this assistance (such as interest rates and fees) to indicators of funding market conditions during normal and crisis conditions. While this analysis provides a measure of program pricing versus potential market alternatives, it does not produce a precise quantification of the benefits that accrued to participating financial institutions. To determine the extent to which emergency equity support programs, CPP and the Targeted Investment Program (TIP), were priced more generously than estimated market alternatives, we reviewed estimates of the expected budget cost associated with equity funding support programs as well as a valuation analysis commissioned by the Congressional Oversight Panel (COP). For more information about the methodology for our analysis of the pricing and terms of these programs and associated limitations, see appendix III. For programs that provided the most significant direct funding support, to compare the extent to which banking organizations of various sizes used these emergency programs, we calculated the percentage of banking organization assets that were supported by emergency programs—either through capital injections, loans, or guarantees—at quarter-end dates for 2008 through 2012. For more information about our methodology for analyzing program utilization, see appendix IV. Finally, we obtained and analyzed Federal Reserve Board documentation of Federal Reserve Board decisions to grant exemptions to Section 23A of the Federal Reserve Act and approve applications from financial companies to convert to bank holding company status. To address our second objective, we identified and reviewed relevant statutory provisions, regulations, and agency documents. To identify recent statutory and regulatory changes related to government support for banks and bank holding companies, we reviewed sections of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that change rules or create new requirements for safety net programs for insured depository institutions; further restrict the types of financial activities that can be conducted by insured depository institutions or their holding companies; make changes to agencies’ emergency authorities to assist or resolve financial institutions; and subject the largest bank holding companies to enhanced regulatory oversight and standards. To corroborate our selection of Dodd-Frank Act provisions, we obtained the views of regulatory officials and financial markets experts on the provisions that are related to government support for banks and bank holding companies. To update the status of agencies’ efforts to implement these provisions, we reviewed agencies’ proposed and final rules, and interviewed staff from FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency, and Treasury. We also reviewed relevant congressional testimonies and other public statements by agency officials. We identified statutory provisions or requirements that agencies had not fully implemented and interviewed agency staff about planned steps to complete implementation. To describe factors that could impact the effectiveness of relevant provisions, we reviewed prior GAO work on the potential impacts of Dodd-Frank Act provisions. To obtain additional perspectives on factors that could impact the effectiveness of these provisions, we interviewed and reviewed the public statements and analyses of agency officials, academics, and market experts. For parts of our work that involved the analysis of computer-processed data, we assessed the reliability of these data and determined that they were sufficiently reliable for our purposes. Data sets for which we conducted data reliability assessments include Federal Reserve Board transaction data for TAF, PDCF, TSLF, and CPFF; Treasury transaction data for CPP and TIP; and FDIC transaction data for TLGP programs (the Debt Guarantee Program and the Transaction Account Guarantee Program). We have relied on Federal Reserve Board and Treasury transaction data for their respective emergency programs for past reports, and we determined that these data were sufficiently reliable for the purpose of presenting and analyzing the pricing and utilization of these programs. To assess the reliability of FDIC’s TLGP data, we interviewed FDIC staff about steps they took to maintain the integrity and reliability of program data. We also assessed the reliability of data sources used to provide indicators of the pricing and terms for market alternatives that could have been available to institutions that participated in these programs. These data sources were interbank interest rates (the London Interbank Offered Rate), additional interest rates from the Federal Reserve, credit default swap spreads from Bloomberg, repurchase agreement interest rates from IHS Global Insight, and repurchase agreement haircuts from the Federal Reserve Bank of New York. To assess the reliability of these data we took a number of steps including inspecting data for missing observations, corroborating interest rate data with other sources, and discussing data with agency officials. We determined these data were sufficiently reliable for measuring market alternatives that might have been available to participants in emergency programs. To calculate the average percentage of assets supported by emergency programs for banking organizations of different sizes, in addition to the program transaction data discussed above, we used Y-9 data for bank holding companies from the Federal Reserve Bank of Chicago, demographic data for bank holding companies and other emergency program participants from the Federal Reserve System’s National Information Center and SNL Financial, balance sheet and demographic data for depository institutions from FDIC, and gross domestic product price index data from the Bureau of Economic Analysis. To assess the reliability of these data, we reviewed relevant documentation. In addition, for the Y-9 data for bank holding companies from the Federal Reserve Bank of Chicago and the balance sheet data for depository institutions from FDIC, we conducted electronic testing of key variables. We conducted this performance audit from January 2013 through November 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. During the financial crisis, the Federal Reserve System, Treasury, and FDIC introduced new programs with broad-based eligibility to provide general funding support to the banking sector and stabilize the financial system. Federal government interventions that provided the most significant direct funding support to U.S. bank holding companies or their subsidiaries were: Treasury’s capital investments through the Troubled Asset Relief the Federal Reserve System’s credit and liquidity programs; FDIC’s guarantees of certain newly issued debt and previously uninsured deposits through the Temporary Liquidity Guarantee Program (TLGP). The first of these interventions occurred in late 2007 when the Federal Reserve System modified discount window terms and launched a new program to auction discount window loans to banks to address strains in interbank credit markets. Discount window. In August 2007, the cost of term funding (loans provided at terms of 1 month or longer) spiked suddenly—primarily due to investor concerns about banks’ actual exposures to various mortgage-related securities—and commercial banks increasingly had to borrow overnight to meet their funding needs. The Federal Reserve Board feared that the disorderly functioning of interbank lending markets would impair the ability of commercial banks to provide credit to households and businesses. To ease stresses in these markets, on August 17, 2007, the Federal Reserve Board approved two temporary changes to discount window terms: (1) a reduction of the discount rate—the interest rate at which the Reserve Banks extended collateralized loans at the discount window—by 50 basis points; and (2) an extension of the discount window lending term from overnight to up to 30 days, with the possibility of renewal. This change initially resulted in little additional borrowing from the discount window. After subsiding in October 2007, tensions in term funding markets reappeared in late November, possibly driven by a seasonal contraction in the supply of year-end funding. Term Auction Facility (TAF). On December 12, 2007, the Federal Reserve Board announced the creation of TAF to address continuing disruptions in U.S. term interbank lending markets. TAF provided term funding to depository institutions eligible to borrow from the discount window. In contrast to the traditional discount window program, which loaned funds to individual institutions at the discount rate, TAF auctioned loans to many eligible institutions at once at a market-determined interest rate. Federal Reserve Board officials noted that one important advantage of this auction approach was that it could address concerns among eligible borrowers about the perceived stigma of discount window borrowing. TAF was the largest Federal Reserve System emergency program in terms of the dollar amount of funding support provided, with TAF loans outstanding peaking at $493 billion in March 2009. In March 2008, the Federal Reserve Board invoked its emergency authority under Section 13(3) of the Federal Reserve Act to authorize two new programs to support repurchase agreement markets—large, short- term collateralized funding markets—that many financial institutions rely on to finance a wide range of securities. The Federal Reserve Board limited eligibility for these programs to the primary dealers, a designated group of broker-dealers and banks that transact with the Federal Reserve Bank of New York (FRBNY) in its conduct of open market operations. Many of the primary dealers are subsidiaries of U.S. bank holding companies or large foreign banking organizations. Term Securities Lending Facility (TSLF). On March 11, 2008, the Federal Reserve Board announced the creation of TSLF to auction 28-day loans of U.S. Treasury securities to primary dealers to increase the amount of high-quality collateral available for these dealers to borrow against in the repurchase agreement markets. In early March, the Federal Reserve Board found that repurchase agreement lenders were requiring higher haircuts for loans against a range of securities and were becoming reluctant to lend against mortgage-related securities. As a result, many financial institutions increasingly had to rely on higher-quality collateral, such as U.S. Treasury securities, to obtain cash in these markets, and a shortage of such high quality collateral emerged. Through competitive auctions that allowed dealers to bid a fee to exchange harder-to-finance collateral for easier-to-finance Treasury securities, TSLF was intended to promote confidence among lenders and to reduce the need for dealers to sell illiquid assets into the markets, which could have further depressed the prices of these assets. The market value of TSLF securities loans outstanding peaked at $236 billion in October 2008. Primary Dealer Credit Facility (PDCF). On March 16, 2008, the Federal Reserve Board announced the creation of PDCF to provide overnight collateralized cash loans to the primary dealers. In the days following the March 11 announcement of TSLF, one of the primary dealers, Bear Stearns, experienced a run on its liquidity. Because the first TSLF auction would not be held until later that month, Federal Reserve Board and FRBNY staff worked to ready PDCF for launch by Monday, March 17, 2008, when Federal Reserve Board officials feared a Bear Stearns bankruptcy announcement might trigger runs on the liquidity of other primary dealers. Although the Bear Stearns bankruptcy was averted, PDCF commenced operation on March 17, 2008. Eligible PDCF collateral initially included collateral eligible for open-market operations as well as investment-grade corporate securities, municipal securities, and asset-backed securities, including private label mortgage-backed securities. The Federal Reserve Board later expanded eligible collateral types for both TSLF and PDCF. In late 2008, the bankruptcy of Lehman Brothers triggered an intensification of the crisis and the Federal Reserve System, Treasury and FDIC took a range of new actions to provide additional support to financial institutions and key credit markets. Federal Reserve System actions. In September and October 2008, the Federal Reserve Board modified its existing programs, launched new programs, and took other actions to address worsening market conditions. Modifications to TSLF, PDCF, and TAF. On September 14, 2008, shortly before Lehman Brothers announced it would file for bankruptcy, the Federal Reserve Board announced changes to TSLF and PDCF to provide expanded liquidity support to primary dealers. Specifically, the Federal Reserve Board announced that TSLF-eligible collateral would be expanded to include all investment-grade debt securities and PDCF-eligible collateral would be expanded to include all securities eligible to be pledged in the tri-party repurchase agreements system, including noninvestment grade securities and equities. On September 29, 2008, the Federal Reserve Board also announced expanded support through TAF by doubling the amount of funds that would be available in each TAF auction cycle from $150 billion to $300 billion. Commercial Paper Funding Facility (CPFF). On October 7, 2008, the Federal Reserve Board announced the creation of CPFF under its Section 13(3) authority to provide a liquidity backstop to U.S. issuers of commercial paper. Commercial paper is an important source of short-term funding for U.S. financial and nonfinancial businesses. CPFF became operational on October 27, 2008, and was operated by FRBNY. In the weeks leading up to CPFF’s announcement, the commercial paper markets showed signs of strain: the volume of commercial paper outstanding declined, interest rates on longer-term commercial paper increased significantly, and increasing amounts of commercial paper were issued on an overnight basis as money-market funds and other investors became reluctant to purchase commercial paper at longer-dated maturities. By standing ready to purchase eligible commercial paper, CPFF was intended to eliminate much of the risk that commercial paper issuers would be unable to issue new commercial paper to replace their maturing commercial paper obligations. Other actions. The Federal Reserve System launched other new programs that provided liquidity support for other market participants, but did not serve a major source of direct support for U.S. bank holding companies or their subsidiaries. Troubled Asset Relief Program. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law to help stem the financial crisis. EESA provided Treasury with the authority to create the Troubled Asset Relief Program (TARP), under which it could buy or guarantee up to almost $700 billion of the “troubled assets” that it deemed to be at the heart of the crisis, including mortgages, mortgage-backed securities, and any other financial instruments, such as equity investments. Treasury created the Capital Purchase Program (CPP) in October 2008 to provide capital to viable financial institutions by using its authority to purchase preferred shares and subordinated debt. In return for its investments, Treasury received dividend or interest payments and warrants. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion in overall TARP funds for CPP. The allocation was subsequently reduced in March 2009 to reflect lower estimated funding needs, as evidenced by actual participation rates. The program was closed to new investments on December 31, 2009. Smaller capital infusion programs included the Targeted Investment Program (TIP) and the Community Development Capital Initiative (CDCI). Temporary Liquidity Guarantee Program. In October 2008, FDIC created TLGP to complement the Federal Reserve and Treasury programs in restoring confidence in financial institutions and repairing their capacity to meet the credit needs of American households and businesses. TLGP’s Debt Guarantee Program (DGP) was designed to improve liquidity in term-funding markets by guaranteeing certain newly issued senior unsecured debt of financial institutions and their holding companies. By guaranteeing payment of these debt obligations, DGP was intended to address the difficulty that creditworthy institutions were facing in replacing maturing debt because of risk aversion in the markets. TLGP’s Transaction Account Guarantee Program (TAGP) also was created to stabilize an important source of liquidity for many financial institutions. TAGP temporarily extended an unlimited deposit guarantee to certain noninterest-bearing transaction accounts to assure holders of the safety of these deposits and limit further outflows. By facilitating access to borrowed funds at lower rates, Treasury, FDIC, and the Federal Reserve expected TLGP to free up funding for banks to make loans to creditworthy businesses and consumers. Furthermore, by promoting stable funding sources for financial institutions, they intended TLGP to help avert bank and thrift failures that would impose costs on the insurance fund and taxpayers and potentially contribute to a worsening of the crisis. Although imperfect, one indicator of the extent to which an institution benefited from participation in an emergency program is the relative price of estimated market alternatives to the program. To determine how pricing of the emergency assistance compared to market rates, we compared the interest rates and fees charged by the Federal Reserve and FDIC for participation in the emergency lending and guarantee programs with market alternatives that might have been available to program participants. We considered a number of potential indicators of market interest rates available to financial institutions, including a survey of interbank interest rates (the London Interbank Offered Rate or LIBOR), commercial paper interest rates published by the Federal Reserve Board, spreads on bank credit default swaps (CDS), and interest rates on repurchase agreements. These interest rates and spreads provide a general indication of market alternatives available to participants but are imperfect and hence unlikely to reflect available alternatives for all participants at all points in time. For example, participants’ access to market alternatives may have been limited, there may be only limited data on the relevant private market, or market alternatives could vary across participants in ways that we do not observe in the data. Furthermore, once programs were introduced, they probably influenced the price of market alternatives, making it difficult to interpret differences between program pricing to contemporary market pricing while programs were active. Where possible—when programs had pricing rules (PDCF, CPFF, and DGP)—we applied program pricing rules during time periods that were not influenced by the program itself to compare program pricing with counterfactual market prices. By choosing high and low financial stress time periods, we can estimate the extent to which participants may have benefitted from program pricing during the financial crisis as well as the extent to which program pricing became less attractive as financial conditions returned to normal. Programs with auction-based pricing (TAF and TSLF) raise particular challenges in interpreting differences between program pricing and market pricing. Under certain assumptions, bidders would bid program pricing up to their market alternatives, which could limit potential benefits from the program as well as eliminate any difference between program and market pricing. In addition, without a pricing rule we cannot apply pricing for auction-based programs to high or low financial stress time periods not influenced by the program itself—in other words, contemporaneous pricing is contaminated by the program itself, making it difficult to determine the true market alternative. As a result, deviations between program and market pricing could indicate differences in terms rather than a benefit to participating financial institutions. These challenges suggest that our estimates of the difference between program and market pricing for auction-based programs should be interpreted with caution. TAF and TSLF also had minimum pricing determined by the Federal Reserve that was prescribed when auctions were undersubscribed. In these instances prices were no longer auction- determined in the traditional sense although the outcome of the auction (undersubscription) determined when the minimum pricing would apply. It is important to note that, among other limitations, our indicators do not capture all the benefits associated with program participation. Because our proxies for market alternatives are imperfect, market prices appear on occasion to be lower than emergency program pricing despite significant participation by financial institutions at these times. Participation by itself suggests that program prices and/or terms were relatively attractive in comparison to available alternatives—benefits could arise from price, quantity available, or other nonprice characteristics of the assistance (loan term, eligible collateral, etc.). Therefore, we discarded values of spreads between program pricing and market alternatives when they were zero or negative since negative spreads are unlikely to capture the benefits that accrued to participants. If these truly reflected market alternatives for the pool of potential participants, then there would be no participation or the participation would have been based on other nonprice considerations. We assume that the true (unobserved) market alternatives overlap at times with our observed proxies. At other times the market alternatives we are able to observe and measure may not overlap with the true market alternatives for participants (including when observed market alternatives indicate programs are more expensive than market rates). Because PDCF operated similarly to repurchase agreement markets, we compared collateral haircuts in PDCF with select asset classes in the triparty (intermediated by a clearing bank) repurchase agreement markets. We selected those asset classes where we were able to draw clear parallels between categories of collateral allowed under PDCF and categories identified in data based on private repurchase agreement market we received from the Federal Reserve Bank of New York. The haircut is an important loan term in repurchase agreement contracts and collateralized lending, the amount of additional collateral required over the value of the loan that is required to secure the loan. Securities with greater risk or less liquidity generally have larger haircuts (i.e., more collateral is required). PDCF borrowers might have utilized triparty repurchase agreement markets for alternative sources of secured borrowing during the 2007-2009 financial crisis. To determine the extent to which emergency equity support programs, CPP and TIP, were priced more generously than estimated market alternatives, we reviewed estimates of the expected budget cost associated with equity funding support programs as well as a valuation analysis commissioned by the Congressional Oversight Panel (COP). The benefits that accrued to banks from participation in equity funding support programs are likely to be proportional to the subsidy rates estimated for accounting purposes. Estimates of subsidy rates are based on a net present value analysis—the price and terms which are offered by a federal agency are compared to the lifetime expected cost (net present value) of the equity and the difference is known as a subsidy. Because private market participants might have charged a price based on a comparable net present value analysis, banks would have benefitted to the extent that the prices offered by Treasury for their equity exceed what they were likely to receive based on the net present value. The valuation analysis commissioned by COP explicitly compared the prices received by Treasury with market-based valuations of similar securities. We assume that the net present values estimated for accounting purposes by Treasury and CBO are reasonable proxies for the market valuations that are more directly estimated in the COP analysis. We used the earliest available estimates from the Congressional Budget Office (CBO) and Treasury as they were closest to market conditions at the time that programs were initiated. Estimates of these subsidy rates depended on timing and market conditions and the size of these subsidy rates likely fell over time as market conditions improved. Emergency government programs to stabilize financial markets resulted in funding support to bank holding companies and insured depository institutions (collectively, banking organizations) of various sizes. To compare use of emergency funding programs by banking organizations of different sizes, we analyzed quarterly data on bank holding companies and depository institutions for the period from 2008 to 2012 along with data on emergency program transactions that occurred during that period. We used quarterly balance sheet and demographic data on bank holding companies for the period from the first quarter of 2008 through the fourth quarter of 2012 from the Federal Reserve Bank of Chicago and the Federal Reserve System’s National Information Center (NIC), quarterly balance sheet and demographic data on depository institutions from FDIC for the period from the first quarter of 2008 through the fourth quarter of 2012, and quarterly data on the GDP price index from the Bureau of Economic Analysis (BEA) for the period from the first quarter of 2008 through the fourth quarter of 2012. We also used data on Debt Guarantee Program (DGP) and TAGP transactions from FDIC, data on Commercial Paper Funding Facility, Primary Dealer Credit Facility, TAF, and TSLF transactions from the Board of Governors of the Federal Reserve System, and data on CPP and TIP transactions from the U.S. Department of the Treasury. Finally, we used demographic data on emergency funding program participants obtained from NIC and from SNL Financial. We organized depository institutions and bank holding companies into groups—hereafter banking organizations—based on their regulatory high holder (the highest holding company in a tiered organization), where depository institutions or bank holding companies that did not indicate a high holder are assumed to be their own high holder. We calculated consolidated assets for each banking organization, excluding banking organizations for which we cannot reliably calculate consolidated assets. We excluded banking organizations with a high holder that was not in our data, e.g., banking organizations with foreign high holders. For banking organizations with a high holder that was in our data and that included at least one bank holding company, we excluded those for which the high holder did not report consolidated assets, those for which the high holder reported consolidated assets but they were less than its parent-only assets, those for which the high holder’s consolidated assets were less than consolidated assets reported by some other bank holding company in the organization, those for which none of the bank holding companies reported consolidated assets, and those that did not contain any depository institutions. For all remaining banking organizations that contained at least one bank holding company, we set consolidated assets for the group equal to consolidated assets reported by the high holder. Note that consolidated assets for a bank holding company include the assets of all consolidated subsidiaries, which generally include all companies for which the bank holding company owns more than 50 percent of the outstanding voting stock. For banking organizations with a high holder in our data that did not include a bank holding company, such as standalone depository institutions, we set consolidated assets for the banking organization equal to the depository institution’s consolidated assets. Banking organizations for which we could reliably calculate consolidated assets constitute our analysis sample. Small bank holding companies (those with assets less than $500 million) generally report their consolidated assets in the second and fourth quarters of each year, but they generally do not do so in the first and third quarters of each year. To maintain consistency in the composition of the analysis sample over time, we ultimately used results for only the second and fourth quarters of each year from 2008 to 2012. Companies that converted to bank holding companies during the crisis are included in our analysis only for the quarters for which they filed financial statements for bank holding companies with the Federal Reserve. For example, both Goldman Sachs Group, Inc. and Morgan Stanley became bank holding companies in September 2008 but neither filed form FR Y-9C, the source of our data on consolidated assets for large bank holding companies, until the first quarter of 2009. As a result, these two companies are not part of our analysis sample until 2009. We assigned banking organizations in our analysis sample to one of six size groups based on their consolidated assets, adjusted for inflation and expressed in fourth quarter 2012 dollars: less than $500 million; at least $500 million and less than $1 billion; at least $1 billion and less than $10 billion; at least $10 billion and less than $50 billion; at least $50 billion and less than $250 billion; and $250 billion or more. Table 3 shows the numbers of banking organizations in our analysis sample by size group and the numbers of banking organizations excluded from our analysis sample for the second and fourth quarters of each year from 2008 to 2012. Table 3. Numbers and average assets of banking organizations in analysis sample by size and quarter, June 30, 2008 to December 31, 2012. For each banking organization in our analysis sample, we calculated the percentage of assets funded by capital provided, loans provided, and liabilities guaranteed by emergency programs at quarter-end for the second and fourth quarters of 2008 through 2012. Capital provided by emergency programs includes capital investments by Treasury under CPP and TIP. Loans provided by emergency programs include TAF, TSLF, PDCF, and CPFF loans from the Federal Reserve System. Funding guaranteed by emergency programs includes deposits guaranteed by FDIC through TAGP and debt guaranteed by FDIC through DGP. To compare the extent to which banking organizations of various sizes used emergency programs, we calculated the percentage of banking organization assets that were supported by emergency programs—either through capital injections, loans, or guarantees—at quarter-end dates from mid-2008 through the end of 2012. In addition, for each of the three types of support, we decomposed average support as a percentage of assets for banking organizations of different sizes into its two components: (1) the rate of participation in emergency programs by banking organizations of different sizes as measured by the percentage of banking organizations using funds provided or guaranteed by the emergency programs and (2) average support as a percentage of assets for those participants. Federal Reserve System programs. TAF was established in December 2007, PDCF and TSLF were established in March 2008, and CPFF began purchasing commercial paper in October 2008. As of the end of 2008, combined CPFF, PDCF, TAF, and TSLF loans outstanding ranged from about 0.01 percent of assets on average for all banking organizations with less than $500 million in assets to about 2.5 percent of assets on average for all banking organizations with at least $50 billion but less than $250 billion in assets (see fig. 3). For banking organizations with $250 billion or more in assets, combined CPFF, PDCF, TAF, and TSLF loans outstanding were about 2.0 percent of assets on average. As of mid-2009, loans outstanding for these four programs combined had declined to less than 1 percent of assets on average for banking organizations of all sizes, and as of the end of 2009, they had declined to less than half a percent of assets on average. Through mid-2009, the larger banking organizations participated in the four Federal Reserve System programs we analyzed at higher rates than smaller banking organizations (see Panel A of table 4). However, by the end of 2009, banking organizations with $250 billion or more in assets had completely exited all of these programs, but of the remaining institutions, larger banking organizations continued to participate at higher rates than smaller banking organizations. These programs all closed in the first quarter of 2010. Among banking organizations that participated in at least one of the four Federal Reserve programs, average combined CPFF, PDCF, TAF, and TSLF loans outstanding as a percentage of assets were generally larger for smaller participants (see Panel B of table 4). As of the end of 2008, among participating banking organizations, combined CPFF, PDCF, TAF, and TSLF loans outstanding ranged from about 2.6 percent of assets on average for participants with $250 billion or more in assets to about 6.0 percent of assets on average for participants with less than $500 million in assets. As of the end of 2009, combined CPFF, PDCF, TAF, and TSLF loans outstanding ranged from about 2.1 percent of assets for participants with at least $50 billion but less than $250 billion in assets to about 7.9 percent of assets for banking organizations with less than $500 million in assets, while banking organizations with $250 billion or more in assets were no longer participating in these programs. Treasury capital investments. Treasury began making equity investments in banking organizations through CPP in October 2008 and it established TIP in December 2008. As of the end of 2008, CPP investment amounts outstanding ranged from about 0.01 percent of assets on average for banking organizations with less than $500 million in assets to about 1.9 percent of assets on average for banking organizations with at least $50 billion but less than $250 billion in assets (see fig. 4). CPP and TIP investment amounts outstanding for banking organizations with $250 billion or more were about 1.6 percent of assets on average. As of mid-2010, banking organizations with $250 billion or more in assets had repaid Treasury and exited CPP and TIP. At the same time, CPP investment amounts had fallen to less than 1 percent of assets on average for banking organizations in all smaller size groups. As of the end of 2012, banking organizations with at least $50 billion but less than $250 billion in assets had repaid Treasury and exited CPP, and CPP investment amounts had fallen to less than 0.25 percent of assets on average for banking organizations in all smaller size groups. At the end of 2008, participation rates in CPP and TIP were higher for larger banking organizations and ranged from about 0.5 percent for banking organizations with less than $500 million in assets to about 87.5 percent for banking organizations with $250 billion or more in assets (see Panel A of Table 5). As of the end of 2010, all banking organizations with $250 billion or more in assets had repaid Treasury and were no longer participating in CPP or TIP. For banking organizations that continued to participate in CPP, participation rates ranged from about 4.8 percent for banking organizations with less than $500 million in assets to 35 percent for banking organizations with at least $50 billion but less than $250 billion in assets. As of the end of 2012, all banking organizations with $50 billion or more had exited CPP and TIP. For banking organizations that continued to participate in CPP, participation rates ranged from about 2.4 percent for banking organizations with less than $500 million in assets to about 6.5 percent for banking organizations with $1-10 billion in assets (see Panel A of table 5). For participating banking organizations of all sizes, average CPP and TIP amounts outstanding were 2 to 3 percent of assets in most quarters (see Panel B of table 5). FDIC’s TLGP. FDIC implemented DGP and TAGP, the two components of TLGP, in October 2008. As of the end of 2008, average DGP- guaranteed debt and TAGP-guaranteed deposit amounts outstanding altogether as a percentage of assets were higher for larger banking organizations than smaller banking organizations and ranged from about 1.5 percent of assets on average for banking organizations with less than $500 million in assets to 7.7 percent of assets on average for banking organizations with $250 billion or more in assets (see fig. 5). By the end of 2010, differences in utilization of DGP and TAGP across banking organizations of different sizes had diminished somewhat, with DGP- guaranteed debt and TAGP-guaranteed deposit amounts outstanding altogether ranging from 1.4 percent for banking organizations with $250 billion or more in assets to about 3.2 percent for banking organizations with at least $1 billion but less than $10 billion in assets. TAGP expired on December 31, 2010, and by the end of 2011, DGP-guaranteed debt amounts outstanding were less than 1 percent of assets on average for banking organizations of all sizes. DGP expired on December 31, 2012, so none of the assets of any banking organization were funded using DGP-guaranteed debt after that date. In general, 50 percent or more of the banking organizations in every size group were using either DGP-guaranteed debt or TAGP-guaranteed deposits (or both) as funding through the end of 2010 (see Panel A of table 6). At the end of 2008, participation rates ranged from about 66.3 percent for banking organizations with less than $500 million in assets to about 92.9 percent for banking organizations with at least $1 billion but less than $10 billion in assets. At the end of 2010, participation rates ranged from about 50 percent for banking organizations with at least $50 billion but less than $250 billion in assets to 100 percent for banking organizations with $250 billion or more in assets. Participation rates for banking organizations with less than $50 billion in assets fell after TAGP expired on December 31, 2010, and in mid-2011 ranged from about 0.04 percent for banking organizations with less than $500 million in assets to about 3.1 percent for banking organizations with at least $1 billion but less than $10 billion in assets. Participation rates were about 42.1 percent and 100 percent for banking organizations with at least $50 billion but less than $250 billion in assets and with $250 billion or more in assets, respectively, at that time. By mid-2012, only banking organizations with $50 billion or more were participating in DGP, which then expired at the end of 2012. At the end of 2008, average DGP-guaranteed debt and TAGP- guaranteed deposit amounts outstanding were higher as a percentage of assets for larger participants than for smaller participants and ranged from about 2.3 percent for participants with less than $500 million in assets to about 8.8 percent for participants with $250 billion or more in assets (see Panel B of table 6). At the end of 2010, average DGP- guaranteed debt and TAGP-guaranteed deposit amounts outstanding as a percentage of assets had fallen for banking organizations with $50 billion or more in assets but not for smaller banking organizations. At that time, DGP-guaranteed debt and TAGP-guaranteed deposit amounts outstanding ranged from about 1.4 percent of assets on average for participants with $250 billion or more in assets to about 5.6 percent of assets on average for participants with $10-50 billion in assets. TAGP expired on December 31, 2010, and as of the end of 2011, DGP- guaranteed debt amounts outstanding were less than 2 percent of assets on average for banking organizations of all sizes. DGP expired on December 31, 2012. Lastly, our analysis found that the six largest bank holding companies as of December 31, 2012—all with consolidated assets greater than $500 billion—used the emergency programs to varying degrees but had exited most by the end of 2009. Table 7 shows the percentage of consolidated assets funded by DGP-guaranteed debt, TAGP-guaranteed deposits, TAF loans, CPFF loans, PDCF loans, TSLF loans, and CPP and TIP equity investments for the largest bank holding companies at year-end from 2008 to 2012. For comparison purposes we also show the average percent of assets funded by the same programs for the six banking organization size groups over the same period. Table 7. Average outstanding amounts of equity provided, loans provided, and liabilities guaranteed by emergency programs for select bank holding companies and for banking organizations by size at year end, 2008-2012. Goldman Sachs Group, Inc. and Morgan Stanley became bank holding companies in September 2008 but did not file form FR Y-9C, the source of our data on consolidated assets, for the fourth quarter of 2008. In addition to the contact named above, Karen Tremba (Assistant Director), Jordan Anderson, Bethany M. Benitez, Stephanie Cheng, John Fisher, Michael Hoffman, Risto Laboski, Courtney LaFountain, Jon Menaster, Marc Molino, Robert Rieke, and Jennifer Schwartz made key contributions to this report. | The federal government extended unprecedented support to financial institutions to stabilize financial markets during the financial crisis. While these actions helped to avert a more severe crisis, they raised questions about the appropriate scope of government safety nets for financial institutions. GAO was asked to review the benefits that large bank holding companies (those with more than $500 billion in assets) have received from actual and implied government support. This is the first of two reports GAO will issue on this topic. This report examines (1) actual government support for banks and bank holding companies during the financial crisis, and (2) recent statutory and regulatory changes related to government support for banks and bank holding companies. GAO reviewed relevant statutes, regulations, and agency documents; analyzed program transaction data; and interviewed regulators, representatives of financial institutions, and academics. In a second report to be issued in 2014, GAO will examine any funding or other economic advantages the largest bank holding companies have received as a result of implied government support. During the 2007-09 financial crisis, the federal government's actions to stabilize the financial system provided funding support and other benefits to bank holding companies and their subsidiaries. Agencies introduced new programs with broad-based eligibility that provided funding support to eligible institutions, which included entities that were part of a bank holding company and others. Programs that provided the most significant support directly to bank holding companies or their subsidiaries included Department of the Treasury capital investment programs, Federal Reserve System lending programs, and Federal Deposit Insurance Corporation (FDIC) guarantee programs. Together these actions helped to stabilize financial conditions, while participating firms also accrued benefits specific to their own institutions, such as liquidity benefits from programs that allowed them to borrow at longer maturities and at interest rates that were below possible market alternatives. At the end of 2008, program use--measured for each institution as the percentage of total assets supported by the programs--was higher on average for banks and bank holding companies with $50 billion or more in total assets than for smaller firms. The six largest bank holding companies were significant participants in several emergency programs but exited most by the end of 2009. Differences in program use were driven in part by how institutions funded themselves. For example, while smaller banks relied more on deposit funding, larger bank holding companies relied more on short-term funding markets and participated more in programs that assisted these markets. In addition to these programs, the Board of Governors of the Federal Reserve System (Federal Reserve Board) granted several regulatory exemptions to allow banks to provide liquidity support to their nonbank affiliates and for other purposes. Finally, government assistance to individual troubled firms benefited these firms, their counterparties, and the financial system. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) contains provisions that aim to modify the scope of federal safety nets, restrict future government support and strengthen regulatory oversight for the banking sector, but implementation is incomplete and the effectiveness of some provisions remains uncertain. Agencies have finalized certain changes to traditional safety nets for insured banks, but impacts of provisions to limit the scope of transactions that benefit from these safety nets will depend on how they are implemented. The act also places restrictions on emergency authorities used by regulators during the crisis to assist financial firms. For example, it prohibits the use of these authorities to rescue a specific failing firm. The Federal Reserve Board is required by the act to establish policies and procedures implementing changes to its emergency authority under Section 13(3) of the Federal Reserve Act, but it has not completed its process for drafting the required procedures or set time frames for doing so. Setting time frames could help ensure more timely completion of these procedures. FDIC has made progress toward implementing its new authority under the Dodd-Frank Act to resolve a large failing firm. FDIC continues to work to address potential obstacles to the viability of its resolution process as an alternative to bankruptcy, such as challenges that could arise when resolving more than one failing firm. Finally, the Federal Reserve Board has finalized certain enhanced prudential standards for the largest financial firms intended to reduce the risks these firms could pose to the financial system. GAO recommends that the Federal Reserve Board establish timeframes for completing its process for drafting procedures related to its emergency lending authority to ensure timely compliance with Dodd-Frank Act requirements. The Federal Reserve Board accepted this recommendation. |
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The United States has a long history of military research and development. To help conduct and manage this research, DOD has a diverse network of 80 in-house laboratories and 26 test centers. Their missions range from basic scientific research to direct technical support to operational commands. The management, operations, and funding for these disparate laboratories and test centers also vary among the services. Over the past decade, several organizations, panels, and commissions have identified significant personnel and resource problems facing the laboratories and test centers. For example, several studies found that the laboratories needed more flexibility in personnel rules governing the scientific workforce in order to attract and retain staff. Similarly, several recent studies identified problems with declines in investment and infrastructure, resulting in outdated facilities and technical equipment. To help the laboratories and test centers with these problems, the Congress enacted legislation in fiscal years 1999 and 2000 establishing pilot programs for laboratories and test centers to propose innovative partnerships, business-like practices, and human capital initiatives. The 1999 pilot program focused on partnerships and business-like practices, while the 2000 program focused more on human capital initiatives. Together, the two pilot programs authorized the Secretary of Defense to provide one laboratory and one test center in each service the authority to explore innovative methods for partnering with universities and private sector entities to conduct defense research and development; attract a workforce balance between permanent and temporary personnel and with an appropriate skill and experience level; develop or expand innovative methods of operation that provide more defense research for the dollar; and waive any restrictions on these methods that are not required by law. A total of 10 laboratories and test centers from all 3 services participated in the pilot programs. They are listed in appendix I. Both programs were authorized for 3 years. The 1999 pilot expired in March 2002; the 2000 pilot, in March 2003. For both programs, DOD was required to submit preliminary and final reports to the Congress on program activities. The preliminary report for the 1999 program was submitted in July 1999. However, as of the date of this report, the three other reports have not been submitted. In fiscal year 2003, the Congress authorized another 3-year pilot program and extended the 1999 and 2000 pilot programs until 2005. Under the new 2003 pilot program, the Secretary of Defense is to provide one laboratory and one test center in each service the authority to use innovative personnel management methods to ensure that the participants can employ and retain an appropriately balanced workforce, and effectively shape the workforce to fulfill the organization mission; develop or expand innovative methods of using cooperative agreements with private sector and educational organizations to promote the technological industrial base for critical defense technologies and facilitate the training of a future scientific and technical workforce; and waive any restrictions not required by law. As of May 2003, DOD had not identified any participants for the 2003 pilot program. The 2003 legislation also requires DOD to issue three reports, including a January 2003 report on its experience with the 1999 and 2000 pilot programs, barriers to implementation of these programs, and proposed solutions to overcome these barriers. According to DOD officials, this report has been drafted, but as of May 2003, it had not been submitted to the Congress. Since the inception of the pilot programs in 1999, 178 initiatives have been proposed, but only 4—or 2 percent—have been implemented under the pilot programs. Participating laboratories and test centers proposed initiatives covering a variety of areas, including business-like practices, partnerships with industry and academia, and human capital innovations. We found that laboratories focused many of their proposals on human capital innovations, while test centers tended to concentrate on business-like practices and partnerships. Over the course of the 1999 and 2000 pilot programs, the laboratories and test centers proposed 178 human capital, business, and partnership initiatives. As shown in table 1, slightly over half of the initiatives dealt with human capital and the remainder dealt with business-like practices and partnerships. Overall, the laboratories proposed substantially more initiatives than did the test centers. Furthermore, the laboratories and test centers focused on different types of initiatives. The laboratories more often proposed human capital initiatives, while the test centers overwhelmingly focused on business and partnership initiatives. Laboratory officials told us that they are especially concerned about attracting top-quality scientists to replace a retiring workforce. Test center officials told us that they are focused on modernizing their infrastructure and developing new methods of sharing the cost of operations. Proposals for business-like practices included many initiatives to streamline or improve local operations. Some initiatives focused on expanding the use of innovative techniques such as other transactions or cooperative agreements. Several other proposals sought the authority to reinvest fees or revenues into facilities revitalization. For example, one Navy laboratory proposed imposing a surcharge for its services and using that revenue to fund capital investments, and an Air Force laboratory proposed using facility construction as a valid in-kind contribution under cooperative agreements. Partnership proposals included initiatives such as collaborative research agreements with Arnold Engineering Development Center and the University of Tennessee Space Institute to create a formal business bond to pursue research in laser-induced surface improvement technology and university flight research. The Army’s Aberdeen Test Center proposed a limited liability company. Under this concept, industry, academia, and government would form a profit-making company to conduct research and testing at the installation. The test center proposed using its share of the profits to reinvest in the infrastructure at Aberdeen. Several human capital initiatives focused on recruiting and retention flexibilities as well as additional voluntary separation incentives. These proposals included initiatives to streamline hiring of experts and consultants; accelerate promotions for scientists and engineers; provide retention bonuses for key scientists; and hire students directly after graduation. Several participants submitted proposals for direct hire authority to allow faster hiring of scientists, and several submitted proposals for voluntary retirement incentives as a mechanism for reshaping the workforce. Almost none of the 178 proposed initiatives were approved and implemented using the pilot programs’ authorities. As figure 1 shows, only 2 percent—or 4 proposals—were implemented under the pilot programs. In contrast, 74 percent were blocked or dropped during the review process or remain on hold awaiting resolution. The four implemented initiatives were donating laboratory equipment directly to local schools, waiving top-level certification of certain service agreements with streamlining cooperative agreements to facilitate collaborative work agreements with outside activities, and granting temporary relief from some mandatory personnel placement reviews. Officials at the laboratories that proposed these initiatives told us that they were considered minor changes with little impact on the larger problems facing the laboratories. Twelve times as many initiatives—24 percent—were implemented using different authorities than the pilot programs. For example, several laboratories requested the authority to appoint retired military members to civilian positions without having to wait the required 180 days. This requirement was waived using a different authority than the pilot programs. Another human capital initiative—to appoint senior scientists from private industry—was authorized by subsequent legislation. In the business/partnership category, the 46th Test Group at Holloman Air Force Base used other authorities to negotiate a complex leasing arrangement with industry to install a radar test facility at White Sands Missile Range. This effort took several years and overcame many contractual and regulatory barriers. In addition, a Navy laboratory streamlined foreign license applications using another authority. The low level of implementation of the proposed initiatives occurred for two primary reasons. First, DOD did not develop an effective process for implementing the pilot programs. Second, DOD determined that proposed human capital initiatives—for example, requests for the authority to hire directly or offer voluntary retirement incentives—were in conflict with statutory provisions. DOD did not provide standardized guidance on proposal requirements or feedback for improving proposals; coordinate or prioritize proposals; or clarify decision-making authority for proposal review and approval. DOD also did not designate a strong focal point to coordinate the pilot programs, advocate process improvements, and provide assistance and advice to participants. The lack of a strong focal point exacerbated other process gaps. According to officials at DOD laboratories, test centers, and headquarters, DOD did not provide standardized guidance on proposal requirements or feedback for improving proposals (or, in many cases, information on the status of proposals submitted for approval). Proposals often lacked specificity and detail. Many were broadly conceptual or generic in nature and lacked a detailed business case that linked their contribution to overall objectives for the pilot programs. For example, a proposal to permit scientists to serve in a leadership role in professional societies failed to include details of the problems encountered, and the potential to improve operations. Similarly, several proposals for direct hire authority failed to include a business case to explain what specific needs this authority would address or how it would address them. Lack of specificity and business case detail led to the failure of many initiatives to win approval. DOD attorneys told us that many proposals were so vague that it was impossible to determine whether or not the proposed initiatives could meet legal requirements. At a department level, DOD also did not coordinate or prioritize proposals, thereby precluding decisions on how best to pursue common interests and issues such as direct hiring authority or forming partnerships with universities. Instead, each participant submitted proposals individually, and thus multiple independent proposals were often submitted for the same or similar issues. DOD attorneys pointed out that it would have been more effective to group proposals by common theme and prioritize them. They believed a unified approach and prioritized proposals with clearly written, specific plans for solving well-defined problems would have enabled them to more effectively assist participants with resolving legal issues. DOD did not clarify decision-making authority for proposal review and approval. Many organizations and individuals were stakeholders in proposal review and approval, and they often had differing management structures, concerns, and interests. Stakeholders included military and civilian leaders, attorneys, and human capital and personnel staff at several levels: the local installation where participating laboratories and test centers were housed; the individual service; and OSD. The roles and decision-making authority of the various stakeholders were never negotiated and clarified. As a result, many players at multiple organizational levels had—and took—an opportunity to say “no” to a particular proposal, but it remained unclear who had the authority to say “yes.” For example, some participants believed that the pilot program legislation gave the director of a participating laboratory or test center the authority to approve a proposed initiative. OSD officials, however, believed that the proposed initiatives had to be approved at higher levels. The role of the services was also unclear. Some laboratory and test center directors initially sent proposals directly to OSD’s Directorate of Defense Research and Engineering (DDR&E), bypassing their service headquarters. Others sent proposals to their service headquarters for approval before submitting the proposals to DDR&E. Eventually, however, each of the service headquarters decided to become more heavily involved in the approval process and provide service-level responses to proposals. These service-level responses often came into play after proposals had been sent directly to DDR&E for approval, further complicating the approval process. Within OSD, both DDR&E and Personnel and Readiness (P&R) had substantial stakes in the human capital proposals—DDR&E because it is charged with oversight and management of defense laboratories and P&R because it has the authority within DOD for human capital issues. However, DDR&E and P&R never agreed on a process for approving proposals. In addition, for the past year P&R’s attention has been focused primarily on developing DOD’s proposed new civilian human capital management system, the National Security Personnel System (NSPS), which the Secretary of Defense recently submitted to the Congress. DOD officials believe that, if enacted, NSPS will provide flexibility to make necessary human capital changes. The Undersecretary of Defense P&R directed that implementation of new personnel initiatives be placed on hold during the development of NSPS so that the existing system could be studied to identify needs and best practices. Consequently, P&R officials believed it would be premature for DOD to implement new personnel initiatives during this time. DOD did not designate a strong focal point to coordinate the pilot programs, advocate process improvements, and provide assistance and advice to participants. This exacerbated the other process gaps. Without such a focal point, participants found their own individual ways to develop proposals and get them reviewed. Several officials agreed that a strong focal point would be helpful. For example, DOD attorneys stated that the laboratories or someone acting as their focal point needed to define the issues they wanted to resolve. The attorneys noted that a focal point could have more successfully drawn upon their expertise and experience with addressing legal challenges in other innovative programs (e.g., demonstration projects). Some pilot program participants also agreed a strong focal point was needed, but they had some concerns regarding the amount of influence and authority he or she should have. According to officials at DOD laboratories, test centers, and headquarters, human capital initiatives were generally in conflict with title 5 of the United States Code. Title 5 provides the framework for standard and equitable personnel practices across the federal government and is the current foundation for management of the DOD civilian workforce. Over time, the Office of Personnel Management has added implementing rules and regulations to the framework. Proposed human capital initiatives often sought relief from these provisions, for example, requests for the authority to hire directly or offer voluntary retirement incentives. However, after reviewing the legislation, the DOD Office of General Counsel advised that the 1999 and 2000 legislation did not provide the authority to waive personnel rules based on title 5 provisions. Rather, the office advised that the pilot programs’ authorities allow only for changes that could already be accomplished under existing DOD regulations. In other words, the pilot programs did not provide any new or additional authority to waive existing personnel rules and regulations grounded in title 5. Consequently, absent statutory authority beyond that provided by the pilot programs, human capital proposals in conflict with title 5 and its implementing rules and regulations could not be implemented. Many initiatives fell into this category. The 2003 pilot program faces several implementation challenges. First, as of May 2003, DOD had not addressed implementation problems. Thus, proposals made via the 2003 pilot program will face the same obstacles as previous proposals. Second, human capital initiatives will continue to face title 5 challenges. Like the earlier legislation, the 2003 legislation does not provide DOD any new authority. Hence, initiatives proposed under the 2003 pilot program will encounter the same statutory restrictions as previous initiatives. P&R officials believe that, if implemented, NSPS will provide the flexibility to make necessary human capital changes, thereby eliminating the need for the pilot programs in this area. However, NSPS has not yet been enacted, and if enacted, it will still require an implementation process. Finally, laboratories and test centers may be reluctant to participate in the new pilot program. Many participants in the earlier pilots told us they were discouraged by their experience and consequently unwilling to repeat it. Some expressed frustration with the lack of guidance and feedback on their proposals; others questioned whether management was really committed to the pilot program. Even those few participants that had proposals approved were wary of expending additional resources on another pilot program. While DOD appears to recognize a need to address human capital and business operations issues specific to laboratories and test centers, it has not effectively managed the pilot programs. If DOD intends to use the pilot programs to address laboratory and test center issues, it will have to address the factors—both process and statutory—that blunted previous proposals made through the pilot programs. The small volume of approved proposals, coupled with DOD’s not providing status reports required by the Congress, has left the Congress uninformed about what objectives DOD would like to achieve with the laboratories and test centers, how it plans to achieve those objectives, and what vehicles it plans to use. This information will be important to the success of any future actions. We recommend that by March 31, 2004, the Secretary of Defense inform the Congress of DOD’s objectives regarding human capital and business operations in the laboratories and test centers, how it plans to meet these objectives, and what vehicles it will use to meet them. We also recommend that by March 31, 2004, the Secretary of Defense develop a process for proposing, evaluating, and implementing human capital, business, and partnership initiatives for the laboratories and test centers, regardless whether by the pilot authority or by some other vehicle. Such a process should include instructions for proposal requirements such as linking to overall goals and measurable objectives and the need for a business case, and specification of procedures for proposal submission and review and providing feedback on proposal quality and scope. Finally, we recommend that the Secretary of Defense designate a strong focal point to receive, evaluate, and prioritize all proposals and work with laboratory and test center directors, legal counsel, personnel and other specialists to develop sound and well-developed business cases and strategies to obtain needed changes. In written comments on a draft of this report, DOD states that it does not concur with our recommendations because it has already taken actions that in effect implement them. While the actions DOD cites that it has taken are important to implementing our recommendations, they are not sufficiently specific to address the problems identified in our report. DOD’s written comments are contained in appendix II. Regarding our first recommendation—that DOD inform the Congress of its human capital and business objectives for the laboratories and test centers and the strategies it will employ to meet them—DOD did not concur. DOD discusses various high-level, agencywide initiatives it has taken to address human capital and business issues in general and stated that the Congress has been made aware of these initiatives, obviating the need for additional reporting. We continue to believe that additional reporting is necessary. We recognize that the general initiatives DOD discusses may provide ways of helping the laboratories and test centers; however, to be effective, they must be made specific, that is, developed into targeted strategies and plans that address the particular problems the laboratories and test centers face. DOD has not provided the Congress sufficient details on how the general initiatives will be used to address laboratories’ and test centers’ objectives and problems. Regarding our second recommendation—that DOD develop a process for proposing, evaluating, and implementing human capital and business-like practices initiatives for the laboratories and test centers—DOD did not concur. DOD states that it has already introduced new agencywide management processes—the Business Initiative Council and the submission of the NSPS proposal to the Congress—to address human capital and business issues in general. However, DOD has not detailed how these general initiatives will apply to the laboratories and test centers or address our process concerns. For example, while the Business Initiative Council may have an effective process for proposing, evaluating, and implementing laboratory and test center business-like practices initiatives, DOD has not provided sufficient information for us to make such a determination. We also recognize that NSPS may address some of the human capital problems faced by the laboratories and test centers, but this system is still under consideration by the Congress. Until it becomes law, we believe it is premature to cite it as an effective management tool. With regard to our third recommendation—that DOD designate a strong focal point to work with the laboratories and test centers to develop, evaluate, prioritize, and coordinate proposed initiatives—DOD did not concur. DOD states that the recently created position of Undersecretary for Laboratories and Basic Sciences has oversight responsibility for all laboratory initiatives and that it is establishing a new Defense Test Resources Management Center that will oversee the test centers. DOD asserts that these two organizations will perform as focal points. However, DOD has not detailed how these organizations will fulfill this role and work with the laboratories and test centers to overcome the many barriers noted in our report. During our review, we met with officials from the following organizations in the Office of the Secretary of Defense: the Director, Defense Research and Engineering; the Director, Operational Test and Evaluation; the General Counsel, and the Deputy Undersecretary of Defense for Personnel and Readiness. We also met with officials from the Army Research Laboratory, Aberdeen Test Center, Army Medical Research and Materiel Command, Naval Research Laboratory, Naval Undersea Warfare Center, Air Force Research Laboratory, Air Force Research Laboratory’s Space Vehicles Directorate, and 46th Test Wing. We also discussed pilot program issues with each participating laboratory or center. To determine the initiatives proposed to date and their status, we obtained records from OSD and service officials. From these records and from discussions with each participant, we compiled a listing of initiatives proposed by each participating laboratory and test center. We verified the listing and the current status of each initiative with cognizant service officials. To determine what obstacles inhibited DOD’s implementation of the pilot programs, we obtained documentation and data from pilot program participants as well as from OSD officials. We also discussed statutory obstacles with the officials from DOD’s Office of General Counsel and Undersecretary of Defense for Personnel and Readiness. We discussed management and procedural obstacles with officials from the Director, Operational Test and Evaluation and Defense Research and Engineering. In addition, we discussed all obstacles with the participating laboratories and test centers. The problems facing the laboratories and test centers have been documented by many organizations, panels, and commissions. We did not independently verify these problems or the findings and conclusions of these entities. We conducted our review from July 2002 to April 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Major contributors to this report were Catherine Baltzell, Arthur Cobb, Christopher Durbin, Rae Ann Sapp, Sylvia Schatz, and Katrina Taylor. If you have any questions regarding this report, please call me at (202) 512-4841. | In fiscal years 1999, 2000, and 2003, the Congress authorized pilot programs to help the Department of Defense (DOD) laboratories and test centers explore innovative business partnerships and human capital strategies. Congressional concerns about DOD's implementation of the pilot programs have been growing. The Congress mandated that GAO review pilot program implementation. GAO (1) identified the pilot initiatives proposed and their current status, (2) examined factors that affected implementation, and (3) assessed implementation challenges the 2003 pilot program faces. The 1999 and 2000 pilot programs have not worked as intended. Since their inception, 178 initiatives have been proposed by the participating laboratories and test centers but only 4--or 2 percent--were implemented under the pilot programs. Participants proposed initiatives covering a variety of areas, including business-like practices, partnerships, and human capital innovations. The pilot programs were not effective because DOD lacked an effective implementation process and proposed human capital initiatives were not consistent with statutory provisions. First, DOD did not provide standardized guidance on proposal requirements, coordinate proposals, or clarify decision-making authority for proposal review and approval. Furthermore, DOD did not designate a strong focal point to provide assistance and advice to participants and advocate process improvements. The lack of a strong focal point exacerbated other process gaps. Second, DOD attorneys advised that the pilot programs did not provide authority to make most of the proposed human capital changes. Implementation of the new 2003 pilot program faces several challenges. First, DOD has not addressed implementation problems. For example, clear guidance is still lacking and decision-making authority is still unclear. Second, the 2003 pilot program provides no change in authority concerning human capital initiatives. Finally, laboratories and test centers may be reluctant to participate. Many participants in the earlier pilots told us they were discouraged by their experience and consequently unwilling to repeat it. |
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All international mail and packages entering the United States through the U.S. Postal Service and private carriers are subject to potential CBP inspection at the 14 USPS international mail facilities and 29 express consignment carrier facilities operated by private carriers located around the country. CBP inspectors can target certain packages for inspection or randomly select packages for inspection. CBP inspects for, among other things, illegally imported controlled substances, contraband, and items— like personal shipments of noncontrolled prescription drugs—that may be inadmissible. CBP inspections can include examining the outer envelope of the package, using X-ray detectors, or opening the package to physically inspect the contents. Each year the international mail and carrier facilities process hundreds of millions of pieces of mail and packages. Among these items are prescription drugs ordered by consumers over the Internet, the importation of which is prohibited under current law, with few exceptions. Two acts—the Federal Food, Drug, and Cosmetic Act and the Controlled Substances Import and Export Act—specifically regulate the importation of prescription drugs into the United States. Under the Federal Food, Drug, and Cosmetic Act, as amended, FDA is responsible for ensuring the safety, effectiveness, and quality of domestic and imported drugs and may refuse to admit into the United States any drug that appears to be adulterated, misbranded, or unapproved for the U.S. market as defined in the act. Under the act and implementing regulations, this includes foreign versions of FDA-approved drugs if, for example, neither the foreign manufacturing facility nor the manufacturing methods and controls were reviewed by FDA for compliance with U.S. statutory and regulatory standards. The act also prohibits reimportation of a prescription drug manufactured in the United States by anyone other than the original manufacturer of that drug. According to FDA, prescription drugs imported by individual consumers typically fall into one of these prohibited categories. However, FDA has established a policy that allows local FDA officials to use their discretion to not interdict personal prescription drug imports that do not contain controlled substances under specified circumstances, such as importing a small quantity for treatment of a serious condition, generally not more than a 90-day supply of a drug not available domestically. The importation of prohibited foreign versions of prescription drugs like Viagra (an erectile dysfunction drug) or Propecia (a hair loss drug), for example, would not qualify under the personal importation policy because approved versions are readily available in the United States. In addition, the Controlled Substances Import and Export Act, among other things, generally prohibits personal importation of those prescription drugs that are controlled substances, such as Valium. (See app. II for a general description of controlled substances.) Under the act, shipment of controlled substances to a purchaser in the United States from another country is only permitted if the purchaser is registered with DEA as an importer and is in compliance with the Controlled Substances Import and Export Act and DEA requirements. As outlined in the act, it would be difficult, if not impossible, for an individual consumer seeking to import a controlled substance for personal use to meet the standards for registration and related requirements. Figure 1 illustrates the two acts that specifically govern the importation of prescription drugs into the United States. It also presents the roles of FDA, DEA, and CBP in implementing those acts. CBP is to seize illegally imported controlled substances it detects on behalf of DEA. CBP may take steps to destroy the seized and forfeited substance or turn the seized substance over to other federal law enforcement agencies for further investigation. CBP is to turn over packages suspected of containing prescription drugs that are not controlled substances to FDA. FDA investigators may inspect such packages and hold those that appear to be adulterated, misbranded, or unapproved, but must notify the addressee and allow that individual the opportunity to present evidence as to why the drug should be admitted into the United States. If the addressee does not provide evidence that overcomes the appearance of inadmissibility, then the item is refused admission and returned to the sender. Investigations that may arise from CBP and FDA inspections may fall within the jurisdiction of other federal agencies. DEA, ICE, and FDA investigators have related law enforcement responsibilities and may engage in investigations stemming from the discovery of illegally imported prescription drugs. Although USPS’s Inspection Service does not have the authority, without a federal search warrant, to open packages suspected of containing illegal drugs, it may collaborate with other federal agencies in certain investigations. Also, ONDCP is responsible for formulating the nation’s drug control strategy and has general authority for addressing policy issues concerning the illegal distribution of controlled substances. ONDCP’s authority does not, however, include prescription drugs that are not controlled substances. CBP and FDA do not systematically collect data on the volume of prescription drugs and controlled substances they encounter at the mail and carrier facilities. On the basis of their own observations and limited information they obtained at selected mail and carrier facilities, CBP and FDA officials believe the volume of prescription drug importation into the United States is substantial and increasing. However, neither agency has developed reliable estimates of the number of prescription drugs imported into the country. Further, the available information shows that some imported prescription drugs can pose safety concerns. We reported in June 2004 that prescription drugs purchased from some foreign-based Internet pharmacies posed safety risks for consumers. FDA officials said that they cannot assure the public of the safety and quality of drugs purchased from foreign sources that are largely outside the U.S. regulatory system. Of particular concern is the access to highly addictive controlled substances, which can be imported by consumers of any age sometimes without a prescription or consultation with a physician. CBP and FDA do not systematically collect data on the volume of prescription drugs and controlled substances they encounter at the mail and carrier facilities. Without an accurate estimate of the volume of importation of prescription drugs, federal agencies cannot determine the full scope of the importation issue. Yet FDA officials have often testified regarding the large and steadily increasing volume of packages containing prohibited prescription drugs entering the United States through the international mail and carrier facilities. CBP and FDA officials have said that in recent years they have observed increasingly more packages containing prescription drugs being imported through the mail facilities. However, neither agency has complete data to estimate volume of importation. For example, a CBP official recently testified that the agency did not have data on the total number of packages containing imported controlled substances. A CBP official at a mail facility told us that to determine the total volume of prescription drug importation would require that the CBP personnel inspect each mail item—which they currently do not do, in part because mail from certain countries bypasses inspection— and tally those that were suspected of containing prescription drugs. This official said that he did not have the resources at his facility for such an undertaking. In addition, neither CBP nor FDA tracked the number of packages suspected of containing prescription drugs that were held for FDA review. FDA officials told us that CBP and FDA currently have no mechanism for keeping an accurate count of the volume of illegally imported drugs, because of the large volume of packages arriving daily through the international mail and carriers. Furthermore, FDA officials told us that FDA did not routinely track items that contained prescription drugs potentially prohibited for import that they released and returned for delivery to the recipient. However, they said that FDA had begun gathering from the field information on the imported packages it handles, but as of July 2005, this effort was still being refined. CBP and FDA, in coordination with other federal agencies, have conducted special operations to gain insight regarding the volume of imported prescription drugs entering through selected mail facilities. Generally, these were onetime, targeted efforts to identify and tally the packages containing prescription drugs imported through a particular facility during a certain time period and to generate information for possible investigation. The limited data collected have shown wide variations in volume. For example, CBP officials at one mail facility estimated that approximately 3,300 packages containing prescription drugs entered the facility in 1 week. CBP officials at another mail facility estimated that 4,300 packages containing prescription drugs entered the facility in 1 day. While these data provide some insight regarding the number of packages containing prescription drugs at a selected mail facility during a certain time period, the data are not representative of other time periods or projectable to other facilities. Debate continues over the estimated volume of prescription drugs entering the United States through mail and express carrier facilities. During congressional hearings over the past 4 years, FDA officials, among others, have presented estimates of the volume of imported prescription drugs ranging from 2 million to 20 million packages in a given year. Each estimate has its limitations; for example, some estimates were extrapolations from data gathered at a single mail facility. More recently, a December 2004 HHS report stated that approximately 10 million packages containing prescription drugs enter the United States—nearly 5 million packages from Canada and another 5 million mail packages from other countries. However, these estimates also have limitations, being partially based on extrapolations from limited FDA observations at international mail branch facilities. Specifically, FDA officials told us that FDA developed its estimate for Canadian drugs entering the country using (1) IMS Health estimates that 12 million prescriptions sold from Canadian pharmacies were imported into the United States in 2003 and (2) FDA’s experience during special operations at various locations from which it concluded that there appeared to be about 2.5 prescriptions in each package. According to FDA officials, the estimate for other countries was an extrapolation using the estimated 5 million packages from Canada in conjunction with FDA’s observations, likewise made during special operations, that 50 percent of the mail packages enter from countries other than Canada. FDA officials have said that they cannot provide assurance to the public regarding the safety and quality of drugs purchased from foreign sources, which are largely outside of their regulatory system. Additionally, FDA officials said that consumers who purchase prescription drugs from foreign-based Internet pharmacies are at risk of not fully knowing the safety or quality of what they are importing. They further said that while some consumers may purchase genuine products, others may unknowingly purchase counterfeit products, expired drugs, or drugs that were improperly manufactured. CBP and FDA have done limited analysis of the imported prescription drugs identified during special operations, and the results have raised questions about the safety of some of the drugs. For example, during a special operation in 2003 to identify and assess counterfeit and potentially unsafe imported drugs at four mail facilities, CBP and FDA inspected 1,153 packages that contained prescription drugs. According to a CBP report, 1,019, or 88 percent, of the imported drug products were in violation of the Federal Food, Drug, and Cosmetic Act or the Controlled Substances Import and Export Act. Some of the drugs were foreign versions of U.S.- approved drugs that are unapproved for import, including Lipitor (a cholesterol-lowering drug), Viagra, and Propecia. Other drugs never had FDA approval. For example, Taro-warfarin, an apparent unapproved version of Warfarin, which is used to prevent blood clotting, was imported from Canada. The drug raised safety concerns because its potency may vary depending on how it is manufactured, and it requires careful patient monitoring because it can cause life-threatening bleeding if not properly administered. A CBP laboratory analyzed 180 of the 1,153 drugs inspected, which showed that many of the imported drugs could pose safety risks. The drugs tested included some that were withdrawn from the U.S. market for safety reasons, animal drugs not approved for human use, and drugs that carry risks because they require careful dosing or initial screening. In addition, other drugs tested were found to contain controlled substances prohibited for import, and some of the drugs contained no active ingredients. Figure 2 illustrates the results of the CBP laboratory analysis. In a past review we found that prescription drugs ordered from some foreign-based Internet pharmacies posed safety risks for consumers. Specifically, in a June 2004 report, we identified several problems associated with the handling, FDA approval status, and authenticity of 21 prescription drug samples we purchased from Internet pharmacies located in several foreign countries—Argentina, Costa Rica, Fiji, Mexico, India, Pakistan, the Philippines, Spain, Thailand, and Turkey. Our work showed that most of the drugs, all of which we received via consignment carrier shipment or the U.S. mail, were unapproved for the U.S. market because, for example, the labeling or the foreign manufacturing facility, methods, and controls were not reviewed by FDA. Of the 21 samples: None included dispensing pharmacy labels that provided instructions for use, and only about one-third included warning information. Thirteen displayed problems associated with the handling of the drug. For example, three samples that should have been shipped in a temperature- controlled environment arrived in envelopes without insulation, and five samples contained tablets enclosed in punctured blister packs, potentially exposing them to damaging light or moisture. Two were found to be counterfeit versions of the products we ordered. Two had a significantly different chemical composition than that of the product we had ordered. We found fewer problems among 47 samples purchased from U.S. and Canadian Internet pharmacies. Although most of the drugs obtained from Canada were of the same chemical composition as that of their U.S. counterparts, most were unapproved for the U.S. market. We said that it was notable that we identified numerous problems among the samples we received despite the relatively small number of drugs we purchased, consistent with problems that had been recently identified by state and federal regulatory agencies. Similarly, during our current review, we observed that some prescription drugs imported through the mail and carrier facilities were not shipped in protective packages, including some wrapped in foil or in plastic bags. In addition to being shipped without containers, the drugs also lacked product identifications, directions for use, or warning labels. For some drugs, the origin and contents could not be immediately determined by CBP or FDA inspection. Figure 3 illustrates an example of drugs that were sent without labeling. Federal agencies and professional medical and pharmacy associations have found that consumers, of any age, can obtain highly addictive controlled substances from Internet pharmacies, sometimes without a prescription or consultation with a physician. For example, a DEA official recently testified that Internet pharmacies that offer to sell controlled substances directly to consumers without a prescription and without requiring consultation with a physician can increase the possibility of addiction, access to counterfeit products, and adverse reactions to medications. According to the Office of National Drug Control Policy, Internet pharmacies that offer controlled substances bypass traditional regulations and established safeguards and expose consumers to potentially counterfeit, adulterated, and contaminated products. Both DEA and ONDCP have found that the easy availability of controlled substances directly to consumers over the Internet has significant implications for public health, given the opportunities for misuse and abuse of these addictive drugs. The American Medical Association recently testified that Internet pharmacies that offer controlled substances without requiring a prescription or consultation with a physician contribute to the growing availability and increased use of addictive drugs for nonmedical purposes. To demonstrate the ease with which controlled substances can be obtained via the Internet, the National Association of Boards of Pharmacy received prescription drugs from four different Internet pharmacies. From one of the Internet pharmacies, the association reported it received a shipment of Valium—a schedule IV controlled substance used to treat muscle spasm or anxiety—despite providing no prescription and the height and weight information for a small dog. The association also reported that 2 days after it received its shipment of 30 tablets of Xanax—a schedule IV controlled substance used to treat anxiety—the Internet pharmacy sent daily refill reminders via electronic mail. In our July 2004 testimony, we reported that while some targeted packages were inspected and interdicted, many others either were not inspected and were released to the addressees or were released after being held for inspection. At the time, FDA officials said that because they were unable to process the volume of targeted packages, they released tens of thousands of packages containing drug products that may violate current prohibitions and could have posed a health risk to consumers. In August 2004, FDA issued standard operating procedures to prioritize package selection, package examination, and admissibility determinations. While the new procedures may encourage uniform practices at the mail facilities, packages that contain potentially prohibited prescription drugs continue to be released to the addressee. Recently, CBP also issued a new policy for processing packages with controlled substances without using time- consuming seizure and forfeiture procedures. While the policy may reduce processing time and encourage the interdiction of more controlled substances, CBP officials do not know whether the new policy has had an impact on the volume of prohibited prescription drug importation. In our July 2004 testimony, we reported that CBP and FDA officials at selected mail and carrier facilities used different practices and procedures to inspect and interdict packages that contain prescription drugs. While each of the facilities we visited targeted packages for inspection, the basis upon which packages were targeted could vary and was generally based on several factors, such as the inspector’s intuition and experience, whether the packages originated from suspect countries or companies, or were shipments to individuals. At that time, CBP officials told us that the factors could also include intelligence gained from prior seizures, headquarters, or other field locations. Specifically, officials at one facility we visited targeted packages on the basis of the country of origin. At this facility, FDA provided CBP with a list of seven countries to target, the composition of which changed periodically, and asked that CBP hold the packages they suspected of containing prescription drugs from those countries. Typically, CBP officials at this facility released packages to the addressee containing prescription drugs that were not from one of the targeted countries. Officials at another facility targeted packages based on whether the packages were suspected of containing a certain quantity of prescription drugs. At this facility, CBP officials held packages containing prescription drugs that appeared to exceed a 90-day supply—a violation of one of the criteria in FDA’s personal importation policy. If the package contained prescription drugs, including in some cases controlled substances, that appeared to be 90 pills or less, it was typically released. FDA officials at this facility told us that every week CBP turned over to FDA hundreds of packages that contained quantities of prescription drugs that appeared to exceed the 90-day supply. However, the FDA officials said that they were able to process a total of approximately 20 packages per day and, as a result, returned many of the packages for release to the addressee. FDA officials explained that 20 packages a day is an approximation because some packages can take longer than others to inspect, particularly if the packages contain many different types of drugs that need to be examined. According to FDA officials and data, in fiscal year 2004, FDA field personnel physically inspected approximately 20,800 packages containing prescription drugs entering the United States through the international mail facilities. Of the packages inspected, FDA’s data showed that 98 percent were refused entry and marked returned to sender and the remaining, about 450, were released to the addressee. The FDA data indicate the number of packages physically inspected by FDA personnel and the results of that process; they do not specify the number of individual prescription drugs or smaller packages of drugs within a larger package. Most important, these data do not indicate the universe of packages of prescription drugs coming through the mail facilities. Figure 4 shows bins containing packages of suspected prescription drugs being held for FDA review and possible inspection at one mail facility. In August 2004, FDA issued standard operating procedures that, according to FDA officials, have been adopted nationwide. According to FDA, the purpose of the new procedures was to “provide a standard operating environment for the prioritized selection, examination and admissibility determination of FDA-regulated pharmaceuticals imported into the United States via international mail.” Under the procedures, CBP personnel are to forward to FDA personnel any mail items, from FDA’s national list of targeted countries and based on local criteria, that appear to contain prescription drugs. The procedures outline how FDA personnel are to prioritize packages for inspection, inspect the packages, and make admissibility determinations. Deviations from the procedures must be requested by facility personnel and approved by FDA management. While the new procedures should encourage processing uniformity across facilities, many packages that contain prescription drugs are still released. Specifically, according to the procedures, all packages forwarded by CBP but not processed by FDA inspectors at the end of each workday are to be returned for delivery by USPS to the recipient. However, according to the procedures, packages considered to represent a significant and immediate health hazard may be held over to the next day for processing. CBP and FDA officials at two facilities told us that the new procedures resulted in an increase in the number of packages CBP personnel refer to FDA. Officials at one facility estimated that CBP referrals have increased from approximately 500 to an average of 2,000 packages per day. The FDA officials noted that the procedures did not resolve the heavy volume of prescription drug importation or FDA’s ability to deal with the volume, nor were they designed to do so. While the packages that are not targeted are released without inspection, so are many packages that are targeted and referred to FDA personnel. At one facility, FDA officials estimated that each week they return without inspection 9,000 to 10,000 of the packages referred to them by CBP. They said these packages were given to USPS officials for delivery to the addressee. If this facility were to maintain that level of release, about half a million packages per year would be delivered to addressees. In our July 2004 testimony, we reported that CBP officials were to seize the illegally imported controlled substances they detected. However, at that time, some illegally imported controlled substances were not seized by CBP. For example, CBP officials at one mail facility told us that they experienced an increased volume of controlled substances and, in several months, had accumulated a backlog of over 40,700 packages containing schedule IV substances. To keep the drugs from entering U.S. commerce and to clear the backlog, a CPB official at the facility said that CBP’s headquarters office granted them permission to send most of the drugs back to the sender. CBP officials at another facility told us that certain controlled substances were a priority and seized when detected; priority substances included anabolic steroids (a category of schedule III drugs that promote muscle growth and potentially boost athletic performance), and gamma hydroxybutyrate (a schedule I drug that acts as a central nervous system depressant). At this facility, other controlled substances encountered that were not a priority and that were shipped in small amounts, less than a 90-day supply, could be released to the addressee. CBP officials at another facility we visited turned over packages they suspected of containing controlled substances in small amounts to FDA for processing. Neither returning an illegally imported controlled substance to the sender nor releasing it to the addressee is in accordance with federal law. CBP field personnel said they did not have the resources to seize all the controlled substances they detected. Officials said that the seizure process can be time-consuming, taking approximately 1 hour for each package containing controlled substances. According to CBP officials, when an item is seized, the inspector records the contents of each package— including the type of drugs and the number of pills or vials in each package. If the substance is a schedule I or II controlled substance, it is to be summarily forfeited without notice, after seizure. However, if it is a schedule III through V controlled substance, CBP officials are to notify the addressee that the package was seized and give the addressee an opportunity to contest the forfeiture by providing evidence of the package’s admissibility and trying to claim the package at a forfeiture hearing. To address the seizure backlog and give CBP staff more flexibility in handling controlled substances, in September 2004, CBP implemented a national policy for processing controlled substances, schedule III through V, imported through the mail and carrier facilities. According to the policy, packages containing controlled substances should no longer be transferred to FDA for disposition, released to the addressee, or returned to the sender. CBP field personnel are to hold the packages containing controlled substances in schedules III through V as unclaimed or abandoned property as an alternative to a seizure. According to a CBP headquarters official, processing a controlled substance as abandoned property is a less arduous process because it requires less information be entered into a database than if the same property were to be seized. Once CBP deems the controlled substance to be unclaimed property, the addressee is notified that he or she has the option to voluntarily abandon the package or have the package seized. If the addressee voluntarily abandons the package or does not respond to the notification letter within 30 days, the package will be eligible for immediate destruction. If the addressee chooses to have the package seized, there would be an opportunity to contest the forfeiture and claim the package, as described above. CBP also instituted an on-site data collection system at international mail and express carrier facilities to record schedule III through V controlled substances interdicted using this new process. From September 2004 to the end of June 2005, CBP reported that a total of approximately 61,700 packages of these substances were interdicted, about 61,500 at international mail facilities and 200 at express carrier facilities. Generally, CBP officials we interviewed told us that the recent policy improved their ability to quickly process the volume of schedule III through V controlled substances they detected. A CBP official at one facility said that the abandonment process is faster than the seizure process, as it requires much less paperwork. A CBP headquarters official told us that the abandonment process takes an inspector at a mail facility about 1 minute to process a package. He added that the new policy was intended to eliminate the backlog of schedule III through V controlled substances at the facilities. Figure 5 shows schedule III through V controlled substances that were abandoned during a 1-month period at one mail facility and awaiting destruction. While the recent policy may have expedited processing, CBP officials in the field and in headquarters said that they do not know whether the new policy has had any impact on the volume of controlled substances illegally entering the country that reach the intended recipient. Generally, CBP officials do not know the extent of packages that contain controlled substances that are undetected and released. For example, CBP officials at one facility told us that they used historical data to determine the countries that are likely sources for controlled substances and target the mail from those countries. They do not know the volume of controlled substances contained in the mail from the nontargeted countries. A CBP official at another facility said that he believed the volume of controlled substances imported through the facility had begun to decrease but had no data to support this claim. One CBP official at a carrier facility told us that because the express carrier environment is constantly changing with new routes, service areas, and increasing freight volume and because smuggling trends shift in response to past enforcement efforts, he could not ascertain the quantities of packages containing controlled substances that are undetected by CBP. Packages containing prescription drugs can also bypass FDA inspection at carrier facilities because of inaccurate information about the contents of the package. Unlike packages at mail facilities, packages arriving at carrier facilities we visited are preceded by manifests, which provide information from the shipper, including a description of the packages’ contents. While the shipments are en route, CBP and FDA officials are to review this information electronically and select packages they would like to inspect when the shipment arrives. FDA officials at two carrier facilities we visited told us they review the information for packages described as prescription drugs or with a related term, such as pharmaceuticals or medicine. CBP and FDA officials told us that there are no assurances that the shipper’s description of the contents is accurate. The FDA officials at the carrier facilities we visited told us that if a package contains a prescription drug but is inaccurately described, it would not likely be inspected by FDA personnel. According to FDA officials, FDA field personnel are not continually on-site at the two carrier facilities we visited. At the FDA field office that has responsibility for inspecting packages at one carrier facility, we observed FDA field personnel reviewing electronic information regarding packages that were en route to the carrier facility. The official said that the field office has electronic information regarding an average of 400 packages per day available for review. If the shipper does not provide enough information about its package, FDA field personnel can request that the carrier detain the package until more information is provided electronically or until the FDA personnel can visit the facility to conduct a physical inspection of the package. The number of physical inspections at the facilities we visited varied depending on the number of packages electronically reviewed. FDA field personnel, responsible for inspection at the other carrier facility, reported that in September 2004 they electronically requested that an average of 20 packages per day be held at the facility for a physical inspection. However, on occasion when the FDA personnel went to the facility to conduct the inspection, the packages were unavailable because they could not be found, had been delivered to the recipient by the carrier, or had been returned to the shipper. According to FDA headquarters officials, since our visit, FDA field personnel may now be visiting the carrier facility on a more routine basis. In contrast, CBP inspectors are located on-site at the carrier facilities we visited. As a result, CBP personnel are able to inspect packages upon arrival of the shipment. In addition, according to CBP officials at the facility, CBP’s on-site presence allows the inspectors to conduct random inspections, on a routine basis, of packages as they are processed at the facility. Instead of relying solely on the information provided by the shipper, CBP personnel said they conduct random inspections, on a daily basis, as another means to identify items that may be unapproved for import. CBP officials told us that they conduct these inspections because the shipper’s information can be inaccurate. During our visit we observed the CBP personnel randomly inspect several hundred packages selected. During these random inspections, CBP inspectors told us that they often come across packages containing noncontrolled prescription drugs, which they will set aside for FDA inspectors. For example, during a random inspection, CBP officials found and held for FDA 13 packages containing a human growth hormone—prohibited from import—that were inaccurately described as glassware. In contrast, according to FDA field personnel with inspection responsibility at the two carrier facilities we visited, few random inspections of packages were performed and when they occurred they were typically part of a special operation. For example, an FDA field official told us that FDA personnel planned to perform one random inspection effort per year. CBP officials told us that they would like to have FDA personnel on-site to improve coordination efforts. One CBP Port Director said that he would like to have FDA personnel on-site to share data, perform analysis to identify trends from CBP’s referrals, and be available to immediately review prescription drugs. A CBP headquarters official also said that it would be helpful if FDA personnel were on-site to enable CBP officials to confer with them to identify controlled substances that are not clearly labeled. FDA officials told us that because FDA personnel review information regarding the packages electronically, there was no advantage to being physically on-site. Further, they said the responsible district can supply personnel to physically work at a given carrier facility for field examinations on an as-needed basis. FDA officials also noted that FDA is not reimbursed by the carriers to maintain staff on-site. By contrast, private express carriers reimburse the federal government for the personnel and equipment costs of the CBP staff located on-site. FDA officials said that there is not a provision under current law that would enable carriers to reimburse FDA so that it could maintain an on-site presence. We identified three factors beyond inspection and interdiction that have complicated federal efforts to enforce the prohibitions on prescription drugs imported for personal use: (1) the volume of importation has strained limited federal resources; (2) Internet pharmacies, particularly foreign-based sites, can operate outside of the U.S. regulatory system for noncontrolled and controlled prescription drugs and can evade federal law enforcement actions; and (3) current law requires that FDA notify addressees that their packages have been detained because they appear unapproved for import and give them the opportunity to provide admissibility evidence regarding their imported items. The current volume of prescription drug imports, coupled with competing agency priorities, has strained federal inspection and interdiction resources allocated to the mail facilities. CBP and FDA officials told us that the increased incidence of American consumers ordering drugs over the Internet in recent years has significantly contributed to the increase in imports through the international mail. CBP officials said that they are able to inspect only a fraction of the large number of mail and packages shipped internationally. In 2004, FDA testified that each day thousands of individual packages containing prescription drugs are imported illegally into the United States. FDA officials have said that the large volume of imports has overwhelmed the resources they have allocated to the mail facilities. Officials add that they have little assurance that the available field personnel are able to inspect all the packages containing prescription drugs illegally imported for personal use through the mail. Agencies have multiple priorities, which can affect the resources they are able to allocate to the mail and carrier facilities. For example, FDA has multiple areas of responsibility, which include, among other things, regulating new drug product approvals, the labeling and manufacturing standards for existing drug products, and the safety of a majority of food commodities and cosmetics, which, according to FDA officials, all go to FDA’s mission of protecting the public health while facilitating the flow of legitimate trade. CBP’s primary mission is preventing terrorists and terrorist weapons from entering the United States while also facilitating the flow of legitimate trade and travel. FDA and CBP personnel operate in multiple venues, such as land border crossings and seaports. DEA’s multiple priorities include interdicting illicit drugs such as heroin or cocaine, investigating doctors and prescription forgers, and pursuing hijackings of drug shipments. DEA officials told us that they have limited resources and often have to balance efforts to address prescription drug importation with their other priorities. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required the HHS Secretary to conduct a study on the importation of drugs that included a review of the adequacy of federal agency resources to inspect and interdict drugs unapproved for import. The report, issued in 2004, states that substantial resources are needed to prevent the increasing volume of packages containing small quantities of drugs from entering the country. The Secretary found that despite agency efforts, including those with CBP, FDA currently does not have sufficient resources to ensure adequate inspection of the current volume of personal shipments of prescription drugs entering the United States. CBP is also in the early stages of assessing the resources it needs at the mail facilities to address the volume of controlled substance imports. However, CBP officials admit that an assessment of resource needs is difficult because they do not know the scope of the problem and the impact of the new procedures. A CBP official told us that CBP has a statistician working on developing estimates on the volume of drugs entering mail facilities; however, he was uncertain whether this effort would be successful or useful for allocating resources. Likewise, in March 2005, FDA officials told us that they had begun to gather from the field information on the imported packages it handles, such as the number of packages held, reviewed, and forwarded for further investigation. However, as of July 2005, they could not provide any data because, according to the officials, this effort was new and still being refined. Internet pharmacies, particularly foreign-based sites, which operate outside the U.S. regulatory system, pose a challenge for regulators and law enforcement agencies. In our 2004 report, we described how traditionally, in the United States, the practice of pharmacy is regulated by state boards of pharmacy, which license pharmacists and pharmacies and establish and enforce standards. To legally dispense a prescription drug, a licensed pharmacist working in a licensed pharmacy must be presented a valid prescription from a licensed health care professional. The requirement that drugs be prescribed and dispensed by licensed professionals helps ensure patients receive the proper dose, take the medication correctly, and are informed about warnings, side effects, and other important information about the drug. However, the Internet allows online pharmacies and physicians to anonymously reach across state and national borders to prescribe, sell, and dispense prescription drugs without complying with state requirements or federal regulations regarding imports. Recently, FDA officials have testified that inadequately regulated foreign Internet sites have become portals for unsafe and illegal prescription drugs. FDA officials state that if a consumer has an adverse drug reaction or other problem, he or she may have little to no recourse because the operator of the pharmacy is often not known and FDA has limited authority to take action against foreign operators. The nature of the Internet has challenged U.S. law enforcement agencies investigating Internet pharmacies, particularly foreign-based sites. Internet sites can easily be installed, moved, or removed in a short period of time. FDA officials said that one Internet site can be composed of multiple related sites and links, thereby making their investigations complex and resource intensive. This fluidity makes it difficult for law enforcement agencies to identify, track, monitor, or shut down those sites that operate illegally. Further, FDA officials said that some Internet pharmacies do not disclose enough information on their Web sites to allow consumers to determine if the drugs they purchased were approved in the United States and dispensed according to state and federal laws. Some Internet pharmacies also do not disclose enough or accurate information regarding the source of the drugs they offer. An Internet pharmacy can claim that the drugs they offer originate in one country, but the drugs may actually be manufactured in another country. Similarly, the anonymous nature of the Internet allows consumers of any age to obtain drugs without a legitimate medical need. According to FDA, when the Internet is used for an illegal sale of prescription drugs, to conduct an investigation they may need to work with the Department of Justice to establish grounds for a case, develop charges, and take action as they would if another sales medium, such as a store or magazine, had been used. Investigations can be more difficult when they involve foreign-based Internet sites, whose operators are outside of U.S. boundaries and may be in countries that have different drug approval and marketing approaches than the United States has. For example, according to DEA officials, drug laws and regulations regarding controlled substances vary widely by country. DEA officials told us their enforcement efforts with regard to imported controlled substances are hampered by the different drug laws in foreign countries. Internet pharmacy sites can be based in countries where the marketing and distribution of certain controlled substances are legal. Steroids, for example, sold over the Internet may be legal in the foreign country in which the online pharmacy is located. Federal agencies can face challenges when working with foreign governments to share information or develop mechanisms for cooperative law enforcement. For example, FDA officials have testified that they possess limited investigatory jurisdiction over sellers in foreign countries and have had difficulty enforcing the law prohibiting prescription drug importation when foreign sellers are involved. A DEA official told us that the agency introduced a resolution at the March 2004 International Narcotics Control Board conference in Vienna, Austria, to encourage member states to work cooperatively on Internet pharmacy issues. However, the DEA official told us that it was difficult to convince some foreign governments that the illegal sales of prescription drugs over the Internet is a global problem and not restricted to the United States. FDA and DEA officials told us that they work with commercial firms, including express carriers, credit card organizations, Internet providers, and online businesses to obtain information to investigate foreign pharmacies, but these investigations are complicated by legal and practical considerations. FDA and DEA officials said that the companies have been willing to work with government agencies to stop transactions involving prescription drugs prohibited from import, and some have alerted federal officials when suspicious activity is detected. However, officials also identified current legal and practical considerations that complicated obtaining information from organizations, such as credit card organizations. These considerations included privacy laws; federal law enforcement agencies’ respective subpoena authority, priorities, and jurisdictions; and the ease with which merchants engaged in illegal activity can enter into a new contract with a different bank to use the same payment system. For example, privacy laws sometimes limit the extent to which companies (e.g., credit card organizations) will provide information to federal agencies about parties to a transaction. According to FDA, DEA, and ICE officials, credit card organizations and banks and other financial institutions that issue credit cards will not provide to the agencies information about the parties involved in the transaction without a subpoena. Representatives from the credit card companies we contacted explained that these issues generally are resolved if the agency issues a properly authorized subpoena for the desired information. (See app. III for information on federal enforcement agencies’ work with credit card organizations to enforce prohibitions on prescription drug importation.) FDA headquarters officials said that packages that contain prescription drugs for personal use that appear to be prohibited from import pose a challenge to their enforcement efforts because these packages cannot be automatically refused. Before any imported item is refused, the current law requires FDA to notify the owner or consignee that the item has been held because it appears to be prohibited and give the product’s owner or consignee an opportunity to submit evidence of admissibility. If the recipient does not respond or does not present enough evidence to overcome the appearance of inadmissibility, then the item can be returned to the sender, or in some cases destroyed. FDA officials told us that this requirement applies to all drug imports that are held under section 801(a) of the Federal Food, Drug, and Cosmetic Act. Nonetheless, they said that they believe this notification process is time consuming because each package must be itemized and entered into a database; a letter must be written to each addressee; and the product must be stored. The process can take up to 30 days per import—and can hinder their ability to quickly process packages containing prescription drugs prohibited from import. According to FDA investigators, in most instances, the addressee does not present evidence to support the drugs’ admissibility, and the drugs are ultimately provided to CBP or the U.S. Postal Service for return to sender. FDA headquarters officials told us that the Standard Operating Procedures, introduced in August 2004 and discussed earlier in this report, were an attempt to help FDA address the burden associated with the notification process because it was designed to focus resources on packages containing drugs considered to be among the highest risk. FDA concerns about the notification process are not new. In testimony before Congress, FDA and the Secretary of HHS raised concerns about the notification process, noting that it is time-consuming and resource intensive. However, FDA’s testimony did not propose any legislative changes to address the concerns it identified. In May 2001, FDA’s Acting Principal Deputy Commissioner wrote a memorandum to the Secretary of HHS expressing concern about the growing number of drugs imported for personal use and the dangers they posed to public health. The memorandum explained that because of the notice and opportunity to respond requirements, detaining and refusing entry of mail parcels was resource intensive. The Acting Principal Deputy Commissioner proposed, among other things, the removal of the requirement that FDA issue a notice before it could refuse and return personal use quantities of FDA- regulated products that appear violative of the Food, Drug, and Cosmetic Act. He noted that removal of the notification requirement would likely require legislation, but without this change, FDA could not effectively prohibit mail importation for personal use. As of July 2005, according to FDA officials and an HHS official, the Secretary had not responded with a specific legislative proposal to change FDA’s notification requirement. FDA officials said that there are some complicating issues associated with eliminating the notification requirement. For example, they said that one of the arguments against eliminating the notification requirement is the importance of providing due process, which basically gives individuals the opportunity to present their case as to why they should be entitled to receive the property, in this case prescription drugs that they ordered from a foreign source. Another is to what extent the law should be changed to cover all imported prescription drugs and other products. In addition, USPS indicated that any discussion of options to expedite the processing and disposition of prescription drugs must consider international postal obligations, specifically the requirements of the Universal Postal Union (UPU). FDA officials said that currently, the notification requirement also applies to large commercial quantities of prescription drugs and other nonpharmaceutical products for which the requirement is not a problem. They said it has become a burden only because FDA and CBP are overwhelmed with a large volume of small packages. FDA officials said that they have considered other options for dealing with this issue, such as summarily returning each package to the sender without going through the process. However, they said that the law would likely need to be changed to allow this, and, as with the current process, packages that are returned to the sender could, in turn, be sent back by the original sender to go through the process again. They said that another option might be destruction, but they were uncertain whether they had the authority to destroy drugs FDA intercepts; they indicated that the authority might more likely lie with CBP. Regardless, FDA officials said that whatever approach was adopted, FDA might continue to encounter a resource issue because field personnel would still need to open and examine packages to ascertain whether they contained unapproved prescription drugs. Federal agencies have been taking steps to address Internet sales of prescription drugs since 1999, but these efforts have not positioned them to successfully prevent the influx of prescription drugs that are being imported through foreign pharmacies. CBP has recently organized a task force to coordinate federal efforts related to prescription drugs imported for personal use. This task force appears to be a step in the right direction. However, its efforts could be further enhanced if the task force established a strategic framework to promote accountability and guide resource and policy decisions. In January 2004, CBP organized an interagency task force to address various issues associated with unapproved prescription drugs entering the United States from foreign countries. Although CBP, FDA, ONDCP, DEA, and ICE appear to be working together to address these very complex issues, their efforts could be enhanced by a strategic framework that guides resource and policy decisions and promotes accountability. Such a framework that establishes measurable, quantifiable goals and strategies for achieving these goals, including a determination of resources needed to achieve the goals, would enhance the ability of agency officials and congressional decision makers to ensure accountability and consistent and focused attention to enforcing the prohibitions on personal importation. Congress enacted the Government Performance and Results Act of 1993 to have agencies focus on the performance and results of programs, rather than on program resources and activities. The principles of the act include (1) establishing measurable goals and related measures, (2) developing strategies for achieving results, and (3) identifying the resources that will be required to achieve the goals. The act does not require agencies to use these principles for individual programs, but our work related to the act and the experience of leading organizations have shown that a strategic approach or framework is a starting point and basic underpinning for performance-based management—a means to strengthen program performance. A strategic framework can serve as a basis for guiding operations and help policy makers, including congressional decision makers and agency officials, make decisions about programs and activities. Our work has also shown that a strategic framework can be useful in providing accountability and guiding resource and policy decisions, particularly in relation to issues that are national in scope and cross agency jurisdictions, such as prescription drug importation. When multiple agencies are working to address aspects of the same problem, there is a risk that overlap and fragmentation among programs can waste scarce funds, confuse and frustrate program customers, and limit overall program effectiveness. Use of a strategic framework may help mitigate this risk. Since 1999, federal law enforcement and regulatory agencies have organized various task forces and working groups to address issues associated with purchasing prescription drugs over the Internet; however, recent efforts have begun to focus particular attention on imported prescription drugs. For example, according to an FDA official, many of FDA’s efforts, started in 1999, focused on Internet pharmaceutical sales by illicit domestic pharmacies and the risks associated with purchasing those drugs, rather than drugs that are being imported from foreign countries. This official said that although FDA had established working groups and advanced media campaigns to address problems associated with drugs purchased over the Internet from domestic sources, imported drugs have added a new dimension that was only incidentally recognized during efforts begun in 1999. He said that the plans developed by FDA in 1999 are still viable as far as domestic sales are concerned, but they have not been refocused to reflect concerns about imported prescriptions and did not position federal law enforcement agencies to anticipate the increased volume of drugs that are imported by individuals. More recent efforts have focused on prescription drugs entering international mail and express carrier facilities. In January 2004, the CBP Commissioner initiated an interagency task force on pharmaceuticals, composed of representatives from CBP, FDA, DEA, ICE, and ONDCP as well as legal counsel from the Department of Justice. According to the Commissioner, the proposal to create the task force was prompted by “intense public debate and congressional scrutiny, which has resulted in increasing pressure being applied to regulatory and law enforcement agencies to develop consistent, fair policies” to address illegal pharmaceuticals entering the United States. The Commissioner proposed that the task force achieve five specific goals, and according to a CBP official, five working groups were established to achieve these goals. Figure 6 shows the task force goals, the five working groups, and the goals of each working group. A CBP official told us that the task force is designed to foster cooperation among the agencies responsible for enforcing the laws governing prescription drugs imported for personal use. The task force was created to go beyond interdiction at the mail and carrier facilities. The official also said that the task force was fashioned to deal with supply and demand issues, thereby reducing the volume of drugs entering these facilities. For example, on the demand side, the public awareness working group is responsible for conveying information about the health and safety risks of imported prescription drugs, and on the supply side, the working cooperatively with industry group is responsible for, among other things, ways of identifying rogue Internet sites. CBP officials and other members of the task force provided examples of activities being carried out or planned by task force working groups that are discussed below. The working group on mail and express consignment operator facilities procedures has carried out special operations at five international mail and three express carrier facilities to examine parcels suspected of containing prohibited prescription drugs over specific periods of time, such as 2 or 3 days. While similar operations have occurred since 2000, a CBP official told us that those conducted under the task force are multiagency efforts. Among other things, task force members gather data about the source, type, and recipients of the drugs and test the contents of the parcels to determine whether they are counterfeit or otherwise prohibited. These operations are expected to continue during the remainder of 2005 at all of the remaining mail facilities and some of the carrier facilities. The working group on targeting/data research is using the results of special operations to analyze data retrieved during the special operations and determine how these data can be used to guide future operations and enforcement efforts. Also, ICE was working with CBP and the government of an Asian country to identify and track controlled substances destined for the United States. ICE plans to use this approach to identify and take possible law enforcement action against illegal enterprises. The working group on increasing public awareness has been developing and disseminating public service announcements on the risks associated with purchasing drugs over the Internet. The working group has placed public service announcements on the FDA and CBP Web sites and is coordinating with FDA on its efforts, ongoing since 1999, to disseminate similar material in magazines, online, and in pharmacies. Also, the working group has entered into an agreement with a major Internet service provider and others to have a public service announcement link on screen when someone tries to access online pharmacy sites. The working group on working cooperatively with industry has met with Internet businesses, such Internet service providers and companies that operate search engines, to discuss how task force members can work with Internet businesses to stem the flow of imported drugs coming into the country, including discussing standards for identifying legitimate Web sites. It has also met with representatives of express carriers and plans to meet with representatives of credit card organizations in late summer 2005. In addition, task force members are working with ONDCP to address the importation of controlled substances through international mail and carrier facilities. In October 2004, ONDCP issued a plan for addressing demand and trafficking issues associated with certain man-made controlled substances—such as pain relievers, tranquilizers, and sedatives. Among other things, ONDCP recommended that DEA, CBP, ICE, State Department, National Drug Intelligence Center, and FDA work with USPS and private express mail delivery services to target illegal mail order sales of chemical precursors, synthetic drugs, and pharmaceuticals, both domestically and internationally. ONDCP officials said that a multiagency working group is meeting to discuss what can be done to confiscate these controlled substances before they enter the country. An ONDCP official said that participants at these meetings included officials from CBP, USPS, and DEA. Finally, USPS is exploring what additional steps it can take to further help the task force. Although USPS has participated in task force activities, USPS officials said USPS is concerned about a conflict between its mission to keep the mail moving and whether it is positioned to determine the admissibility of mail. USPS officials said that they proposed, during a July 2004 hearing, the possibility of cross-designating U.S. Postal Inspectors with Customs’ authority so that Postal Inspectors can conduct warrant-less searches, at the border, of incoming parcels or letters suspected of containing illegal drugs. According to USPS officials, such authority would facilitate interagency investigations. They said that their proposal has yet to be finalized with CBP. In addition, internationally, USPS has drafted proposed changes to the U.S. listing in the Universal Postal Union List of Prohibited Articles. A U.S. Postal Service official told us that USPS is awaiting a response to a letter it sent to FDA last year requesting FDA’s views on the proposed changes. The official said that, without FDA input, USPS does not have the expertise to determine whether the proposed changes are accurate. In August 2005, FDA officials said that after receiving the letter last year, they met with USPS officials regarding drug importation, including this proposal. However, according to FDA officials, USPS had not subsequently engaged FDA on this particular issue, and FDA did not believe USPS was awaiting a formal written response. FDA officials stated that if USPS would like to discuss this matter further, they would be happy to work with USPS. Although the task force has taken positive steps toward addressing issues associated with enforcing the laws on personal imports, it has not fully developed a strategic framework that would allow the task force to address many of the challenges we identify in this report. Carrying out enforcement efforts that involve multiple agencies with varying jurisdictions is not an easy task, especially since agencies have limited resources and often conflicting priorities. The challenges identified in this report could be more effectively addressed by using a strategic framework that more clearly defines the scope of the problem by estimating the volume of drugs entering international mail and carrier facilities, establishes milestones and performance measures, determines resources and investments needed to address the flow of imported drugs entering the facilities and where those resources and investments should be targeted, and evaluates progress. Our review showed that the task force has already begun to establish some elements of a strategic framework, but not others. For example: In light of the Commissioner’s January 2004 memo discussed earlier, the task force has a clear picture about its purpose and why it was created. However, it has not defined the scope of the problem it is trying to address because, as discussed earlier, CBP and FDA have yet to develop a way to estimate the volume of imported prescription drugs entering specific international mail and carrier facilities. Without doing so, it is difficult to assess what resources are necessary to effectively inspect parcels and interdict those that contain unapproved drugs. Whereas the task force and individual working groups have goals that state what they are trying to achieve, the task force has not established milestones and performance measures to gauge results. A CBP official said that the goals are intended to be guidelines rather than goals to be measured; he would expect progress or results to be measured within the context of strategic plans prepared by individual agencies. However, without task force-specific milestones and performance measures, it is difficult to measure improvement over time and ensure accountability, particularly if the goals and measures of individual task force members do not directly address, or are not in harmony with, the goals of the task force. The task force has not addressed the issue of what its efforts will cost so that it can target resources and investments, balancing risk reduction with costs and considering task force members’ other law enforcement priorities. Instead, according to a CBP official, working group projects are done on an ad hoc basis wherein resources are designated for specific operations. Nonetheless, the absence of cost and resource assessments makes effective implementation harder to achieve because over time, alternative agency priorities and resource constraints may hinder the ability of the task force to meet its goals. We acknowledge that such a strategic framework needs to be flexible to allow for changing conditions, but it could be helpful to organize it in a logical flow, from conception to implementation. Specifically, the strategy’s purpose leads to definition of the problems and risks it intends to address, which in turn leads to specific actions for tackling those problems and risks, allocating and managing appropriate resources, identifying different organizations’ roles and responsibilities, and finally integrating action among all the relevant parties and implementing the strategy. Advancing a strategic framework could establish a mechanism for accountability and oversight and set the stage for defining specific activities needed to achieve results and specific performance measures for monitoring and reporting on progress. In so doing, task force officials could measure progress over time, identify new and emerging barriers or obstacles to carrying out goals and objectives, develop strategies to overcome them, and inform decision makers about the implications of taking or not taking specific actions. For example, CBP, FDA, and the other agencies could work jointly to develop statistically valid estimates of the number of parcels suspected of containing imported prescription drugs entering particular facilities and begin to develop realistic risk-based estimates of the number of CBP and FDA staff needed to interdict parcels at mail facilities. Task force members could also take steps to explore how they can work more collaboratively and strategically with private organizations, such as credit card organizations and express carriers. In doing so, task force members and representatives of these organizations could examine what can be done within the context of current law and establish strategies and goals for overcoming any practical considerations that act as barriers to enforcing the prohibition on imported pharmaceuticals, including controlled substances. They could also identify any legislative barriers they face in aggressively enforcing the prohibition and work together to develop legislative proposals aimed at stemming the flow of imported prescription drugs into the country. In addition, agencies could work collaboratively among themselves to examine the resources and investments needed to address particular strategies. Any effort to implement task force objectives would require sustained high-level leadership and commitment to ensure that resources are available to carry out task force goals, commensurate with the goals and priorities of the individual agencies involved with the task force. According to a CBP official involved in the task force, agencies have made a high-level commitment to supporting the task force. Nonetheless, in the absence of a strategic framework and, in particular, measurable goals and milestones, there is little assurance that this commitment will continue as the goals and priorities of individual agencies change. A strategic framework could also enable the task force to adjust to changing conditions. As mentioned earlier, FDA had developed plans and initiated steps in 1999 to deal with Internet sales of prescription drugs, but most of those efforts focused on domestic sales. However, plans to address Internet sales had not been refocused to reflect prescriptions imported from foreign countries for personal use, partly because FDA and other agencies did not anticipate that the volume of imported drugs would overwhelm available resources. A strategic framework, with ongoing problem definition and risk assessment, might help task force members, including FDA and others to identify the impact of this emerging threat and give the task force members the opportunity to adjust their enforcement strategies to address the threat on a proactive, rather than a reactive, basis. It also might help them consider interrelationships between the enforcement strategies and priorities of the task force and their own strategies and priorities. Furthermore, a strategic framework could help agencies adjust to potential changes in the law governing the importation of prescription drugs for personal use. During recent sessions of Congress, members introduced a number of bills that could have changed how personal prescription drug imports were treated under the law. Some proposals would have allowed importation of selected prescription drugs under certain conditions, for example, allowing importation from certain countries, such as Canada. Another proposal would have maintained the current prohibitions, but would have allowed for expedited disposal of illegally imported prescription drugs, such as controlled substances available by prescription. Those bills that would have allowed some personal importation also included provisions for expediting the process of disposing of those drugs that still may not be imported for personal use. Although none of these changes were adopted, continued congressional interest could prompt changes in the future. If that occurred, a strategic framework could better position agencies to adjust to any changes; identify any new threats or vulnerabilities; and redefine strategies, roles, and responsibilities. Enforcing the laws governing prescription drug imports for personal use is a complex undertaking that involves multiple agencies with various jurisdictions and differing priorities. We acknowledge these complexities, but current inspection and interdiction efforts at the international mail branches and express carrier facilities have not prevented the reported substantial and growing volume of prescription drugs from being illegally imported from foreign Internet pharmacies into the United States. CBP and other agencies have taken a step in the right direction by establishing a task force designed to address many of the challenges discussed in this report. Although agencies responsible for enforcing these laws have a mechanism in place to jointly address the threat posed by prohibited and sometimes addictive drugs entering the country via the international mail and express carriers, many packages that may contain these drugs enter the United States daily. Furthermore, according to officials, resources are strained as the volume of prescription drugs entering the country is large and increasing. Our past work has shown how a strategic framework can be useful in promoting accountability and guiding policy and resource decisions. In the case of the task force, a strategic framework that facilitates comprehensive enforcement of prescription drug importation laws and measures results would provide it an opportunity to better focus agency efforts to stem the flow of prohibited prescription drugs entering the United States. The task force could become more effective as it becomes more accountable. An assessment of the scope of the problem would help the task force prioritize activities and help ensure that resources are focused on the areas of greatest need. With milestones and performance measures, it could be able to better monitor progress and assess efforts to enforce the laws. An analysis of resources and investments is critical because of current resource constraints, a point highlighted by the Secretary of Health and Human Services’ report under the Medicare Modernization Act. Moreover, without these elements culminating in concrete plans for implementation, it will be difficult for the task force to maximize effectiveness in reducing the flow of prohibited imported prescription drugs into the United States. In addition to the broader issues being addressed by the task force, FDA has said it faces a significant challenge handling the substantial volume of prescription drugs imported for personal use entering international mail facilities. Specifically, in recent years, FDA has expressed continuing concern to Congress that it encounters serious resource constraints enforcing the law at mail facilities because packages containing personal drug imports cannot automatically be refused. Instead, under current law, FDA is to notify recipients that they are holding packages containing drugs that appear to be prohibited from import and give them the opportunity to provide evidence of admissibility. FDA has stated that it cannot effectively enforce the law unless the requirement to notify recipients is changed. FDA has suggested that the HHS Secretary consider proposing changes to this requirement, but the HHS Secretary has not yet responded with a legislative proposal. Although there may be complex issues associated with changing the requirement to notify, including an individual’s due process right to provide evidence of admissibility and consideration of Universal Postal Union requirements, assessing the ramifications of such a proposal would help decision makers as they consider how best to address FDA’s resource constraints and responsibility to enforce the law and protect the health and safety of the American public. To help ensure that the government maximizes its ability to enforce laws governing the personal importation of prescription drugs, we recommend that the CBP Commissioner, in concert with ICE, FDA, DEA, ONDCP, and USPS, develop and implement a strategic framework for the task force that would promote accountability and guide resource and policy decisions. At a minimum, this strategic framework should include establishment of an approach for estimating the scope of the problem, such as the volume of drugs entering the country through mail and carrier facilities; establishment of objectives, milestones, and performance measures and a methodology to gauge results; determination of the resources and investments needed to address the flow of prescription drugs illegally imported for personal use and where resources and investments should be targeted; and an evaluation component to assess progress, identify barriers to achieving goals, and suggest modifications. In view of the FDA’s continuing concern about the statutory notification requirement and its impact on enforcement, we also recommend that the Secretary of HHS assess the ramifications of removing or modifying the requirement, report on the results of this assessment, and, if appropriate, recommend changes to Congress. We requested comments on a draft of this report from the Secretary of Homeland Security, Attorney General, Director of the Office of National Drug Control Policy, Secretary of Health and Human Services, and Postmaster General. DHS, DEA, ONDCP, HHS, and USPS provided written comments, which are summarized below and included in their entirety in appendixes IV through VIII. DHS generally agreed with the contents of our report. Since our recommendation that the CBP-led task force develop and implement a strategic framework to address prescription drug importation issues affects other agencies, DHS said that CBP would convene a task force meeting to discuss our report and recommendation and is to provide us with additional information after the meeting. Responding for DOJ, DEA generally agreed with our recommendation that the CBP task force develop and implement a strategic framework. Specifically, DEA agreed that a strategic framework can be useful in promoting accountability and guiding policy and resource decisions, but it said that the interagency task force is a cooperative initiative and DEA must balance priorities in accordance with agency mandates. DEA also said that its strategic plan clearly establishes a framework to articulate agency priorities and assess its performance. Noting that our report acknowledges that such a framework needs to be flexible to allow for changing conditions, DEA stated that, in concert with other task force agencies, it will support the CBP Commissioner’s strategic framework for the interagency task force. ONDCP generally concurred with our recommendation that the CBP-led task force develop and implement a strategic framework. ONDCP also “strongly” suggested that the ONDCP-led Synthetic Drug Interagency Working Group play a significant role in integrating prescription drug considerations with all of the other synthetic drug concerns that potentially inflict harm on our society. ONDCP noted that our report documented well the problems associated with effectively policing Internet purchases and identified the significance played by credit card use as a facilitator of the problem. In addition, ONDCP stated that it encouraged law enforcement proposals that may curtail some of these dangerous practices and concurred with our identification of the cumbersome nature of currently required enforcement practices dealing with the use of the mails to transfer illicit narcotics. HHS generally concurred with both recommendations. With regard to the strategic framework, HHS said that it would work with its federal partners to discuss the development of a more formalized approach for addressing the issues associated with the importation of unapproved drugs. However, HHS questioned whether the framework should include an approach for developing more reliable volume estimates, because HHS believes the volume estimates already provided in HHS’s December 2004 report on drug importation are valid. HHS said that volume may depend on the incentive for the public to import unapproved drugs, as well as other external factors, and said that, short of opening and counting each package as it enters the United States, the reliability of estimates would always be in question given the fluid nature of unapproved prescription drug imports and the number of mail and courier facilities involved. HHS also stated that volume estimates would not alter the resource calculations articulated in HHS’s December 2004 report, which, according to HHS, were derived from special operations, called blitzes, by CBP and FDA at various international mail facilities. According to HHS, these calculations were based on personnel time and salaries needed to process each package. HHS further noted that our statement that the task force agencies could develop statistically valid volume estimates and realistic risk-based estimates of the number of staff needed to interdict parcels at mail facilities did not recognize that FDA is not always able to process the current number of packages set aside by CBP. In addition, HHS said that FDA must always be cognizant of competing priorities regardless of fluctuations in the volume of illegally imported prescription drugs. We recognize that any number of factors can influence the volume of unapproved drugs entering the country at any point in time or location. However, HHS’s current estimates are based on estimates of drugs imported from Canada during 2003 and, in part, on extrapolations from FDA’s limited observations during special operations at international mail branch facilities. We believe a more reliable and systematic approach might begin by using information already being collected by CBP and FDA at the various field locations, including the number of packages deemed abandoned by CBP and the number of imported packages FDA handles. With regard to resource calculations, as more reliable estimates are developed, FDA and other task force agencies would be better positioned to define the scope of the problem so that the task force and other decision makers can make informed choices about resources devoted to this problem, especially in light of competing priorities. Regarding our recommendation that the HHS Secretary assess FDA’s statutorily required notification process, HHS said that it intends to pursue an updated assessment. HHS observed that, given the increased volume of illegally imported prescription drugs since its initial request for modification of FDA’s notification process, other actions might be needed, and HHS would work with its federal partners to determine the actions required. HHS also provided technical comments that have been included, as appropriate. USPS did not state whether it agreed or disagreed with our recommendations but expressed a concern about possible procedural and legislative changes to the current notification requirements governing the processing and disposition of imported pharmaceuticals. Specifically, USPS requested that the report acknowledge the United States’s international postal obligations and stated that any discussion of options to expedite the processing and disposition of prescription drugs should consider these obligations. USPS further noted that recognizing these obligations is particularly important with respect to registered or insured mail for which the Postal Service can be held financially responsible if it is not delivered or returned. We acknowledge USPS’s concerns and have added language to the report accordingly. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of the Department of Homeland Security, the Secretary of Health and Human Services, and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me on (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IX. This report addresses the following questions: (1) What do available data show about the volume and safety of prescription drugs imported into the United States for personal use through the international mail and private carriers? (2) What procedures and practices are used at selected facilities to inspect and interdict prescription drugs unapproved for import? (3) What factors affect federal agency efforts to enforce the prohibition on prescription drug importation for personal use through international mail and carrier facilities? (4) What efforts have federal agencies undertaken to coordinate the enforcement of the prohibitions on personal importation of prescription drugs? We performed our work at the Department of Homeland Security’s U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement (ICE), the Department of Health and Human Services’ (HHS) Food and Drug Administration (FDA), the Department of Justice’s Drug Enforcement Administration (DEA), the U.S. Postal Service (USPS), and the Office of National Drug Control Policy (ONDCP). We also carried out work at 3 of the 14 international mail facilities—New York, Los Angeles, and Chicago—and 2 of the 29 carrier facilities—Cincinnati (DHL Corporation) and Memphis (FedEx Corporation). We selected the New York and Los Angeles mail facilities because they (1) processed among the highest overall number of packages, representing 27 percent of the total number of estimated packages going through international mail facilities in 2002 and (2) also received prescription drugs. The Chicago facility was selected because it received prescription drugs and provided geographic dispersion. The 2 carrier facilities selected were (1) different companies; (2) handled the highest overall number of packages, according to data provided by CBP; and (3) were located near each other. At each of these locations, we collected and reviewed available relevant importation and interdiction data from FDA and CBP; observed inspection and interdiction practices; met with CBP and FDA management, inspectors, and investigators to discuss issues related to inspection and pharmaceutical importation volume; and reviewed relevant documents on inspection and interdiction procedures. At the international mail facilities, we also met with USPS officials to discuss mail handling and processing procedures. The information from our site visits is limited to the 3 international mail facilities and 2 carrier facilities and is not generalizable to the remaining 10 international mail facilities and 27 carrier facilities. To determine what the available data show about the volume and safety of imported prescription drugs, we interviewed CBP, FDA, DEA, ICE, and USPS headquarters officials and CBP and FDA officials at the 3 international mail facilities and 2 carrier facilities. We obtained and analyzed available data on the volume and safety of imported prescription drugs (1) collected from the facilities we visited and (2) gathered through multiagency special operations at selected mail facilities and provided to us by CBP headquarters. The available CBP and FDA information on the volume and safety of prescription drugs imported through the mail and carrier facilities we visited was primarily based on estimates and limited to observations at these locations. To obtain additional views on the overall volume or safety of imported prescription drugs, we reviewed ONDCP and HHS reports and testimony from the American Medical Association. We discussed with FDA officials the methodology used to develop the volume estimates presented in the 2004 HHS report on prescription drug importation and we reviewed the methodology to determine any limitations. In addition, we interviewed an official and reviewed documents from the National Association of Boards of Pharmacy to obtain the association’s findings on the safety of prescription drugs imported from foreign-based Internet pharmacies. We also relied on existing GAO work on the safety of prescription drugs imported from some foreign- based Internet pharmacies. To understand procedures and practices, we reviewed current federal law and CBP and FDA policies, procedures, and guidance regarding or applicable to prescription drugs and controlled substance importation. We interviewed officials at CBP, FDA, DEA, ICE, and USPS headquarters. To understand inspection procedures and practice, at each of 3 international mail facilities and 2 carrier facilities, we carried out site visits, observing the inspection process and interviewing CBP and FDA officials. At the selected international mail facilities, we also interviewed USPS officials to obtain information about their procedures and practices. In addition, when FDA and CBP implemented new procedures at the international mail facilities and carrier facilities, we carried out additional interviews at FDA and CBP headquarters, pursued telephone interviews with CBP and FDA officials at the facilities we had visited, and revisited 2 of the mail facilities to determine how the new procedures were being implemented, working in practice; and being monitored and evaluated. We also obtained from FDA fiscal year data on the number of mail packages containing prescription drugs it processed. From CBP we obtained data on the number of packages interdicted using its new procedures for processing schedule III through V controlled substances. Because these data were used for contextual purposes, we did not assess the reliability of these data. However, we discussed the scope of the FDA and CBP data with the respective agency officials and have noted the limitations in the report. To determine what factors affect federal agency efforts to enforce the prohibitions on prescription drug importation for personal use through international mail and carrier facilities, we interviewed CBP, FDA, DEA, ICE, and USPS officials. We asked these officials to identify any factors that affected their respective agency’s efforts to process or interdict prescription drugs imported through the mail and carriers. The information presented in this report is limited to the views expressed by the officials interviewed. In addition, we met with representatives from MasterCard International and Visa U.S.A., Inc., the two credit card associations identified by DEA as the organizations used by the majority of Internet drug sites. These associations also testified in July 2004 at congressional hearings on matters related to the illegal importation of prescription drugs. We discussed with them each association’s efforts to assist federal enforcement of the prohibitions on prescription drug importation. To determine what efforts federal agencies have undertaken to coordinate the enforcement of the prohibitions on personal importation of prescription drugs, we interviewed CBP, USPS, FDA, DEA, ICE, and ONDCP headquarters officials. We obtained and reviewed documents describing these initiatives, their status, and any studies or data describing the results of the initiatives. These documents included agency guidelines and memorandums, indicating changes to agency policies and procedures; congressional hearings; and selected legislative proposals. We obtained these documents from agency officials; agency Web sites, as directed by agency officials; and congressional Web sites. We also interviewed CBP and FDA field officials at the selected international mail facilities and private carrier facilities to ascertain the status of the implementation of these initiatives. We analyzed and synthesized the information gathered from the interviews and documents. In addition, in appendix III of this report, we used data from FDA on the number of open and closed investigations it had undertaken related to Internet drug sales and imported prescription drugs. We also used data from DEA on the number of arrests related to the illegal diversion of pharmaceuticals. Because these data were used for contextual purposes, we did not assess their reliability. We conducted our review between April 2004 and August 2005 in accordance with generally accepted government auditing standards. The drugs and drug products that come under the Controlled Substances Act are divided into five schedules. A general description and examples of the substances in each schedule are outlined below. During congressional hearings in July 2004, representatives from MasterCard International and Visa U.S.A., Inc., testified on issues concerning the use of credit cards to purchase prescription drugs for importation from Internet pharmacies, including discussions with federal law enforcement agencies to address these issues. Accordingly, we met with Drug Enforcement Administration (DEA), Food and Drug Administration (FDA), and Immigration and Customs Enforcement (ICE) officials, as well as representatives from MasterCard International and Visa U.S.A., Inc. to more fully understand how these organizations are working together to address prohibitions on prescription drug importation. The agency officials and credit card association representatives described their working relationship as cooperative, but complicated by legal and practical considerations. The following section summarizes our discussions. According to FDA, DEA, and ICE officials, their agencies have worked with credit card organizations to obtain information to investigate the importation of prescription drugs purchased with a credit card from Internet pharmacies, but these investigations were complicated by legal and practical considerations. Such considerations included privacy laws; federal law enforcement agencies’ respective subpoena authority, priorities, and jurisdictions; and the ease with which merchants engaged in illegal activity can enter into a new contract with a different bank to use the same payment system. In addition, according to the two credit card associations we contacted, their respective associations have also undertaken searches of the Internet for Web sites that appeared to be selling problematic materials and accepting their respective payment cards, but these investigations can also be complicated by legal considerations. Privacy laws can sometimes limit the extent to which companies, including credit card organizations, will provide information to federal law enforcement agencies about parties to a transaction. FDA and DEA officials told us that credit card organizations and/or banks and other financial institutions, when they have the direct contractual relationship with the merchants, have provided to the agencies information regarding transactions involving prescription drugs prohibited from import, as well as alerting federal officials when suspicious activity is detected. However, they said that the companies do not provide information about the parties involved in the transaction without a subpoena. Representatives from the two associations with whom we met explained that law enforcement usually needs to issue a subpoena because of company concerns about possible legal action by the subject of the investigation (for example, if the subject asserted that information was provided by the association or bank to law enforcement in violation of federal privacy laws). They further noted, however, that their respective associations would provide law enforcement information without a subpoena, when properly requested under certain circumstances, including matters of national security or when a human life was in immediate jeopardy. DEA, ICE, and FDA officials confirmed that they are able to obtain information from credit card companies and/or banks and other financial institutions through subpoenas, although the agencies have different subpoena authority with regard to entities, such as banks and credit card companies. DEA and ICE have the authority to subpoena information directly from such entities, but FDA must ask a U.S. Attorney to obtain a grand jury subpoena requesting the information. DEA and ICE may also use grand jury subpoenas. For example, DEA officials told us that usually they are able to obtain needed information using administrative subpoenas; however, they may use a grand jury subpoena if a company will not provide the requested information or a U.S. Attorney prefers that approach. DEA, FDA, and ICE could not readily provide data on the number of subpoenas served because (1) data on DEA and ICE administrative subpoenas were maintained at the field office requesting the subpoena and were not organized according to payment method and (2) none of the agencies could share grand jury information. Agencies’ priorities also affect their ability to conduct investigations of credit card purchases of prescription drugs for importation. According to FDA, DEA, and ICE officials, their investigations, including those involving imported prescription drugs, focused on commercial quantities, rather than quantities to be consumed for personal use. DEA officials also said that DEA seeks to dismantle major drug supply and money laundering organizations; therefore, its investigations of prescription drug violations focused on the suppliers of Internet pharmacies, not individual consumers. DEA reported no active cases on individuals who were illegally importing controlled substance pharmaceuticals over the Internet for personal consumption. FDA, DEA, and ICE officials said that investigations involving smaller quantities may be handled by state and local law enforcement. In addition to the quantity of drugs being imported, federal enforcement agencies consider jurisdiction when determining whether to pursue an investigation, including investigations of Internet pharmacies using credit card payment systems that cross U.S. borders. For a federal enforcement agency to determine whether it has jurisdiction to investigate potential illegal activity outside the United States, it generally needs to consider whether (1) the federal statute or statutes violated apply to activity outside the country and (2) there is sufficient evidence of an intent to produce effects in the United States or some other connection to the United States, such as a U.S. distributor. Pursuit of investigations of Internet pharmacies using credit card payment systems presents both jurisdictional and practical limitations, when some or all of the operations (e.g., pharmacies, Web sites, and bank accounts) are located in foreign countries and there is no U.S. distributor. According to FDA officials, in cases that FDA does not have jurisdiction to pursue, it may ask its foreign counterparts for assistance. ICE officials told us that they focused on transporters of commercial quantities across U.S. borders from a foreign country into the United States. By contrast, DEA enforces a statute that specifically applies to manufacturers or distributors of certain prescription drugs who are located in foreign countries. Specifically, DEA has jurisdiction over a manufacturer or distributor of schedule II controlled substances in a foreign country who knows or intends that such substances will be unlawfully imported into the United States. However, the relevant statute does not apply to prescription drugs that are schedules III through V controlled substances. Therefore, according to a DEA official, to pursue such investigations, DEA has to devise other ways to reach those operating outside the United States. A DEA official said that another practical consideration affecting investigations of credit card purchases of imported prescription drugs was the ease with which merchants engaged in illegal activities were able to open new merchant credit card accounts. Credit card association representatives confirmed that the reappearance of the same violators using a different name or bank, or even disguising the illegal activity as a different and legal activity, can be a problem. They said that unlike law enforcement, credit card organizations do not have the authority to arrest the violators, and some of the merchants engaged in such illegal activities are skilled at moving from bank to bank and masking their illegal activities. In addition to investigations by federal law enforcement agencies, each of the credit card associations we contacted had also undertaken searches of the Internet for Web sites that appeared to be selling problematic materials and using its payment cards. One association used a vendor to carry out the searches and then provided the information to its member banks regarding their merchants who appear to have been involved in selling controlled substances. The other association’s security personnel conducted the Internet search, identified the sites, and then attempted to contact the member bank that had contracted with the merchant. Representatives of the latter association told us that as a result of this effort, at the association’s request, contracts with approximately 500 merchants had been terminated by the member banks that had authorized the particular merchants to accept the association’s credit card. Representatives from both associations agreed that federal law enforcement agencies were in the best position to enforce the prohibition on prescription drug importation, because they have arrest authority and can remove the violators. However, these representatives had differing opinions concerning the desirability of their taking any additional enforcement steps in this area. Representatives of one association told us they did not want the authority to make purchases to confirm that illegal transactions were occurring. They said once their investigators identified a site willing to sell drugs, they contacted the bank that authorized the merchant’s account so that the bank could take appropriate action. Further, they told us that the association was not set up to make such purchases safely and its mail room was not structured to take delivery. Representatives of the other association told us that their association would like the authority to make such purchases, noting that their investigations were complicated by the inability of the association’s security personnel to purchase controlled substances. However, these representatives told us that, if they were allowed to make such transactions, they would expect to turn over the controlled substances to federal law enforcement immediately upon receipt. A DEA official told us that currently credit card organizations are not exempt from the general prohibition against possessing controlled substances, and therefore it is illegal for them to purchase controlled substances from an Internet pharmacy to show that the pharmacy is acting illegally. He also said that even if the law were changed to allow such transactions, executing them could be unmanageable, because the companies would have to comply with federal regulations for handling and storing controlled substances. For example, federal regulations require that controlled substances be stored in a safe, vault, steel cabinet, or cage. The regulations also specify the methods and materials to be used to construct the storage facility, as well as the type of security system (alarms, locks, and anti-radiation devices) required to prevent entry. Even if a credit card company planned to turn over purchased controlled substances to federal law enforcement upon receipt, it would need to have a facility as prescribed by federal regulations to hold and store the substances until a DEA agent could take possession of them. Federal enforcement agencies and credit card organizations have had periodic discussions about credit card enforcement issues involving purchases of prescription drugs for importation from Internet pharmacies. In addition, the associations told us that they had provided information about this issue to banks and other financial institutions. According to FDA and DEA officials and representatives of the two credit card associations we contacted, meetings have been held periodically, between individual agencies (e.g., DEA and FDA) or as part of the Customs and Border Protection (CBP) Interagency Task Force (discussed earlier in this report) and with representatives of one or more companies present. Association representatives told us that they believed that the meetings, which began in late 2003, have provided an educational opportunity for both the credit card companies and the federal law enforcement agencies. For example, the representatives of one association said that during the meetings they had described how the association’s payment system operated, explaining (1) the relationship among the association, the banks and other financial institutions, merchants, and cardholders, and (2) which entities maintained the transactional information needed by law enforcement for investigations of Internet pharmacies. They said that DEA and FDA had explained federal laws related to the importation of prescription drugs, both controlled and noncontrolled substances. Representatives of the other association said that the meetings helped to educate its officials about issues, concerns, and risks related to the illegal importation of prescription drugs. In addition, agency officials and association representatives said that they had discussed the role credit card organizations can play with regard to illegal importation. No minutes of these meetings are maintained. According to association representatives, information obtained at these meetings was disseminated to the banks and other financial institutions through bulletins. Through association bulletins, both credit card associations provided to banks and other financial institutions information concerning the illegal importation of prescription drugs. The bulletins reminded the recipients of their obligation to ensure that the credit card system was not to be used for illegal activity, alerted them to the risk of illegal activity involving transactions for prescription medications purchased over the Internet, and underscored the need for due diligence to ensure that merchants were not engaged in illegal activities. One association also issued a press release that, according to the association’s representatives, was to communicate to the public information similar to that which had been sent to the banks. FDA and DEA officials and association representatives said that the dialogue was continuing and described the relationship between the agencies and associations as good. A meeting between credit card organizations and the CBP task force is to be held in late summer 2005. Moreover, they noted that informal contacts between the agencies and the credit card organizations occurred, as needed, on specific matters related to prescription drug importation. However, agency officials confirmed that they had no plan or written strategy for dealing with credit card organizations related to the illegal importation of prescription drugs purchased with a credit card. In addition to the above, John F. Mortin, Assistant Director; Leo M. Barbour; Frances A. Cook; Katherine M. Davis; Michele C. Fejfar; Yelena T. Harden; James R. Russell; and Barbara A. Stolz made key contributions to this report. | Consumers can be violating the law and possibly risking their health by purchasing imported prescription drugs over the Internet. U.S. Customs and Border Protection (CBP), in the Department of Homeland Security (DHS), and the Food and Drug Administration (FDA), in the Department of Health and Human Services (HHS), work with other federal agencies at international mail and express carrier facilities to inspect for and interdict prescription drugs illegally imported for personal use. This report addresses (1) available data about the volume and safety of personal prescription drug imports, (2) the procedures and practices used to inspect and interdict prescription drugs unapproved for import, (3) factors affecting federal efforts to enforce the laws governing prescription drugs imported for personal use, and (4) efforts federal agencies have taken to coordinate enforcement efforts. The information currently available on the safety of illegally imported prescription drugs is very limited, and neither CBP nor FDA systematically collects data on the volume of these imports. Nevertheless, on the basis of their own observations and limited information they collected at some mail and carrier facilities, both CBP and FDA officials said that the volume of prescription drugs imported into the United States is substantial and increasing. FDA officials said that they cannot assure the public of the safety of drugs purchased from foreign sources outside the U.S. regulatory system. FDA has issued new procedures to standardize practices for selecting packages for inspection and making admissibility determinations. While these procedures may encourage uniform practices across mail facilities, packages containing prescription drugs continue to be released to the addressees. CBP has also implemented new procedures to interdict and destroy certain imported controlled substances, such as Valium. CBP officials said the new process is designed to improve their ability to quickly handle packages containing these drugs, but they did not know if the policy had affected overall volume because packages may not always be detected. We identified three factors that have complicated federal enforcement of laws prohibiting the personal importation of prescription drugs. First, volume has strained limited federal resources at the mail facilities. Second, Internet pharmacies can operate outside the U.S. regulatory system and evade federal law enforcement actions. Third, current law requires FDA to give addressees of packages containing unapproved imported drugs notice and the opportunity to provide evidence of admissibility regarding their imported items. FDA and HHS have testified before Congress that this process placed a burden on limited resources. In May 2001, FDA proposed to the HHS Secretary that this legal requirement be eliminated, but according to FDA and HHS officials, as of July 2005, the Secretary had not responded with a proposal. FDA officials stated that any legislative change might require consideration of such issues as whether to forgo an individual's opportunity to provide evidence of the admissibility of the drug ordered. Prior federal task forces and working groups had taken steps to deal with Internet sales of prescription drugs since 1999, but these efforts did not position federal agencies to successfully address the influx of these drugs imported from foreign sources. Recently, CBP has organized a task force to coordinate federal agencies' activities to enforce the laws prohibiting the personal importation of prescription drugs. The task force's efforts appear to be steps in the right direction, but they could be enhanced by establishing a strategic framework to define the scope of the problem at mail and carrier facilities, determine resource needs, establish performance measures, and evaluate progress. Absent this framework, it will be difficult to oversee task force efforts; hold agencies accountable; and ensure ongoing, focused attention to the enforcement of the relevant laws. |
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BIA administers funding for the operation, maintenance, construction, and repair of school facilities at 171 elementary and secondary schools in 23 states. These schools are located primarily in rural areas and small towns and serve Indian students living on or near reservations. Many of these schools include not only educational buildings, but also dormitories and supporting infrastructure such as water and sewer systems. BIA operates 64 of the schools directly while the others are operated by tribes through separate grant or contract agreements. We previously reported on issues related to the condition of BIA school facilities in 1997 and 2001. BIA’s Office of Facilities Management and Construction (OFMC) is responsible for overseeing FMIS. At both BIA-operated and tribal-operated schools, it is the responsibility of the facility managers to enter data about the inventory and condition of their schools into the system. Prior to acceptance into FMIS, these draft data entries are reviewed and approved by facility managers at BIA agency and regional offices respectively, before final review and approval by a BIA contractor and BIA’s central office. For 22 years BIA relied on its Facility Construction Operations and Maintenance (FACCOM) system to maintain inventory data for its annual O&M program, as well as “backlog” data that reflect repairs and improvements needed outside of the annual maintenance program to improve the facilities’ condition now and in the future. These data assist BIA in monitoring the status of facilities repair and new construction projects and identifying funding needs for O&M and renovation. However, as BIA’s needs began to change, BIA managers realized that FACCOM had limitations and acknowledged that there were serious concerns with the accuracy and completeness of these data. As shown in figure 1, BIA’s efforts to replace FACCOM began in 1995 when one of its contractors issued a report about the FACCOM system’s shortcomings and recommended actions for improvement. In 1995, BIA entered into a contract with Anteon Corporation, a system developer, to design the new management information system. Relying on government standards, BIA worked with Anteon Corporation to design the new system and address FACCOM’s shortcomings. In 1999, BIA contracted with an engineering firm, Applied Management Engineering, Inc. (AME), to conduct a survey at all school sites in order to validate the schools’ condition data and to verify the presence of buildings and their use. According to BIA officials, after AME validated each school’s inventory and condition data, and BIA approved it, the data were accepted into FMIS. From fiscal years 1995 through 2002, BIA spent nearly $12.5 million to develop and begin implementing FMIS. These costs include about $8 million for contractor expenses and over $2.6 million for BIA in-house expenses, which covered the design of FMIS and ongoing technical support. During fiscal years 1999- 2003, BIA spent about $13 million for the AME contract covering the validation of inventory and condition data and other engineering support activities. To operate FMIS, BIA expects to spend about $1.7 million annually through fiscal year 2006 for contractor expenses and about $250,000 for in-house expenses. In fiscal year 2007, BIA hopes to move to an annual steady rate of about $750,000 for contractor costs and about $250,000 for in-house costs. To continue having AME reassess and validate the schools’ inventory and condition data, BIA projects to spend over $8.3 million from fiscal years 2004 through 2006 on contract expenses. Recognizing the FACCOM system’s shortcomings, BIA worked with its system developer to design a new management information system that would assist in resolving many of the weaknesses identified with the old system, including those related to difficulty of use and accuracy of data. FMIS is more user friendly and it is designed to meet facility managers’ needs at all levels within BIA by serving as both an information management system and as a project management tool. FMIS incorporates modules, including the inventory and backlog modules, which help facility managers make decisions regarding the condition of the school facilities to provide a safe environment for their students. The inventory module contains information such as the physical characteristics and use of buildings and is used to make funding decisions for annual operating expenses and routine maintenance. The backlog module contains data that tracks detailed information about the physical condition of a school’s facility and is used to prioritize and fund repair projects, capital improvements, and construction. FMIS is designed to better support the day-to-day activities of the facility management staff by being more user friendly. FMIS is a Windows-based system that provides a point-and-click feature, which makes it easy to navigate the system without having to remember codes. This is important for FMIS users, because some facility managers have little prior exposure to computers. Facility managers we interviewed at the school sites and agency and regional offices said that compared to FACCOM, FMIS is better and easier to use. One facility manager in Arizona said FMIS is easier to use because the system automatically sends messages to him when changes are made to the data, allowing him to instantly see when updates have been made to his school’s data. Another facility manager in Arizona said FMIS’s automated functions, such as drop-down menus, make it user friendly. Finally, according to BIA officials, FACCOM was only accessible by about 3-4 percent of facility managers, which did not include facility managers located at the schools. FMIS is designed to be accessible by all of BIA’s facility managers, including those at the school sites, via an Internet connection. Although most of the facility managers we visited at the schools said FMIS was better compared to FACCOM, many had been unable to access FMIS at school sites since December of 2001 due to a court order that shut down access to BIA’s Internet site. These facility managers had to travel to agency or regional offices to enter data or had to forward data to these offices for data entry. FMIS is also designed to help BIA employees improve the accuracy of the data, in part through automated mechanisms that help facility managers consistently describe the category and rank of backlog entries and the funding needed to address them. One difficulty under FACCOM was that entries listed in the backlog were often categorized incorrectly with inflated priorities, making it difficult to determine which projects needed immediate attention. To address this problem, FMIS is designed to restrict who can enter safety deficiencies, which are given first priority for funding. In addition, FMIS is designed to only accept entries that have been reviewed and approved by three different levels of BIA management and the contractor. Further, BIA refined the definitions of how backlog items should be categorized and ranked to help facility managers use the definitions consistently. The definitions now include nine categories and a ranking system for determining the priority of the items entered into the backlog (see table 1). These nine categories describe whether the deficiency at the school affects safety and endangers students’ lives; violates an environmental, disability, or energy standard; is a maintenance or capital improvement item; or requires an emergency repair. In addition, the system ranks items using a scale from one through three—with one describing the most severe deficiency. The backlog entries ranked as a “1” will most likely be funded first because they are the highest priority. FMIS requires facility managers to enter an associated category and rank for all items entered into the backlog. Such a process, with its greater specificity in how to categorize and rank deficiencies, can help facility managers improve consistency in the data entered for all 171 schools. U-1—an unforeseen event in which danger exists that could reasonably be expected to cause death, physical harm, or property damage. S-1—serious deficiency that poses a threat to safety and health, such as fire safety violations. S-2—moderate deficiency such as poor lighting or trip or fall hazards. (maintenance) M-1—deficiency related to the structural, mechanical, or electrical systems that render it inoperable, such as the deterioration of a roof that causes interior building damage. M-2—deficiency related to the facility, systems, or grounds, such as replacing worn door locks that are inoperable M-3—functional facility equipment exceeds its normal life expectancy. H-1—serious code deficiency, such as the lack of accessible door hardware. H-2—violation of codes and standards, such as the lack of code compliant accessible handrails. X-1—serious code deficiency that poses a threat to life or property, such as removing friable asbestos in occupied areas. X-2—code deficiency, such as removing asbestos floor tiles from a building. R-3—backlogs identified for future planning to determine the life cycle needs beyond the 5-year plan. C-1—to replace buildings with serious code/safety deficiencies or to abate numerous high cost code violations that meet or exceed the replacement cost rule. C-2—to accommodate functional or programmatic needs, such as replacing an undersized dining room to accommodate the student population. P-2—to change the functional space or to accommodate programmatic space needs, such as retrofitting an existing classroom into a computer laboratory. E-2—violation of energy codes and standards, such as upgrading or replacing inefficient heating systems. E-3—deficiencies, which when corrected will reduce energy use, such as replacing weather seals on exterior doors. To help facility managers develop accurate and consistent cost estimates to address backlog items, FMIS is designed to operate with a software program that helps facility managers accomplish industry standard cost estimates for replacement, renovation, or construction projects over $5,000. A facility manager at a school site we visited said that this software tool eliminates the need to make calculations by hand, and thus greatly assists him in estimating accurate costs for school projects. Another accuracy-related area that plagued FACCOM was that projects would continue on the active backlog list even after completion. The FMIS backlog module is designed with a “backlog completion screen” that stores completion dates, costs, and narrative comments. This function helps facility managers monitor the length of time that funded backlog items remained on the backlog without being completed. Unlike FACCOM, FMIS is designed with a tracking function that identifies the name of the person who entered or updated a particular backlog item. Managers can use this function to seek clarification or justification for items that have not been completed within a reasonable timeframe. The FMIS inventory module, one of six modules in the system, is designed to assist BIA in determining operations and maintenance funding for its school facilities. Specifically, the inventory module is designed to manage information about all of BIA’s school buildings, rooms, towers (such as a water tower), and grounds, along with their associated inventory items, such as stairs, sidewalks, or playgrounds. The inventory module also details if the property is owned, operated, or maintained by BIA directly or under contract or grant. The inventory module is designed with the capacity to integrate with other FMIS modules in order to generate reports and provide detailed documentation for federal funding purposes. At the schools we visited, several facility managers said the inventory function in FMIS helps them to better manage their school facilities. For example, one school facility manager in Arizona said FMIS helps him more accurately keep track of his school’s inventory and allowed him to enter the information that is necessary for BIA to make good funding decisions. Another facility manager in South Dakota said that because only one staff person can enter information into the inventory module, his school is able to maintain consistency in inventory changes and additions. The FMIS backlog module is designed to help BIA officials prioritize and make funding decisions for needed repair projects and capital improvements. The backlog collects and tracks condition data related to deficiencies, capital improvements, or construction for specific inventory items, such as classrooms, sidewalks, or utility systems. These data are entered into FMIS by a facility manager, by safety officers as a part of a safety inspection, or by BIA’s contractor. Although the backlog module can store information about any identified deficiency, the only items that are reported as part of BIA’s backlog are those with an estimated cost of more than $1,000 to fix. These deficiencies, which may be grouped together to form repair, replacement, or construction projects are maintained in the backlog until funded and complete. During our site visits, many of the facility managers said the backlog module helped them to better manage their facilities. For example, one school facility manager in Arizona said FMIS’s ability to store digital pictures was helpful because a picture of a deficiency could be sent to the regional facility manager and reviewed without the facility manager traveling nearly 284 miles to the school. Facility managers at schools use the information in the backlog module to justify funding needs for repair projects and capital improvements at their schools. BIA management officials allocating funding among the schools said the data in the backlog module allow them to determine which deficiencies are related to student safety and need to be addressed immediately, and which are related to capital improvements, such as roof replacement, that are planned for the future. BIA officials said they use the backlog data to help improve the physical condition of their schools in order to provide a safe and healthy learning environment for the students. BIA’s engineering contractor has corrected the inventory and backlog data that existed in the old data system, but BIA has not transferred all corrected information to the new FMIS. The contractor completed its validation of the inventory data in February 2003, and BIA plans to transfer the corrected data into the FMIS by August 2003. BIA officials expect that the corrected inventory data, in conjunction with improvement to the existing funding formula, will enhance their ability to better match funding with annual expenses for utilities and routine maintenance at each school site. For the backlog data, BIA’s contractor is in the third year of the second cycle review of the condition of BIA-funded schools as planned. In fiscal year 2002, the contractor visited 33 schools and identified corrections to add, delete, or adjust the FMIS data. BIA, however, had not entered the results of these condition assessments into FMIS for over 1 year. BIA officials attribute the long delays in correcting the FMIS condition data to a revised process for verifying contractor data and to software compatibility problems that they say are being addressed. The FMIS inventory module contains data on BIA facilities, including almost 2,200 separate buildings that are occupied by or used for BIA- funded schools. More than 50 percent (1,146) of the buildings are used directly by children, as shown in table 2. Accurate and up-to-date inventory data are crucial to the operation of the entire FMIS because other modules rely on inventory data for planning and prioritizing the work and for identifying and prioritizing funding needs. For example: School facility managers access inventory data when planning and scheduling routine maintenance of their facilities, grounds, and equipment. For example, one FMIS module acts as a scheduling tool to inform facilities managers about work, such as preventive maintenance, that needs to be done to buildings, equipment, and other physical assets listed in the inventory. BIA’s Office of Facilities Management and Construction uses inventory data in the formula that determines the amount of operations and maintenance funding allocated to each school location. Distribution of this funding is calculated using a formula that includes such inventory data as the square footage of rooms in each building and systems that support the facility such as heating and cooling systems. Funding distributions have been a particular source of contention for Office of Indian Education officials, who told us that inaccuracies in the inventory data have led to inequities in how the money is apportioned. Accurate data that are collected using a methodology that is consistent from site to site is a necessary component for demonstrating the fairness of the process. BIA’s engineering contractor, AME, has remained on schedule in its effort to improve the accuracy of the inventory information currently in FMIS. In conducting this effort, AME visited each school and collected inventory data using a standardized, industry-based approach to help ensure that information on all facilities is uniformly collected and recorded. AME completed the first phase of this effort in 2000, when it visited each school to verify and update the inventory data listed in the FACCOM before its transfer to FMIS in that year, according to a BIA official. This phase, which focused on the more general aspects of the inventory, was aimed at such matters as identifying which buildings were still in use, the use of the facility, and who owns it. AME completed the second phase of the improvement effort in February 2003. This second phase, which took longer than the first phase, involved a more extensive measurement of the buildings and updated the drawings of floor space, grounds, infrastructure, and utility lines. BIA’s current plans call for replacing the existing data in FMIS with this updated and corrected data by August 2003. Our preliminary review of the new data generated during the second phase of AME’s work indicates that the inventory figures may change considerably for some schools. At our request, AME officials provided revised square footage data for more than 90 buildings (such as classroom buildings, dormitories, multipurpose buildings, and offices) at 13 different schools. Overall, the revised measurements for these buildings decreased the total square footage by about 3 percent, but the range in increases and decreases at each school varied significantly. For 9 of the schools the decrease in square footage ranged from less than 1 percent to more than 13 percent; increases for the remaining 4 schools, ranged from less than 1 percent to almost 18 percent. We do not know if these results will be typical for all schools. One BIA official indicated, however, that some schools were likely to experience greater changes than others in the square footage that would qualify for O&M funding. BIA officials said that the improved data, along with improvements to the funding formula, will help ensure the various schools that their share of O&M funding was objectively and accurately determined. However, whether this corrected inventory data will be transferred to FMIS in time for making fiscal year 2004 funding decisions is uncertain. BIA may yet face some implementation problems as it moves into the final months of putting this information in place. For example, during 2002, BIA attempted to run the O&M funding formula using the existing FMIS inventory data for the first time and experienced problems with the data and software. While the agency has had a year to work out these problems, introduction of the updated inventory data may hold its own unforeseen problems. If such problems are encountered and remain unresolved, a BIA official told us that the agency would continue to use the data currently in the system to allocate the O&M funding for fiscal year 2004. The backlog data in FMIS reflects actions and funding needed to improve the condition of facilities and infrastructure at the various schools now and in the future. Most of the items listed in the backlog provide detail for repairs needed over the next 5 years to correct what is wrong with a facility such as a leaky roof, the presence of asbestos, or a violation of handicapped codes and standards. However, FMIS also includes entries for capital improvements that will need to be addressed beyond 5 years to upgrade specific building components such as replacing lighting and power systems, siding, and carpeting as well as future construction to replace, renovate, and add buildings to accommodate program needs. Accurate and up-to-date backlog data are important because FMIS contains formulas that use these data to allow BIA to make informed decisions not only about which projects are in greatest need of attention, but also how much money is needed to fund them each year. As of October 2002, for example, BIA schools had a backlog of unfunded repairs and improvements with an estimated cost over $640 million (see table 3); FMIS shows that almost two-thirds of this amount may be needed within the next 5 years. AME currently validates the backlog for each school in a 3-year cycle. During its first review, in 1999, AME conducted a 100-percent validation of the backlog data prior to transferring that data from the old FACCOM system to the new FMIS backlog module. In that review, AME updated the backlog data by confirming entries already in the system, updating the costs estimated to conduct the work, deleting entries for duplicate items or completed work, and identifying new entries. Results of the validation effort, as shown in table 4, increased the backlog by more than $265 million; almost 28 percent of the total backlog of $960 million that existed in 1999. AME has since started the second review of each school, which consists of updating this information for a certain percentage of the facilities each year. AME updated 20 percent of the facilities in each year 2001 and 2002. For 2003, AME is on track to increase the percentage of facilities reviewed each year to 34 percent to comply with recent changes in the law. These updates involve visually inspecting the architectural, structural, mechanical, and electrical components of each facility to determine if action is still needed and to update the estimated costs. In addition, AME identifies new deficiencies, including the extent to which handicapped accessibility requirements are met, and verifying estimated costs. Our review of some updates conducted during fiscal year 2002 indicates that AME’s reviews will continue to result in substantial changes in backlog data. We obtained data for 14 of the schools reviewed between February and April 2002. For the 14 schools, the AME update resulted in a net increase of almost $11 million (see table 5) in the unfunded FMIS backlog of more than $39 million, an increase of about 28 percent. Part of the change involved modifications to deficiencies already in the backlog inventory, such as revising cost estimates and deleting projects that had been completed or no longer needed but were still listed in the backlog as ongoing. However, a large part of the change involved adding new deficiencies to the backlog. In all, there were almost 650 new backlog entries, and more than 75 percent of these entries were for deficiencies identified at school facilities and dormitories, where children are the primary occupants. For example, there were more than 200 entries for dormitories with an estimated cost of almost $4 million. None of these entries were for urgent or safety deficiencies that needed immediate attention; most were maintenance deficiencies that will need attention over the next 2 to 5 years, such as repairing lighting and plumbing systems, carpeting, and ceilings. While the contractor’s field assessments are proceeding on schedule, there have been significant delays in incorporating the 2002 updated backlog data into FMIS. In fiscal year 2001, the first year of the updates, the contractor assessed the condition of 39 schools and transferred the data from its information system to the FMIS without problems, according to BIA and contractor officials. However, officials said that in fiscal year 2002, the untimely transfer of data from the field assessments to the contractor’s information system and software compatibility problems between the contractor’s information system and FMIS delayed the update of backlog data for 33 schools for over a year. These implementation problems occurred for such reasons as the following: BIA added a new function to the FMIS, which took 6 months to implement, rather than the 2 months that they had planned, according to a BIA official. This new function involved using the FMIS, for the first time, to generate the O&M funding amounts to be distributed to the various schools. A change to the backlog category and ranking system in FMIS created duplicate entries that took time to resolve. In the 2002 assessments, some deficiencies that were already in the system were recategorized, and when the update was transferred to FMIS a duplicate entry was created instead of overwriting the old entry. According to BIA and contractor officials, this software compatibility problem has largely been addressed. As of April 2003, data for 27 of the 33 schools had been entered into FMIS. A BIA official told us that delays in introducing these updates into the FMIS backlog could have some impact on their ability to prioritize or fund repair and capital improvement projects, but not a significant impact for two reasons. First, the deficiencies that receive the highest points in the project ranking system are safety deficiencies, which are identified and updated in an annual safety inspection by BIA’s safety officers and not AME. Second, the most critical deficiencies at the schools were identified in the first assessment in 1999, and during this second assessment, AME is finding very few deficiencies that would be funded within 1 to 2 years that were not already in the system. However, one official acknowledged that since the FMIS ranks the schools for major repair and capital improvement projects based on the points applied to each deficiency, if AME’s assessment indicated an increase in the severity of a deficiency and that change was not reflected in the system, that school could be ranked lower than if the data were up to date. Our site visits to 8 BIA-funded schools did not disclose any instances where serious problems were not being addressed. While facilities management staff and school principals pointed out problems with their facilities, we did not observe that the children were in an unsafe learning environment with obvious safety or repair issues. The problems we observed were either of a less serious nature, or if serious, were being addressed in some form. For example, at a boarding school in Arizona the principal said that the fire alarm system for the school building and dormitory had been improperly installed and had to be replaced. While waiting for the funding for a new system, which had been approved, they had to use funds from the school budget to hire extra people to stand fire watch 24 hours a day. The ability of FMIS to provide accurate and complete data depends on BIA employees entering correct and timely information, but review processes and training programs BIA has established for ensuring data quality have been largely ineffective. Although adherence to federal control standards are a major part of providing reasonable assurance that the objectives of the agency are being achieved, half of the entries proposed by BIA employees are incorrect or incomplete and are flagged by BIA’s contractor. Discussions with BIA employees indicate that some employees are unclear about their responsibilities in maintaining the accuracy of FMIS data, and the high error rates in data entry indicate that additional training is needed in some locations to improve performance. BIA has not analyzed the information it has available about the content and origination of the data errors to determine the type of additional training that might be needed or to target locations with the highest error rates for technical assistance. Further, BIA has not established criteria or performance goals that define its expectations for the accuracy and completeness of the data for employees that enter and review this information. BIA’s Office of Facilities Management and Construction, which manages FMIS, did not until recently have authority to establish criteria or performance goals for agency and regional office personnel that are responsible for reviewing and approving data entries by school facility managers. BIA’s OFMC still does not have similar authority over school facility managers who originate most data entries. Under BIA’s current organization, such action would have to be taken by the Office of Indian Education Programs. BIA established a multilevel review process as a control to prevent problems related to inaccurate and incomplete data entries to BIA’s information system. In this process, each entry that school facility managers propose for the backlog is first reviewed and approved by BIA facility management personnel at an agency and a regional office before it is sent to BIA’s contractor, AME, for review and approval, with final approval by BIA’s central office. After approval has been obtained from each level, the status of the entry is changed from “draft” to “accepted” in FMIS, according to BIA. Although BIA established this multilevel review process to improve the quality of the data entered into FMIS, AME continues to reject half of the proposed entries because they are inaccurate and incomplete. For example, between August 2001 and December 2002, out of more than 650 entries to the backlog made by facilities management staff from 102 schools, more than 300, or almost 50 percent, were rejected by the contractor. BIA documents show that the incidence of the errors among the 102 schools was widespread. In all, 73 of the 102 schools entering data had one or more entries disapproved, and 33 of them had all entries disapproved (see table 6). Facility management staff at the regional and agency offices appear to have the necessary background to fulfill their responsibilities for screening and correcting inaccurate and incomplete data entries; however, it may be unclear to some reviewers what their role is in this process. Federal control standards require that employees have the requisite knowledge, skills, and abilities to perform their job appropriately and have clear roles and responsibilities outlined in their job descriptions. Among the facilities management staffs in the agency and regional offices that we interviewed, most had an engineering background or had significant experience in facilities management and they were aware that maintaining accurate and complete data in the FMIS was important. However, facilities managers we interviewed at two regional offices each had a different view about their role in the review process. One said that it was important that the backlog entries are consistent and that two staff had been designated to review the FMIS entries from the schools and agencies in the region before being sent on to the central office for review by the contractor. The second manager said he reviewed the entries so that he knew what new additions were being proposed for the backlog; he did not consider it his role to critique the entries for accuracy and completeness. Although most BIA locations have staffs that have received training to use FMIS, the extent of the errors indicates that employees may not be receiving the kind of training needed to create accurate and complete data entries. Standards for internal control in the federal government include a commitment to competence, which includes the provision that employees receive the appropriate training necessary to improve their performance. BIA has developed a training program that is intended to provide FMIS users with sufficient information to operate the system. All FMIS users receive 40 hours of training before they are given a password that allows them to access the system, according to BIA; a review of BIA’s training log indicates that about 70 percent of the schools have at least one staff member onsite that has received this training. While training appears to be adequate in terms of providing staff with the basic skills needed to use the computer-based applications, what appears to be lacking in the training program is more specific instruction and guidance on the kinds of information that are needed to enter an accurate and complete deficiency to the backlog. BIA officials acknowledged that a user manual to provide this type of guidance was lacking and should be developed. BIA officials said developing the FMIS training has been a challenge because the facilities management staffs have different levels of knowledge about computers—for some facility managers, FMIS training was their first exposure to using a computer. The training programs were developed to meet the needs of this diverse group of users, according to the contractor that developed and provides the training. In our site visits we asked users about the training that they had received for using FMIS; almost all of the staff that we interviewed said that they were pleased with the training they received and believed that it had prepared them for using FMIS. In addition, they said that when they did have problems they contacted central office with questions and/or problems with using the system, the response was prompt and very helpful. However, the engineering contractor indicated that the varying levels of experience and expertise is a difficulty affecting staff’s ability to input data successfully. He said that there are more than 180 sites with education buildings for which data must be entered and the level of knowledge and expertise about facilities and the kinds of information needed for an FMIS entry varies widely—particularly in those sites where the turnover rate of facilities management staff is high. We were unable to obtain comprehensive data on the turnover rate for the facility management staff, but among the schools that we visited, the facilities managers’ length of employment at their current location ranged from 2 years to 17 years. BIA officials have information on the number and reasons that data entries are rejected at each location, but said that they had not used this information to provide performance counseling to employees or modify the training and guidance in this regard. Standards for internal control in the federal government include the provision that employees receive the feedback necessary to improve their performance. Analyzing the extent and content of data errors would be helpful to determine the type and amount of additional training and guidance needed to improve employee performance at schools, agencies, and regional offices and target them appropriately for technical assistance. BIA data we reviewed indicated that the reasons for disapproval generally fell into one of four groups and were consistent with historical data entry problems experienced under the old FACCOM system. For example, more detailed description was needed for the deficiency; a roof repair, for example, required specific information about the kind of roof and its size; questionable cost estimates involving labor rates or material costs; duplicate entry for a deficiency already in the backlog; and wrong category and/or rank for the entry such as categorizing the replacement of asbestos floor tiles as maintenance rather than environmental, which are funded from different sources. Of these problems, most of the rejected backlog entries generally related to insufficient detail to accurately estimate the cost to address the deficiency, according to an AME official who reviewed and rejected many of these entries. The kind of detail that is needed to successfully enter a deficiency can be seen in an example involving the repair of a leaking roof. To adequately estimate the cost for this repair, information is needed about the size of the area that needs repair or replacement, the composition of the roof (such as asphalt shingles or tile), and other associated components (such as whether skylights or gutters are present and whether they also need to be replaced). We reviewed one entry that had been rejected by the contractor because it came through the review process without information about the roof’s size or its composition. The ineffectiveness of BIA’s guidance, training, and review processes to minimize inaccurate or incomplete data entries by its employees suggests that accountability is another issue that deserves attention. Federal standards require that agencies clearly establish authority and responsibility for achieving agency goals and hold their employees accountable for performing their assigned responsibilities in a competent manner. During our review, the organization of BIA was such that the office that manages FMIS did not have line authority to establish performance criteria and standards for the BIA employees that entered and reviewed the FMIS data. In April 2003, BIA announced a new organization plan. This plan may offer OFMC greater opportunity to establish performance criteria and standards for facility managers at agency and regional offices. BIA officials told us the reorganization would not provide OFMC with line authority for facility managers at schools. However, the Director of the Office of Indian Education programs said that his office would work with OFMC to establish comparable performance criteria and standards for school facility managers. FMIS is designed to assist BIA employees improve the quality of information used to manage school facilities, but the quality of the decisions that BIA makes for managing the operations and maintenance, repair, and construction of its facilities is directly dependent upon BIA employees entering correct and timely information. Currently, the FMIS data that BIA uses for making its decisions are improving as the data are updated by its contractor and entered into FMIS—to date the inventory data have been updated and the contractor is in the third year of assessing the condition of the schools and updating the backlog for the second time. However, challenges remain in BIA’s efforts to improve the quality of data entered by its employees. Although BIA has implemented controls for ensuring the accuracy and completeness of the FMIS data entered and reviewed by BIA employees, they do not work effectively. Without the role of the contractor as a reviewer of new entries by field staff and in conducting site visits to verify and update the data, the quality of the FMIS data could quickly become inaccurate and out of date. BIA has not taken the necessary steps to hold its staff accountable for data accuracy or to use the available information on why the problems exist to develop training programs and target technical assistance where it is needed. Such actions are needed if BIA is to rely on its employees, rather than the contractor, to ensure that it provides a safe and quality learning environment for Indian children. To better enable BIA to rely on its employees for maintaining accurate and complete information in the FMIS, we recommend that the Office of the Assistant Secretary of Indian Affairs establish data standards for accuracy and completeness of FMIS data and related performance criteria for BIA employees who are responsible for entering and reviewing the data and analyze available error data and use this information to provide its employees with the necessary training, guidance, and technical assistance to improve performance. We provided a draft of this report to the Department of the Interior for its review and comment. Interior’s comments are provided in appendix II. In its written comments, Interior agreed with our findings and recommendations and said that BIA is establishing a special working group to develop a plan to address our recommendations. In addition, BIA will consider our comments and observations as it continues to develop and implement the FMIS. We will send copies of this report to the Secretary of the Department of Interior, relevant congressional committees, Indian education organizations, and other interested parties, and will make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-6778 if you or your staff have any questions about this report. Other major contributors to this report are listed in appendix III. The objectives of this study were to determine (1) whether the Bureau of Indian Affairs (BIA) new facilities management information system (FMIS) addresses the former system’s shortcomings and meets BIA’s needs for managing school facilities; (2) the status of BIA’s effort to validate the accuracy and completeness of the data being transferred from the old system into FMIS; and (3) how well BIA’s quality control measures are working to ensure that new data entered into FMIS are accurate and complete. To determine the extent to which FMIS was designed to address weaknesses of the previous data processing system and how the new system meets BIA’s facility management needs we reviewed contractor reports, BIA documentation on the FMIS, and interviewed contractors and BIA headquarters, regional, agency, and school facility management staff. First, we reviewed the needs assessment studies conducted by independent contractors to identify old system weaknesses and the recommendations made for addressing the system problems. We then reviewed the FMIS documentation to determine whether the system addressed weaknesses identified in the needs assessment. In addition, we conducted interviews with some of the contractors hired by BIA to build and implement the system. We also interviewed BIA officials at the Office of Facilities Management and Construction, the Division of Safety and Risk Management, and the Office of Indian Education Programs about improvements in the new system and how it meets their management needs. Finally, to understand how well school facility management staff received FMIS, we conducted site visits to 8 schools in Arizona, New Mexico, and South Dakota. We selected these schools to obtain a mix based on their differences in size, geographic location, type of school (i.e., grade level, day school, or on-reservation boarding school), and whether it was BIA-operated or tribal-operated. At these schools, we interviewed facility managers, education line officers, principals, and tribal officials. We also interviewed facility management staff at two regional and five agency offices that provide facility management services to the schools. To determine the extent to which the FMIS inventory and backlog data are accurate and complete we used three methods. First, we obtained data from two sources (1) a copy of the FMIS database and (2) a copy of the contractor file of backlog data from the fiscal year 2002 condition assessments of 14 schools. The data in these files were assessed for reliability, which included looking for missing data, the relationship of one data element to another, values beyond a given range, and dates outside of valid time frames. We determined that the data were sufficiently reliable for the purposes of this report. We also calculated summary statistics of the data from these files. Second, we evaluated BIA’s multilevel review process. For this analysis, we obtained data on the number of backlog entries made by facility managers and the number that had been accepted and rejected by the contractor. In addition, we reviewed the log of entries that had been rejected by the contractor to understand the reasons for these rejections. We also interviewed the contractor and BIA central office and regional and agency facility management staff about this review process. Finally, we accompanied BIA’s engineering contractor on site visits to 2 schools in Arizona where we evaluated their methodologies for data collection and validation of the inventory and backlog data. To determine how well BIA’s internal control measures are working for its FMIS we first reviewed our standards on internal controls to identify controls that apply to an organization’s management of an information system. We then compared the BIA controls with those identified in our reports to evaluate the effectiveness of the BIA controls. Additionally, we interviewed staff at the BIA central office about the internal controls they had in place for the FMIS. We also interviewed staff at the regional and agency offices and the schools about one of the controls—the effectiveness of the training they received. In addition to the individuals mentioned above, Jessica Botsford, Maya Chakko, Terry Dorn, David Gill, Barbara Johnson, Nathan Morris, Stan Stenerson, and Michelle Zapata made significant contributions to this report. | The Bureau of Indian Affairs (BIA) is responsible for providing over 48,000 children with a safe place to learn. In response to concerns that data in its old information system did not accurately reflect the condition of facilities, BIA acquired a new system, called the Facilities Management Information System (FMIS). GAO was asked to determine whether FMIS addresses the old system's weaknesses and meets BIA's management needs, whether BIA has finished validating the accuracy of data entered into FMIS from the old system, and how well the quality control measures are working for ensuring the accuracy of new data being entered into the system from individual schools. FMIS is designed to address the previous data system's shortcomings and appears to have the capability to meet BIA's management needs if the data that are entered into FMIS are correct and timely. The old system was hard to use and did not readily provide data for maintenance and repair efforts. FMIS's design appears to overcome these weaknesses. For example, FMIS has features that help facility managers make data more consistent, as well as tools for helping managers develop cost estimates for maintenance and construction projects. BIA's contractor has been correcting the data that were transferred to FMIS from the previous system, but issues such as software compatibility problems between the contractor's system and FMIS have delayed entry of some of the data for more than 1 year. BIA officials say that these problems are being addressed. They said the delay has not affected their ability to prioritize or fund repair and construction projects, and our review of the data indicated that most newly identified deficiencies will not need to be addressed for 2 to 5 years. Our review of data from 14 BIA schools and observations during site visits disclosed no instances in which these data problems resulted in an unsafe learning environment for children. Most measures for controlling the quality of new data BIA employees are entering into the system for individual schools are not working well. BIA has established a multilevel review process and training programs to help ensure that such data entries are complete and accurate, but BIA's contractor, in reviewing data at the end of this process, continues to find that nearly half of the proposed data entries coming through the system are inaccurate and incomplete. Data entries from one-third of 102 schools that entered data show a 100-percent error rate. As a result, BIA officials continue to rely on their contractor to ensure that FMIS reflects accurate and complete data on the condition of BIA's facilities. |
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In May 2001, the FBI initiated a major IT upgrade project known as Trilogy. Trilogy consisted of three parts: (1) the Information Presentation Component (IPC) to upgrade FBI’s computer hardware and software, (2) the Transportation Network Component (TNC) to upgrade the FBI’s communication network, and (3) the User Application Component (UAC) to upgrade and consolidate the FBI’s five most important investigative applications. The IPC component provided for new desktop computers, servers, and commercial-off-the-shelf automation software, including Web-browser and e-mail software to enhance usability by the agents. The TNC component called for upgrading the complete communication infrastructure. These upgrades were expected to provide the physical infrastructure that would run the applications that were to be developed under the UAC component of the Trilogy project to replace the FBI’s paper case files with electronic files and improve efficiency and replace the obsolete Automated Case Support system, the FBI’s primary investigative application that uploads and stores case files electronically. Our 2006 audit of the project’s costs identified significant internal control deficiencies over administration of contracts and interagency agreements, the processing (review, approval, and payment) of invoices, and the accountability over assets purchased under the project. More specifically, we reported that the FBI’s review and approval process for contractor invoices did not provide an adequate basis for verifying that goods and services billed were actually received by the FBI or that payments were for allowable costs. This occurred in part because responsibility for the review and approval of invoices was not clearly defined in the interagency agreements related to the Trilogy project and because contractors’ invoices frequently lacked the detailed supporting documentation necessary for an adequate review of invoice charges. During our audit, we identified more than $10 million in questionable contractor costs paid by the FBI for the Trilogy project. With respect to property, we reported that the FBI: (1) did not adequately maintain accountability for purchased computer equipment; (2) relied extensively on contractors to account for Trilogy assets while they were being purchased, warehoused, and installed; (3) did not establish controls to verify the accuracy and completeness of contractors’ records on which the FBI was relying; (4) did not ensure that only the items approved for purchase were acquired by the contractors, and that the bureau received all those items; and (5) did not establish adequate physical control over the assets. As a result of these deficiencies, we identified more than 1,200 pieces of missing equipment that we estimated to be worth more than $7.5 million. We made 22 recommendations to the FBI in our 2006 report on Trilogy. Of the 22 recommendations, 17 were focused on developing agencywide policies and procedures to address internal control weaknesses in the FBI’s procurement and contract administration processes. The remaining five recommendations were specific to the Trilogy project and were related to contractor overpayments and accountable property. The FBI discontinued the virtual case file component of its Trilogy project in March 2005, after it was determined to be infeasible and cost prohibitive to implement as originally envisioned. FBI’s Sentinel project was approved in July 2005 and was to succeed and expand on elements of the Trilogy project, namely to provide the FBI with a modern, automated investigative case-management system. The Sentinel project management office (PMO) had designed and implemented policies and procedures that assigned specific invoice-review responsibilities and required Sentinel contractors to provide detailed support for all invoiced amounts and to obtain advance approval from the Sentinel PMO for travel, overtime, and other direct costs. With respect to Sentinel equipment, we reported that the Sentinel PMO had established policies and procedures specific to the Sentinel project to ensure Sentinel’s equipment purchases were properly authorized and that received property was timely inspected and entered into the FBI’s Property Management Application (PMA). However, we did identify some additional opportunities for the Sentinel PMO to improve controls over purchased equipment for the Sentinel project. We made five recommendations to the FBI related to Sentinel. The corrective actions developed by the FBI were sufficient to address 21 of the 22 Trilogy recommendations and all 5 of the Sentinel recommendations we made in our prior reports. The FBI substantially addressed 17 Trilogy recommendations related to contract administration, invoice processing, and property accountability by establishing or revising policies and procedures, 4 by contracting for follow-up audits of the Trilogy costs, and the 5 Sentinel recommendations by revising Sentinel policies and procedures. Of the 27 prior recommendations, 17 focused on establishing, revising, or reinforcing policies and procedures with FBI- wide applicability. We found that the FBI had sufficiently developed, revised, or updated these policies and procedures as we recommended. For example, in response to our recommendation that the FBI revise its policies and procedures to require that accountable assets be entered into PMA immediately upon receipt rather than within the prior 30-day time frame, the FBI issued a new policy that required that accountable property be recorded in PMA within 48 hours of being received. Appendix II provides information on each of the 27 Trilogy and Sentinel recommendations and the specific corrective actions developed by the FBI. We also made four recommendations in our Trilogy report related to the recovery of overpayments and reimbursement of questionable costs from Trilogy contractors. In response to these recommendations, the Defense Contract Audit Agency (DCAA), an independent third party, was engaged to perform post audit reviews of contractor billings for the Trilogy project. DCAA conducted separate audits of the billings submitted by the two prime contractors, Computer Sciences Corporation (CSC) and Science Applications International Corporation (SAIC), as well as the billings submitted by the numerous subcontractors, and identified over $18 million in questioned costs. DCAA defines questioned costs as those costs that are not acceptable for negotiating a fair and reasonable contract price. DCAA’s audits included reviewing the areas with potential overpayments we had identified as well as assessing if other identified questionable costs should be reimbursed. The most significant questioned costs were costs incurred outside the effective dates of temporary labor agreements, missing supporting documentation, application of incorrect billing rates, unapproved timesheets, unapproved overtime, and subcontractor overbillings. The one recommendation that the FBI had not fully addressed from our Trilogy report recommended that the FBI investigate the 1,205 assets that we identified as missing, lost, or stolen and determine whether any confidential or sensitive information may be exposed to unauthorized users, and identify any patterns related to the equipment that could necessitate a change in FBI policies and procedures. These assets consisted of a variety of information technology items, including desktop computers, servers, and laptops that could potentially contain confidential or sensitive information that could be exposed to unauthorized users. In February 2011, FBI officials provided documentation accounting for the status of all but 134 assets, including desktop computers, laptops, and servers that could contain sensitive information. With regard to the 134 assets, the FBI stated that all of these assets had a useful life of 7 years or less and that if they were not already returned or destroyed, they are now obsolete and that spending more time or resources to search for the obsolete equipment would be wasteful. Instead the FBI is focused on implementing a new property management system, and incorporating property management lessons learned from the Trilogy project. However, FBI officials also stated they would make the necessary entries to properly record any of the remaining 134 assets for which they subsequently determine the status. Although the FBI developed or revised policies and procedures in response to 17 of our prior recommendations, our testing to assess their implementation FBI-wide identified possible issues in certain areas. In our testing of the four recommendations dealing with interagency agreements and contracts, we found that they were effectively implemented, but we identified a new issue unrelated to our prior recommendations. In our implementation testing for the remaining 13 corrective actions, we identified indications of implementation issues for 3 of them. As shown in table 1, our tests related to policies and procedures over interagency agreements and contracts indicated that the FBI had effectively implemented these corrective actions. In the course of testing the interagency agreement sample transactions, we identified a new issue unrelated to our prior recommendations. Specifically, the Federal Acquisition Regulation (FAR) requires that any interagency agreement entered into under the authority of the Economy Act, 31 U.S.C. § 1535, be supported by a Determination and Findings document. The Determination and Findings form identifies the responsible agencies to the agreement (requesting agency and servicing agency), is prepared by the requesting agency, and identifies the goods or services that are to be provided by the servicing agency. In addition, it documents the requesting agency’s determination that, among other things, the use of an interagency acquisition is in the best interest of the government, and the supplies or services cannot be obtained as conveniently or economically by contracting directly with a private source. The FAR also requires that the requesting agency complete the Determination and Findings form before placing an order for supplies or services with another government agency. In reviewing our statistical sample of 55 interagency agreements with regard to implementation of our prior recommendations, we identified 54 interagency agreements that were required to comply with FAR requirements related to Determination and Findings and found that 15 of them did not comply with these FAR requirements. For these 15 cases, the required Determination and Findings forms supporting the execution of interagency agreements between the FBI and other federal entities were prepared and signed after the interagency agreements were executed—in some cases more than a year later. Three Determination and Findings forms were signed less than 3 months after the date of the related purchase orders were issued. One Determination and Findings form was signed between 3 months and 6 months after the date of the related purchase order was issued. Seven Determination and Findings forms were signed between 6 months and 1 year later. Four Determination and Findings forms were signed more than a year after the date of the related purchase orders. Based on the results of our review, we are 95 percent confident that the total percentage of interagency agreements executed by the FBI in fiscal year 2009 that lacked a required Determination and Findings form prior to the FBI placing the order could be as much as 39.5 percent. FBI officials acknowledged that the Determination and Findings forms were not completed prior to placing orders for goods and services and provided two explanations. The interagency agreements and related documentation for some of them were executed by a new employee who was instructed to prepare and include the Determination and Findings forms after the files had been reviewed by the Unit Chief, and a contracting officer did not prepare and submit the interagency agreement documentation to the Unit Chief in a timely manner for the others. The FBI’s monitoring of the interagency agreement process did not identify that the Determination and Findings forms were not properly prepared as required. Internal controls should be designed to assure that ongoing monitoring occurs in the course of normal operations. By not completing a required Determination and Findings form prior to issuing a purchase order, obligating the agency for the purchase order amount, the requesting agency risks obligating funds for supplies and services or both that are not in the best interest of the government, and executing a contract that is not in compliance with federal laws or regulations. Of the remaining 13 corrective actions that involved the implementation of FBI-wide policies and procedures, our testing found indications that 3 of them may not have been fully or consistently implemented. As shown in table 2, our tests of non-statistically selected transactions identified implementation issues primarily in policies and procedures related to review of contractor invoices and accountability for purchased assets. As shown in table 2, our detailed testing found instances in which the FBI had not fully implemented the policies and procedures established in response to our prior recommendations in this area. Internal control standards require agencies to establish controls that reasonably ensure, among other things, that funds, property, and other assets are safeguarded against waste, loss, or unauthorized use. The FBI requires contractors bidding on contracts to submit proposals that include direct labor categories and rates, subcontractor labor categories and rates, and other direct costs used to calculate the total cost of their proposal. Contractor invoices must include key information such as employee name, labor classification, rate of pay, hours worked for billed labor charges and support for other charges. FBI guidance states that staff performing invoice reviews should compare the key data to the contractor proposal to verify the accuracy of amounts charged. During our review of a non-statistical sample of 37 contractor invoices, we found unsupported charges of $292,684 on five invoices submitted by three contractors for three separate contracts that totaled $6,293,046 for prime contractor and subcontractor direct labor, materials, and other direct costs. Specifically, these totals include: We reviewed an invoice, dated October 5, 2009, submitted by one contractor that included direct labor charges of $16,963 for one labor group that was not included in the contractor’s cost proposal. The FBI acknowledged that the labor group was not listed in the original proposal by the contractor but stated that during the course of the contractual effort, the contractor determined there was a need for labor to be performed on the contract that required the skill set of a labor group that had not been included in the contractor’s cost proposal. In addition, the FBI stated that the rate charged resulted in a savings to the FBI under this contract without affecting the contract schedule or deliverables. However, the FBI did not provide us with documentation supporting the FBI’s approval of the new labor rate for the contract prior to the period billed on the invoice. In addition, the invoice included $50,000 for the work of a subcontractor. In our review of the contractor’s proposal related to subcontractor labor, we noted that it included, for this specific subcontractor, a proposed labor rate of $184.84 for 610 hours for a total of $112,752. However, the invoice documentation did not include any information such as the name of the subcontractor employee(s), the labor category, the hours worked, or the rate of pay under other direct costs that would allow the FBI to verify the accuracy and validity of the charges. In our review of two invoices submitted by another contractor, we found that the contractor had billed the FBI $97,851 for direct labor and subcontractor labor at rates, six for the contractor and three for a subcontractor, which were not included in the contractor’s proposal. Similarly, in our review of two invoices submitted by a contractor for a third contract we found that they included labor charges of $127,870 at hourly labor rates, for four contractors and two subcontractors, which were not supported by the contractor’s proposal. We also discussed our findings related to the second and third contractor’s invoices with FBI officials, and they explained that in reviewing the invoices they focus on the status of the project and its various components or tasks. They also stated that both contractors submitted monthly reports to the FBI that included the actual costs of the project for each current month as well as the costs of the project to date and compared the costs to project’s budget. However, the FBI also stated that it did not require the contractors to provide analyses for cost variances except when variances exceed thresholds set for the two contracts. Without verifying labor groups and labor rates billed on contractor invoices against the contractor’s proposal as required by FBI policy, the FBI is at increased risk that it will not identify erroneous or improper billings and will disburse government funds for unallowable contractor charges. As shown in table 2, we also found instances in which the FBI did not record accountable property items in its system in a timely manner and did not accurately record key accountability information such as location and serial numbers as required by the FBI’s policies and procedures. The FBI’s revised policy, which is in response to our prior recommendation, requires that accountable property be recorded into the Property Management Application (PMA) within 48 hours of receipt instead of within 30 days of receipt, which was the FBI’s policy at the time our 2006 report. Internal control standards require agencies to establish controls that reasonably ensure, among other things, that funds, property, and other assets are safeguarded against waste, loss, or unauthorized use. In our review, we found 406 pieces of accountable property out of the 674 we tested had not been recorded in PMA within 48 hours of being received as now required and that some had not been recorded until more than a month after being received. However, we also noted that the FBI, while not adhering to its more stringent current policy, had recorded 90.7 percent of the accountable property we tested within 30 days of receipt. This represents an improvement from the situation that existed at the time of our Trilogy work. During its agencywide upgrade of hardware and software under the Trilogy project, the FBI only recorded 28.4 percent of accountable property that we reviewed, within 30 days of receipt, as reported in our 2006 report. FBI management acknowledged that property was not being recorded in compliance with its policy. FBI management officials explained that this condition was due to property being ordered and received by numerous FBI divisions and field offices and that some of these divisions and field offices, did not have dedicated staff for recording purchased assets in PMA immediately upon receipt of the property. This situation serves to delay the recording of the assets in PMA. In addition, they explained that some accountable property ordered by the various FBI offices is delivered to FBI storage facilities and held for security reasons before being delivered to the end user and that these properties are not recorded in PMA until received by the end user. Recording of property in PMA is critical in establishing accountability. The longer it takes to record property in PMA, the greater the risk that property may be stolen or lost without detection by the FBI. In 2006, the FBI issued a policy to all FBI divisions that made recording the location field when accountable property is added to PMA or when corrections to records are made, mandatory. In addition, the policy stated that the information recorded in the location data field is the location of the property within the division or “legat.” In reviewing the data entry screens for recording assets in the FBI’s property management application we noted that there are fields that can be utilized by the property custodian to provide a location within the division or legat. In our review of the PMA screens for the selected property items we found that the information recorded in PMA for 80 of the 674 records did not provide sufficient information on the location of the property within the division as required. In addition, we found that the serial number field was either blank, incomplete, or had the entry “719TOBEADDED” in the PMA records for 14 of the 674 tested assets. In addition, the five records that had “719TOBEADDED” recorded, had not been updated for more than a year. We also found 45 PMA records in which the model description was entered as “TO BE ADDED.” The model description was missing for all 45 assets for more than a year, with 6 of these assets lacking this information for almost 2 years since they were first entered in PMA. We brought these findings above to the attention of FBI officials. With regard to the location information, the FBI stated that while the location field is mandatory, there is no requirement on the amount of detail to be listed. However, as mentioned previously, the 2006 policy issued by the Asset Management Unit clearly states that the information recorded in the location data field is the location of the property within the division or legat. The lack of key information such as model, manufacturer, description, serial number, and specific location information in PMA as required by FBI policy would limit its ability to investigate assets reported as missing during physical inventories. In addition, inadequate location information results in the lack of a systematic means of identifying where an asset is located or when it is moved, transferred, or disposed of. The FBI has taken action to address 26 of the 27 recommendations we made in our prior Trilogy and Sentinel reports. Many of these actions involved developing policies and procedures. Developing and communicating policies and procedures, while critical, is only the first step that the FBI must take to address the identified internal control weaknesses. Management must also ensure that the policies and procedures are effectively implemented throughout the agency. Although we found that the FBI had effectively implemented policies and procedures related to interagency agreements and contracts, our tests on the statistical selected transactions showed that additional action is needed to ensure that Determination and Findings forms are properly completed before the FBI enters into interagency agreements. With an estimated 40 percent of its interagency agreements lacking a properly completed Determination and Findings form, the FBI increases the risk that it is obligating funds for supplies and/or services that are not in the best interest of the government or executing a contract that is inconsistent with federal laws or regulations. Further, we identified several other areas where the implementation of policies and procedures, primarily related to review of contractor invoices and accountability for purchased assets, may need to be strengthened. Our testing of selected invoice transactions identified unsupported labor categories and rates billed by contractors. This situation points to a lack of thorough review of contractor invoices. This weakness puts the FBI at risk of making payments to contractors for questionable or improper charges. Additionally, our testing of selected accountable property items identified property items that were not timely or accurately recorded. This problem decreases the FBI’s ability to adequately safeguard its accountable property. Identifying and correcting any systemic weaknesses in these areas will be critical to achieving sustainable improvements in the FBI’s agencywide controls over its procurement activities. We recommend that the Director of the FBI direct the Chief Financial Officer take the following three actions. Enhance the monitoring of the interagency agreements process to ensure that Determination and Findings forms are prepared, when applicable, in accordance with federal and agency requirements. In the area of contractor invoice review and approval, we recommend the Director of the FBI to direct the Chief Financial Officer to: review agencywide implementation of the new or revised policies and procedures related to our prior recommendations to verify that invoice costs are in accordance with contract terms to determine if the indications of issues we identified in this report represent systemic, agencywide implementation deficiencies, and take appropriate, cost-effective actions to better ensure agencywide compliance with the applicable policies and procedures. In the area of property accountability, we recommend the Chief Financial Officer be directed to: review agencywide implementation of the new or revised policies and procedures related to our prior recommendations to record specific data for acquired assets within specified time frames to determine if indications of issues we identified in this report represent systemic, agencywide implementation deficiencies, and take appropriate, cost-effective actions to better ensure agencywide compliance with the applicable policies and procedures. In its written comments, FBI concurred with our recommendations and stated that it has already initiated changes to its processes and procedures to address our recommendations. FBI stated that it provided interagency agreement training to its contract specialists and is now testing an application to monitor, collect, and document information for all FBI interagency agreements. The FBI further stated that it is taking steps to ensure that invoices are properly reviewed, including strengthening its procurement training curriculum and modifying the current contract specialist file review checklist to include comparing invoiced labor categories and costs to labor categories and costs in supporting contracts. Additionally, the FBI stated that it has developed an accountable property officer training course intended to help ensure that its divisions have an effective and efficient property management program, and that actions are under way to configure a new property management application to include additional controls to better track physical location of purchased assets. If properly implemented, the activities outlined in FBI’s letter should help further improve FBI’s accountability for future interagency acquisitions and accountable property. FBI’s comments are reprinted in their entirety in appendix III. FBI also provided technical comments, which we have 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 30 days from the report date. At that time, we will send copies to interested congressional committees. We will also send copies to the Attorney General, the Director of the Federal Bureau of Investigation, and other interested parties. The report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9471 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To address our first objective to determine whether the FBI’s new or revised policies and procedures and other specific corrective actions were sufficient to address the 27 recommendations we made in our Trilogy and Sentinel reports, we performed an assessment of the FBI’s corrective action plans and reviewed additional supporting documentations received from the FBI. Specifically, in its required 60-day letter to Congress, the FBI explained the corrective actions it had taken or planned to take to address the issues we identified in our report. In addition, in mid-2006, the FBI submitted additional documentation to GAO which included revised or updated corrective action plans for each recommendation. Also, in the third quarter of 2009, the FBI submitted additional documentation to GAO for selected recommendations to support additional corrective action steps taken since 2006. We also identified key operations and management officials at the FBI responsible for the development of the corrective actions and conducted interviews and walk- throughs to ensure that we fully understood the corrective actions. We reviewed additional information and documentation identified during our interviews, as well as new and revised policies and procedures and training materials received from the FBI, and utilized this information to make a determination of whether the corrective actions were adequately designed to address our recommendations. To address our second objective to determine whether there were any indications of implementation issues related to the policies and procedures that the FBI developed to address 17 of the 27 recommendations, we selected statistical samples of interagency agreements and contracts. We then non-statistically selected purchase orders, invoices, and accountable property from the contracts selected in the statistical samples and performed a variety of detailed tests. In our review of the FBI’s corrective action plans, we determined that the agency had continued to take corrective actions to address our recommendations through fiscal year 2008. Therefore, in order to obtain a more representative population of transactions that had occurred after the last corrective actions had been put in place, we decided to select statistical samples from a population of transactions that occurred in fiscal year 2009. Because we selected statistical samples for testing implementation of certain new or revised policies and procedures, we assessed the reliability of the FBI’s contracting, interagency-agreement, and property- data files by first identifying and documenting the controls in place at the FBI for ensuring accurate and complete data is recorded into information systems during the FBI’s contracting, interagency-agreement, and property-acquisition processes and then assessing whether these controls appeared adequate. We inquired about the processes by which interagency agreements, contracts, and purchase orders are completed and recorded and developed an understanding of the controls designed to ensure data entered into FMS for interagency agreements and contracts is accurate and complete. In addition, we reviewed DOJ’s annual financial statement internal control reports for fiscal years 2007, 2008, and 2009 to identify any material weaknesses or reportable conditions related to the information systems identified in the step above. We also analyzed data listings to identify any anomalies in the data fields such as blank cells or inconsistent naming conventions for contracts and interagency agreements and obtained explanations for any anomalies noted. Based on these steps, we determined the FBI’s contract, interagency-agreement, and property-data files were sufficiently reliable to address the objectives of this report. We selected a statistical sample of 55 interagency agreements from a total population of 494 interagency agreements executed by the FBI during fiscal year 2009. In our testing of interagency agreements, we verified that all agreements clearly defined the roles and responsibilities relative to contract administration including invoice submission for both parties. During our testing, we also considered new guidance on interagency agreements issued by the Office of Management and Budget’s (OMB) Office of Federal Procurement Policy that the FBI disseminated to all of its procurement chiefs. We selected a statistical sample of 32 contracts from a population of 51 contracts executed in fiscal year 2009. In addition, for each of the 32 contracts in the sample, we selected all related purchase orders for testing. The total number of purchase orders selected for testing was 34. Our contract and purchase-order testing consisted of determining whether the contracts and/or purchase orders (1) clearly specified key cost determination provisions; (2) clearly reflected the appropriate Federal Acquisition Regulation travel cost requirements; and (3) contained provisions regarding the contractor’s review of subcontractor charges. In addition, for purchase orders only, we determined whether the purchase orders were sufficiently detailed to verify the receipt of property and other goods and services. We obtained a listing of all invoices that had been submitted to the FBI for the purchase orders we selected noting that invoices had not yet been submitted to FBI for 7 of the 34 purchase orders. A total of 110 invoices had been submitted for the other 27 purchase orders we selected—one invoice each had been submitted for 16 of the purchase orders, two invoices each for 3 of the purchase orders, and three or more invoices had been submitted for the remaining 8 purchase orders. In selecting invoices for testing, we selected all invoices for those purchase orders that only had either one or two invoices. For each of the 8 purchase orders with three or more invoices, we selected the invoice with the highest dollar value for testing and one other invoice on a non-judgmental basis. The total number of invoices selected for testing was 37. Our invoice testing consisted of determining whether the contractor’s invoice and supporting documentation (1) provided evidence of the FBI review and approval of the charges by the parties designated in the contract; (2) included evidence that goods and services billed on the invoice were received; (3) provided sufficient information to support the charges; (4) included amounts that were appropriate and in accordance with contract terms; and (5) provided evidence that the FBI properly documented the resolution of invoice discrepancies. We also asked the FBI to provide a listing of all accountable property included in its Property Management Application (PMA) for each of the 34 purchase orders we reviewed. According to the FBI’s listing, 20 of the 34 purchase orders included accountable property that had been recorded in the FBI’s PMA. There were a total of 674 individual items of accountable property for the 20 purchase orders. We included all 674 items of accountable property for our property testing. Our property testing consisted of determining whether the FBI (1) entered in PMA the appropriate purchase order number, asset description, and physical location of the accountable property purchased; (2) entered all accountable property in PMA within the time frame specified in the FBI’s policy; (3) assigned bar codes to the accountable property when received and annotated the assigned bar codes in the receiving reports and in PMA; (4) properly documented any accountable property rejected immediately upon delivery; and (5) properly updated the PMA records of all accountable property returned after being accepted. We requested comments on a draft of this report from the FBI. We received written comments from the FBI on August 11, 2011, and have summarized those comments in the Agency Comments section of this report. FBI’s comments are reprinted in appendix III. We conducted this performance audit from February 2010 through September 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform our audits 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. Interagency agreements and contract Administration 1. To improve FBI’s controls over its review and approval process for cost-reimbursement type contract invoices, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that future interagency agreements establish clear and well-defined roles and responsibilities for all parties included in the contract administration process, including those involved in the invoice review process, such as contracting officers, technical point of contacts, contracting officer’s technical representatives, and contractor personnel with oversight and administrative roles. In July 2008, FBI’s Senior Procurement Executive issued Procurement Guidance Document 08-10 to all Bureau Procurement Chiefs that incorporated a memorandum from the Office of Federal Procurement Policy (OFPP), Office of Management and Budget (OMB), which discussed new guidance on interagency agreements. The new OFPP guidance, issued in June 2008, requires the requesting agency and the servicing agency to assign specific roles for each agency and is to be fully implemented for all interagency agreements executed after November 3, 2008. The guidance discusses, among other things, the need for defining roles such as the COTR and establishing specific responsibilities for those roles. It further elaborates on responsibilities for identifying an appropriate invoice review official prior to submittal of the first invoice and inspecting and rejecting contract work as necessary. 2. To improve FBI’s controls over its review and approval process for cost-reimbursement type contract invoices, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that labor rates, ceiling prices, treatment of overtime hours, and other key terms for cost determination are clearly specified and documented for all contracts, task orders, and related agreements. In December 2008, FBI’s Policy Training Unit created an intranet site, the Contract Specialist Corner, to provide contract specialists/contract officers with procurement information and guidance. The site includes links to procurement guidance and directives issued by DOJ, the FBI’s Policy Training Unit, and Federal Acquisition Regulation (FAR) circulars issued by the FAR council, as well links to standard procurement forms used in the procurement process. The site also provides access to contract execution checklists for different contract types, as well as standard FAR clauses applicable to various types of acquisitions including clauses related to labor rates, ceiling prices, treatment of overtime hours, and other key contract terms. In addition, in 2009, the Policy Training Unit created a separate intranet site for contracting officer technical representatives (COTR) as well as one for field offices to provide on-line access to procurement guidance and documentation. In addition, since January 2009 the Policy Training Unit has held monthly training sessions for contract specialists/contracting officers to ensure that directives issued by DOJ and FBI are being implemented properly. Development of policies and procedures and other actions taken process for cost-reimbursement type contract invoices, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that an appropriate process is in place to assess the adequacy of contractor’s review and documentation of submitted subcontractor charges before such charges are paid by FBI. In December 2008, FBI’s Policy Training Unit created an intranet site, the Contract Specialist Corner, to provide contract specialist/contract officers with procurement information and guidance, including references (and hyperlinks) to all procurement guidance documents that have been issued by DOJ, the Policy Training Unit, and FAR circulars issued by the FAR council. In addition, the site includes a section, FAR Matrix of Clauses, which provides information on applicable FAR clauses, including guidance useful to contract specialists in determining whether subcontractor clauses are necessary. In addition, in 2009, the Policy Training Unit also created two other separate intranet sites for contracting officer technical representatives (COTR) and Field Offices. The COTR site includes links to procurement guidance that includes discussion of contract administration responsibilities related to the COTR, prime contractor and subcontractor, as well as provides access to the documentation related to the activities of the COTR. In addition, since January 2009, the Policy Training Unit has held monthly training sessions for contract specialists/contracting officers to ensure that directives issued by DOJ and FBI are being implemented properly. In December 2008, FBI’s Policy Training Unit created an intranet site, the Contract Specialist Corner, to provide contract specialist/contract officers with procurement information and guidance, including references to all procurement guidance documents issued by DOJ, the Policy Training Unit, and FAR circulars issued by the FAR council, including those related to travel cost requirements (i.e., using the lowest standard coach or equivalent airfare). Specifically, the site includes a section, FAR Matrix of Clauses, which provides information on applicable FAR clauses, including those related to travel cost requirements. In addition, since January 2009, the Policy Training Unit has held monthly training sessions for contract specialists/contracting officers to ensure that directives issued by DOJ and FBI are being implemented properly. process for cost-reimbursement type contract invoices, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that future contracts clearly reflect the appropriate Federal Acquisition Regulation travel cost requirements, including the purchase of the lowest standard, coach, or equivalent airfare. FBI has established policies and procedures designed to provide guidance on its invoice review and approval process. Specifically, FBI issued two electronic communications that provided guidance on the invoice review and approval process. The first electronic communication, titled “Invoice Processing - Purchase Orders and Contracts,” states that the Contracting Officer is responsible for ensuring that the requirements for a proper invoice are attached and incorporated as a condition of the purchase order and for contracts, ensuring that the applicable clause is included. The second electronic communication, titled “Vendor Invoice and Payment Matter,” provides guidance on the information that constitutes a proper invoice and on the documentation required to support the payment of invoices. FBI incorporated these electronic communications in its Manual of Administrative Operations and Procedures (MAOP) Part 2 - Section 6-5.2, titled “Invoices under Purchase Orders/Contracts,” issued in February 2007. The section states that prior to submitting an invoice to the FBI’s Contracting Officer (CO) for approval and payment, the FBI requesting division is responsible for ensuring that goods and services are received in accordance with contract terms. Section 6-5.2 of the MAOP also states that the FBI CO is responsible for verifying that all required information is on the invoice before approving it. process for cost-reimbursement type contract invoices, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that appropriate steps are taken during the invoice review and approval process for every invoice cost category (i.e., labor, travel, other direct costs, equipment, etc.) to verify that the (1) invoices provide the information required in the contract to support the charges, (2) goods and services billed on invoices have been received, and (3) amounts are appropriate and in accordance with contract terms. 6. To improve FBI’s controls over its review and approval process for cost-reimbursement type contract invoices, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that the resolution of any questionable or unsupported charges on contractor invoices identified during the review process is properly documented. FBI has established policies and procedures related to properly documenting the resolution of any questionable or unsupported charges on invoices identified during the invoice review process. Specifically, Part 2, Section 6-9.3.3 of FBI’s Manual of Administrative Operations and Procedures (MAOP), version dated 2/26/07, titled “Review of Invoices,” and FBI’s Electronic Communication titled “Vendor Invoice and Payment Matter” specifies requirements for FBI to properly document the reasons for determining that an invoice is improper, the date the invoice is returned to the vendor, and the date a corrected invoice is received from the vendor. Development of policies and procedures and other actions taken the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that invoices are paid only after all verified purchase order and receipt documentation has been received by FBI payment officials and reconciled to the invoice package. In November 2006 FBI issued a policy titled, “Implementation of Invoice Submission Form for Invoices and Intragovernmental Payment and Collection Process by CPCSU,” 319E-HQ- A1487524-FD. This policy requires that all invoices sent to the commercial payment unit beginning in November 2006 must include a completed invoice submission form as the cover sheet. The new required form includes the following fields to be completed by the submitting division: vendor number, invoice date, acceptance date, purchase order number, purchase order line number, purchase order quantity, total amount, date the COTR and the contracting officer (1) received the invoice form, (2) approved it—with their signature, and (3) the date they sent it on to the next responsible party. Collectively, these actions to establish policies requiring confirmation of receipt of goods and services before payment addresses our recommendation. 8. To address issues on the Trilogy project that could represent opportunities for recovery of costs, the Administrator of General Services, in coordination with the Director of FBI, should determine whether other contractor costs identified as questionable in this report should be reimbursed to FBI by contractors. 9. To address issues on the Trilogy project that could represent opportunities for recovery of costs, the Administrator of General Services, in coordination with the Director of FBI, should further investigate whether DynCorp Information Systems’ labor rates exceeded ceiling rates and pursue recovery of any amounts determined to have been overpaid. 10. To address issues on the Trilogy project that could represent opportunities for recovery of costs, the Administrator of General Services, in coordination with the Director of FBI, should confirm the Science Applications International Corporation’s (SAIC) informal Extended Work Week policy and work with SAIC to determine and resolve any overpaid amounts. 11. To address issues on the Trilogy project that could represent opportunities for recovery of costs, the Administrator of General Services, in coordination with the Director of FBI, should consider engaging an independent third party to conduct follow-up audit work on contractor billings, particularly areas of vulnerability identified in this report. In January 2007 GSA requested, on behalf of the FBI, that Defense Contract Audit Agency (DCAA) perform post-award audits of direct costs incurred and billed by contractors under the FBI’s Trilogy project. In March 2008, DCAA reported the results of its audit related to SAIC reporting questioned costs of $3.7 million. As a result of this audit, FBI recovered $3.2 million from SAIC. In December 2008, DCAA reported the results of its audit of the direct costs incurred and billed by Computer Sciences Corporation (CSC) reporting questioned costs of $14.95 million, $9.7 of which was related to labor charges. In addition to questioned costs related to labor rates exceeding ceiling rates, DCAA reported additional CSC questioned costs of $1,825,952 related to airfare costs because the costs were inadequately supported and exceeded the lowest customary standard coach or equivalent airfare, and $979,187 of labor costs because of lack of personnel qualifications or lack of supporting documentation that shows the employees’ labor qualifications. DCAA’s report also incorporated evaluations of costs incurred by the largest subcontractors that performed under CSC’s task order. The report questioned costs for subcontractors CACI, DigitalNet, PlanetGov/Apptis, Inc. and others totaling $5.1 million. The types of subcontractor questioned costs reported by DCAA included 1) supporting timesheets that were either not certified by the consultant or not approved by an appropriate/approving authority 2) use of personnel that did not meet the minimum labor qualifications, and 3) unsupported or inadequately supported transactions. With regard to these questioned costs, in March 2009, the Department of Justice, Office of Inspector General, began an investigation to determine whether the billings were potentially fraudulent and involved criminal conduct by CSC and its subcontractors. In commenting on a draft of this report, the FBI informed GAO that the Inspector General’s report on this matter was under review by OIG management. Development of policies and procedures and other actions taken 12. To improve FBI’s accountability for purchased assets, the Director of FBI should instruct the Chief Financial Officer to reinforce existing policies and procedures so that when assets are delivered to FBI sites, they are verified against purchase orders and receiving reports. Copies of these documents should be forwarded to FBI officials responsible for reviewing invoices as support for payment. The FBI has reinforced policies and procedures related to verifying assets received to purchase orders and receiving reports. Specifically, FBI issued an Electric Communication to all divisions in November 2005 to reinforce FBI’s policy that all accountable property be entered in the Property Management Application (PMA) immediately upon receipt and that data recorded in FBI’s financial management system must include the purchase order number and the destination division. The information entered into the financial management system is to be immediately uploaded to PMA for verification of the accuracy of property being recorded in PMA with specific purchase orders. In addition, the FBI issued an electronic communication to all divisions in November 2006 to implement a new invoice submission form to be used with all commercial invoices to improve the information provided to the payment unit for invoices. The electronic communication required that the invoice submission form include various fields, including, purchase order line number - purchase order line number to charge the invoice, purchase order quantity – quantity to be paid for the invoice, and Total amount – total amount to be paid by purchase order line. 13. To improve FBI’s accountability for purchased assets, the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures so that (1) purchase orders are sufficiently detailed so that they can be used to verify receipt of equipment at FBI sites, and (2) contractor invoices are formatted to tie directly to purchase orders and facilitate easy identification of equipment received at each FBI site. The FBI formed the Policy Training Unit in 2007 which is responsible for all acquisition policy and acquisition training within the FBI, including implementation, updates, and training of specialized acquisition matters. Since January 2009, the Policy Training Unit holds monthly contractor specialist training sessions at which participants discuss new procurement guidance issued by DOJ and procurement directives issued by FBI and implementation. According to FBI, during these procurement training sessions, the Policy Training Unit staff have stressed the importance to contracting officers of generating purchase orders with a sufficient level of detail so that the requesting division can use the purchase order to verify equipment receipt. In addition, the FBI formed the Acquisition Strategy and Planning Unit in March 2006. The Acquisition Strategy and Planning Unit developed training materials for acquisition planning that included guidance on the FD-369, the requisition form which is also used in generating purchase orders, which states that equipment and services be on separate lines. 14. To improve FBI’s accountability for purchased assets, the Director of FBI should instruct the Chief Financial Officer to establish a policy to require that upon receipt of property at FBI sites, FBI personnel immediately identify all accountable assets and affix bar codes to them. In order to record an asset on PMA it must have a bar code assigned. In November 2005, FBI issued an electric communication to reinforce accountable property policies and procedures by requiring that all divisions record accountable property in PMA within 48 hours of being received. If fully and effectively implemented, this policy should improve the FBI’s accountability over purchased assets. Development of policies and procedures and other actions taken the Director of FBI should instruct the Chief Financial Officer to revise FBI’s policies and procedures to require that all bar codes are centrally issued and tracked through periodic reconciliation of bar codes issued to those used and remaining available. Assigned bar codes should also be noted on a copy of the receiving report and forwarded to FBI’s Property Management Unit. FBI has taken action to strengthen controls that help ensure all accountable property is bar coded and properly recorded by issuing a March 2009 electronic communication (approved by the Chief Financial Officer) that requires all FBI offices to perform a weekly review of the On Order Report to ensure that all property that has been receipted in FBI’s financial management system is also added to PMA. The On Order Report lists all property items associated with a particular purchase order that do not show having been recorded in the PMA, thus providing FBI with the ability to identify and investigate potentially missing and/or unrecorded property items. Also, our September 2010 walk-through of the process to enter assets into PMA found that the bar code numbers are annotated on copies of the receiving reports that are forwarded to the property custodian as we had recommended. In addition, we noted that the FBI’s Asset Management Unit is solely responsible for issuing bar codes to FBI offices and the unit requires that all offices sign an FD-281 verifying receipt of bar codes. 16. To improve FBI’s accountability for purchased assets, the Director of FBI should instruct the Chief Financial Officer to revise FBI policies and procedures to require that accountable assets be entered into PMA immediately upon receipt rather than within the current 30-day time frame. In November 2005, FBI issued an electric communication to reinforce accountable property policies and procedures by requiring that all divisions record accountable property in PMA within 48 hours of being received. 17. To improve FBI’s accountability for purchased assets, the Director of FBI should instruct the Chief Financial Officer to require officials inputting data into PMA to enter (1) the actual purchase order number related to each accountable equipment item bought, (2) asset descriptions that are consistent with the purchase order description, and (3) the physical location of the property. The FBI has taken action to enhance its PMA to help ensure the accuracy and completeness of reporting on the status of property on order, the On Order Report, including installing a system edit limiting data entry to those transactions with valid purchase order numbers. Specifically, FBI issued an electric communication “Property Management Application Policy Change” on 02/15/2006 that provides that assets added to PMA must include data in the PMA location field. We confirmed that the FBI developed and put in place system edit checks that were effective in ensuring that only valid purchase order numbers were recorded into PMA and that related purchase order information was automatically and accurately uploaded from the financial management system into PMA. Development of policies and procedures and other actions taken the Director of FBI should instruct the Chief Financial Officer to establish policies and procedures related to the documentation of rejected or returned equipment so that the (1) equipment that is rejected immediately upon delivery is notated on the receiving report that is forwarded to FBI officials responsible for invoice payment and (2) equipment that is returned after being accepted at an FBI site (e.g., items returned due to defect) is annotated in PMA, including the serial number and location of any replacement equipment, under the appropriate purchase order number. In September 2006, FBI issued an electric communication to all divisions requiring that the Asset Management Unit be notified of any accountable property returned to vendors to ensure that the return of the property is recorded in PMA. If a replacement is provided by the vendor the Asset Management Unit is to revise the PMA records to provide descriptive information for the new property item (serial number and barcode) and show it as “Active” and show the barcode of the returned piece of property as “Inactive.” In addition, when a piece of accountable property delivered to FBI is returned and a replacement is to be provided by the vendor, the item is to remain on FBI’s On Order Report until a replacement is received and not to be recorded in PMA. We also noted, during our discussions with officials from the FBI’s commercial payment unit that FBI’s financial management system will not allow a disbursement of funds until the property has been recorded as received. FBI issued an electric communication “2009 Wall-to-Wall Inventory of Property, Plant, Equipment, and Issued Personal Property” that included additional directions to the inventory staff to ensure that, property information recorded in PMA was accurate. Specifically, the directive included detailed steps on how to request changes to correct errors in the manufacturer or model description fields in PMA for property identified during the inventory. The directive included as an attachment, a form titled “2009 INVENTORY CHANGES FOR MANUFACTURER & MODEL #s” to request a change or modification to these fields. the Director of FBI should instruct the Chief Financial Officer to expand the next planned physical inventory to include steps to verify the accuracy of asset identification information included in PMA. Development of policies and procedures and other actions taken the Director of FBI should instruct the Chief Financial Officer to reassess overall physical inventory procedures so that all accountable assets are properly inventoried and captured in the PMA system and that all unlocated assets are promptly investigated. FBI has reassessed its inventory procedures as reflected in changes to instructions provided to all divisions through electronic communications in advance of wall-to-wall inventories. The FBI issued an electronic communication in advance of the wall to wall inventory titled “2009 The Wall-to- Wall Inventory of Property, Plant, Equipment and Issued Personal Property” on 3/31/2009 for the wall-to-wall inventory to be held beginning 4/13/09. The electronic communication includes instructions that are related to findings we reported. For example, the 2009 electronic communication states that during the inventory, only the PMA custodians will have access to change only the serial number due to the fact that 95% of the manufacturer and/or model information has now been standardized on PMA. In addition, the 2009 electronic communication included additional language that stressed a complete inventory, stating that all additions must be added to the PMA during the inventory period in order to comply with a “fully completed” wall-to-wall inventory because failure to comply with the procedure would result in an “incomplete” inventory. The 2009 electronic communication also included new language on property issued to individual employees and contractors, which stated, Each office is to ensure that the issued personal property for each employee and contractor is inventoried. Discrepancies for issued personal property are to be forwarded to the appropriate FBIHQ Program Managers and the Asset Management Unit should be notified of these changes. Lastly, the electronic communication included a section titled “Required Procedures for Concluding Inventory” that included additional language related to lost and stolen property and additions. Beginning in 2008, the FBI’s Finance Division’s audit unit expanded its audit coverage to include conducting audits of compliance with FBI policies and procedures for review and approval of contractor invoices, government purchase card usage, and oversight for the semi-annual audits of property and equipment at the FBI field offices and divisions. Further, the Audit Unit Chief informed us that his unit expanded the scope of its audits to include audits of internal controls related to accountable property on a periodic basis as needed in response to significant events at FBI. For example, in fiscal year 2009 the FBI initiated the Next-Generation Workstation Tech Refresh program (NGW) to purchase approximately 47,000 new computers. The Finance Division audit unit performed on-site reviews at the Seattle field office and the Portland field office to determine whether required controls over property accountability were in place as the computers from the NGW program were being distributed throughout the agency. the Director of FBI should instruct the Chief Financial Officer to establish an internal review mechanism to periodically spot check whether the steps listed above- including verifications of purchase orders and receiving reports against received equipment, immediate identification and bar coding of accountable assets, maintenance of accurate asset listings, prompt entry of assets into PMA, documentation of rejected and returned equipment, and improved bar coding and inventory procedures- are being carried out. Development of policies and procedures and other actions taken the Director of FBI should instruct the Chief Financial Officer to investigate all missing, lost, and stolen assets identified in this report to (1) determine whether any confidential or sensitive information and data may be exposed to unauthorized users and (2) identify any patterns related to the equipment (e.g., by location, property custodian, etc.) that necessitates a change in FBI policies and procedures, such as assignment of new property custodians or additional training. In March 2011, the FBI provided us with documentation on the results of its investigation into the status of the over 1,200 assets that acknowledged that 134 assets remained unaccounted for. The assets that remain unaccounted for include some that could contain sensitive information, such as desktop computers, laptops, and servers.We initially identified 1,404 assets as missing, lost, or stolen, but prior to the issuance of our 2006 report the FBI provided additional documentation that enabled us to verify an additional 199 assets on PMA that we initially determined to be missing. lost, or stolen, reducing the number reported to 1,205. The FBI has not provided an analysis to identify any patterns related to these assets that would be helpful for identifying any needed changes to FBI policies and procedures. 23. We recommend that the Director of the FBI direct the Sentinel Program Manager to modify existing Sentinel policies and procedures to require the Sentinel property manager to verify for every property shipment that data in the Lockheed Martin database are complete and accurate before using these data to create or update FBI’s official property records in PMA. FBI modified its existing policies and procedures to include a policy of verifying accuracy and completeness of data in the Lockheed Martin database. Specifically, Section 2.2.3 of FBI’s Property Management Policy & Procedures, prepared by Office of IT Program Management, Sentinel Program and Business Management Team, version dated 9/3/2008, titled “Receipt of Property” policy specifies requirements of the Sentinel Property Manager to verify the accuracy of equipment data on the property list uploaded by the contractor before using this data to enter equipment to PMA upon receipt and verification of equipment. The equipment data on the property list refers to the Lockheed Martin database for Sentinel project. 24. We recommend that the Director of the FBI direct the Sentinel Program Manager to modify existing Sentinel policies and procedures to require that the Sentinel property manager perform monthly reconciliations of the key property records (i.e., the BOM, the vendor invoices, the Lockheed Martin database, and PMA) throughout each subsequent phase of Sentinel rather than a single close-out reconciliation at the completion of a phase. FBI modified its existing policies and procedures to include periodic reconciliation of the key property records. Specifically, Section 3.2 of FBI’s Property Management Policy & Procedures, prepared by Office of IT Program Management, Sentinel Program and Business Management Team, version dated 9/3/2008, titled “Data Requirements” specifies that the Sentinel Property Manager will perform at least monthly reconciliations of the key property records including Bill of Materials, invoices, contractor property list (Lockheed Martin database) and PMA throughout the Sentinel Program. Sentinel Program Manager to modify existing Sentinel policies and procedures to require the Sentinel property manager to document the initial inspection of property as it is received, including verification that the property was properly barcoded. FBI modified its existing policies and procedures to include initial inspection of property upon receipt, including verification that the property was properly barcoded. Specifically, Section 2.2.3 of FBI’s Property Management Policy & Procedures, prepared by Office of IT Program Management, Sentinel Program and Business Management Team, version dated 9/3/2008, titled “Receipt of Property” specifies that the Sentinel Property Manager will match quantity, manufacturer, make, model and serial number and barcode number on the shipping document, packing lists, or invoice to the physical inventory of equipment received, and after the verification the document will be annotated with receipt noted and signed by the Property Administrator and Sentinel Property Manager. 26. We recommend that the Director of the FBI direct the Sentinel Program Manager to modify existing Sentinel policies and procedures to require the Sentinel property manager to record in the Lockheed Martin database the date Sentinel property is received to allow for assessments of whether Sentinel property was timely recorded into PMA. FBI modified its existing policies and procedures to require the received date be tracked. Specifically, Section 3.2 of FBI’s Property Management Policy & Procedures, prepared by Office of IT Program Management, Sentinel Program and Business Management Team, version dated 9/3/2008, titled “Data Requirements” specifies that in order to be useful to both the PMO and contractor the key data points, including the date received and Shipping Document/Item Receipt Verification Date, should be tracked by either an electronic spreadsheet or listed on a locally devised inventory sheet. According to FBI’s Sentinel team, the “Date Received” column in the Lockheed Martin database now tracks the received date of each property. 27. We recommend that the Director of the FBI direct the Sentinel Program Manager to modify existing Sentinel policies and procedures to require the Sentinel property manager to follow up on and document actions taken with respect to the 20 property records we identified as having valuation discrepancies, including any adjustments to the valuations in either FBI’s or the contractor records. FBI followed up with the 20 items identified in our report and took necessary corrective action to eliminate valuation discrepancies. We reviewed accountable property records maintained in the PMA and the Lockheed Martin database provided by FBI for those 20 items and verified that FBI has made adequate adjustments to the valuation in PMA and the Lockheed Martin database. PMA that we initially determined to be missing. lost, or stolen, reducing the number reported to 1,205. Staff members who made key contributions to this report include: Phillip McIntyre, Assistant Director; William E. Brown; Sharon Byrd; Liliam Coronado; Joshua Edelman; Francine DelVecchio; Francis Dymond; Wendy Johnson; Galena Phillips; Lisa Reijula; and Seong Bin Park. | The FBI has spent over $900 million on the Trilogy and Sentinel information technology (IT) projects intended to provide FBI with an upgraded IT infrastructure and an automated case management system to support FBI agents and analysts. In February 2006 and July 2008, GAO reported on significant internal control weaknesses related to FBI's contract administration, processing of contractor invoices, and accountability for equipment acquired for these projects. GAO made 27 recommendations to the FBI to address these deficiencies. The FBI concurred with all 27 recommendations. This report provides an assessment of (1) the FBI's corrective actions to address GAO's 27 recommendations and (2) whether there were any indications of implementation issues related to the policies and procedures the FBI developed to address 17 of the 27 recommendations. GAO reviewed FBI policies and procedures, performed walk-throughs, and conducted detailed tests on statistically and nonstatistically selected samples of transactions. The corrective actions developed by FBI were sufficient to address 21 of the 22 Trilogy recommendations and all 5 Sentinel recommendations. The FBI substantially addressed: 17 Trilogy recommendations related to contract administration, invoice processing, and property accountability by establishing or revising policies and procedures; 4 by contracting for follow-up audits of the Trilogy costs; and the 5 Sentinel recommendations by revising Sentinel policies and procedures. The one Trilogy recommendation that FBI did not address completely was related to 1,205 missing, lost, or stolen Trilogy assets. As of February 2011, the FBI had researched and determined the status of all but 134 of these assets. FBI officials stated that almost all of these assets had a useful life of 7 years, and if they were not already returned or destroyed, they are now obsolete. There are diminishing returns to continue to pursue these assets, which included several information technology items that could potentially contain sensitive information. However, if the FBI is able to determine the status of any of these assets in the future, officials stated that they will make the entries to properly record them in FBI's property management application (PMA). In assessing implementation of the policies and procedures developed in response to GAO's 17 Trilogy recommendations related to contract administration, invoice processing, and property accountability, GAO found that policies and procedures related to the 4 recommendations dealing with contract administration, including interagency agreements, were effectively implemented but also identified a new issue. Specifically, GAO found that forms--required by the Federal Acquisition Regulation to support the use of interagency agreements to conveniently or economically obtain supplies and services--were not timely completed for 15 of 54 statistically selected interagency agreements tested, and found that FBI's monitoring did not identify this deficiency. GAO estimates that as much as 39.5 percent of FBI's fiscal year 2009 interagency agreements did not meet this requirement, increasing the risk that funds may have been disbursed for goods or services that were not in the best interest of the government. In addition, GAO's testing of FBI's implementation of polices and procedures for the remaining 13 recommendations that were related to invoice processing and property accountability found indications of implementation issues in 3 areas. (1) Regarding the review of contractors' invoices, 5 invoices (of the 37 tested) that had been reviewed and approved by FBI officials included labor rates that were not fully supported by the contract documentation. Without verifying labor charges against the contractor's proposal as required by FBI policy, there is an increased risk of disbursing funds for unallowable charges. (2) For property accountability, GAO found instances in which FBI (1) did not record accountable property items in its system in a timely manner and (2) did not accurately record key accountability information, such as location and serial numbers, as required by FBI's policies. These shortcomings increase the risk that assets could be lost or stolen and not be detected and investigated in a timely manner. GAO makes three new recommendations to improve interagency agreement controls and determine if additional actions are necessary to improve controls for invoice processing and property accountability. The FBI concurred with all three recommendations and discussed actions it has initiated to address GAO's recommendations. |
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The electricity industry is the largest industry in the United States. According to the Department of Energy’s (DOE) Energy Information Administration (EIA), the industry had total assets worth about $700 billion in 1993 and has revenues of about $200 billion annually. Nuclear power plants have provided about 20 percent of the nation’s electricity in recent years. Most nuclear power plants are owned and operated by investor-owned utilities. Investor-owned utilities comprise only about 8 percent of the nation’s 3,200 electric utilities but generate and sell over 75 percent of the electricity. One such utility—the Commonwealth Edison Company—received the former Atomic Energy Commission’s first license to operate a civilian nuclear power plant almost 40 years ago. Since then, the Atomic Energy Commission and its successor regulatory agency—the Nuclear Regulatory Commission (NRC)—have issued operating licenses for a total of 125 plants. Twenty-one of the plants licensed to operate have been permanently retired, leaving 104 with operating licenses. The Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974, as amended, require NRC to, among other things, protect the radiological health and safety of the public. Under this mandate, NRC licenses nuclear power plants to operate for up to 40 years and continually regulates the utility-licensees’ operation of these plants. In addition, NRC permits utilities to seek license extensions of up to 20 years. Decommissioning a nuclear power plant involves dismantling the structures and equipment at the plant, properly disposing of the resulting radioactive and other wastes, and then ensuring that the plant site complies with applicable environmental standards. Decommissioning involves a combination of technical, financial, and regulatory challenges. For example, the nuclear reactor vessel, other plant components, and concrete surfaces of various rooms in the plant are radioactive or contaminated with radioactive material. Therefore, the processes of maintaining the plant in a safe condition prior to dismantling it and disposing of the resulting radioactive wastes requires constant attention to protecting workers and the public from exposure to radiation. The interval of time between the initial operation of a plant and its eventual dismantling also presents challenges to licensees and NRC. This interval can be as short as a few years if a plant is retired earlier than expected and dismantled shortly thereafter or as long as 40 to 60 years if a plant operates for an extended license period. In lieu of dismantling a plant immediately after its retirement, a utility may instead elect to decommission a plant by placing the plant in safe storage before dismantling it, as long as the entire decommissioning process is completed within 60 years. This feature of NRC’s regulation allows utilities to defer dismantling a retired plant if they (1) are awaiting the retirement of a colocated plant, (2) need to give DOE time to remove all of the spent (used) fuel from the plant, and (3) need to allow the radioactivity in the plant to decay before dismantling the plant, among other things. Finally, the financial aspects of decommissioning also present challenges to utility-licensees. For example, although actual decommissioning experience is limited, decommissioning a single plant is expected to cost hundreds of millions of dollars. NRC does not have the authority to regulate the manner in which licensees recover from their customers the costs of constructing, operating, and decommissioning nuclear power plants. Most licensees are investor-owned utilities that traditionally have been provided a monopoly within their service areas. In return, these utilities built generating plants, including nuclear, coal, gas, and hydro power plants, and transmission and distribution facilities to provide electricity for all of the existing and future customers within their service areas. Under this traditional “cost-of-service” regulation, state public utility commissions approved electricity rates that reflected the utilities’ costs of building and operating their electricity systems and approved the financial returns on these investments. Similarly, the interstate aspects of the electric utility industry, including financial transactions, wholesale rates, and interconnection and transmission arrangements, are regulated by the Federal Energy Regulatory Commission (FERC). In this context, utilities’ proposed arrangements to finance the decommissioning of their nuclear plants are a part of their financial operations that are subject to review and approval by their respective state public utility commissions and FERC. NRC’s authority to require utilities to accumulate funds to decommission their nuclear power plants is derived from its responsibilities under the Atomic Energy Act of 1954, as amended, to regulate the safety of nuclear power. Until 1988, NRC required licensees to certify that sufficient financial resources would be available when needed to decommission their nuclear power plants but did not require these licensees to make specific financial provisions for decommissioning. On July 26, 1988, NRC’s original regulations on the technical and financial aspects of decommissioning became effective. By then, NRC had licensed 114 plants to operate. NRC’s 1988 regulations provided utilities with the following options for providing decomissioning financial assurance: The prepayment of cash or liquid assets into an account segregated from the licensee’s assets and outside the licensee’s administrative control. Prepayment may be made in the form of a trust, escrow account, government fund, certificate of deposit, or deposit of government securities. External sinking funds. These types of funds are established and maintained through the periodic setting aside of funds in an account segregated from the licensee’s assets and outside the licensee’s administrative control. An external sinking fund may be in the same forms permitted for prepayment. A surety method or insurance. A surety method may be in the form of a surety bond, letter of credit, or line of credit payable to a trust established for decommissioning costs. For “federal licensees,” such as the Tennessee Valley Authority, a statement of intent that decommissioning funds will be obtained when necessary. NRC recognized both the uncertainty over decommissioning costs and the authority of public utility commissions and FERC to regulate the economic affairs of utilities. Therefore, NRC approached the regulation of the financial aspects of decommissioning by requiring utilities to provide “reasonable assurance” that sufficient funds would be available to decommission their nuclear power plants when the plants are permanently shut down. Among other things, NRC required, by July 27, 1990, each holder of an operating license to (1) certify that the licensee would provide the required financial assurance for decommissioning; (2) calculate, using a formula contained in NRC’s regulations, the minimum amount (expressed in current-year dollars) that utilities would accumulate for decommissioning their plants by the time they expect to retire them; and (3) provide a copy of the financial instrument(s) executed to provide the required financial assurance. Essentially all utilities have elected the option of establishing external sinking funds to finance future decommissioning costs. A portion of the charge that utilities’ customers pay for their electricity is earmarked for deposit in these funds, and the funds are invested to earn income. In its regulations, NRC deferred to utilities and their rate regulators the details of collecting the required decommissioning funds. NRC requires only that the amount actually accumulated by the end of a plant’s operating life equals the projected cost to decommission the plant. About 5 years before the projected end of plant operations, NRC requires a utility to submit a preliminary decommissioning cost estimate that includes an up-to-date assessment of the major factors that could affect the cost to decommission its plant. Also, if necessary, the cost estimate shall include plans for adjusting needed funds for decommissioning to demonstrate that a reasonable level of assurance will be provided so that funds will be available when needed to cover the cost of decommissioning. Finally, not later than 2 years after a plant has been permanently shut down, the utility must submit to NRC a decommissioning report that includes, among other things, a site-specific decommissioning cost estimate. After about 10 years of experience with NRC’s 1988 decommissioning regulations, the electricity industry has begun to change in ways that have prompted NRC to reassess the adequacy of its regulations governing nuclear power plants, including financial assurances for decommissioning retired plants. Over the next 10 years or so, many states are expected to replace their traditional systems of economic regulation of monopolistic electric utilities with more-competitive, less-regulated environments mainly for the generation of electricity but, to a lesser degree, for the transmission and distribution of electricity as well. Competition, according to NRC, could result in economic pressures that will affect the availability of adequate funds for decommissioning and how utilities address maintenance and safety in nuclear power plant operations. Currently, the Congress is considering a number of bills to restructure the retail electricity industry to promote a more efficient and market-driven industry. Also, as of September 1997, 49 states had considered reforming their retail electricity markets. As of June 1, 1998, FERC and at least 18 states had either enacted legislation or issued comprehensive regulatory orders implementing plans to restructure the industry. In California, for example, a plan to produce competitive electricity markets and allow consumers to choose their electricity supplier went into effect in March 1998. Also, some of these initiatives would encourage or require the restructuring of the affected electricity industry. Specifically, utilities that have traditionally generated, transmitted, and distributed electricity would be encouraged or required to separate the operation of electricity generation systems from the operation of transmission and distribution systems. Concerned about the potential costs to decommission nuclear plants and the implications of a competitive electricity environment on the ability of plant owners to finance decommissioning projects, the congressional requesters of this report asked us to determine if (1) there is adequate assurance that NRC’s licensees are accumulating enough funds to decommission their nuclear power plants when the plants are retired and (2) NRC is adequately addressing the effects of electricity deregulation on the funds that will eventually be needed for decommissioning. To address both of our objectives we met with, and obtained documentation from, officials of the following organizations: NRC, Rockville, Maryland. Nuclear Energy Institute, Washington, D.C. (The Institute represents the nuclear industry, including utilities that operate nuclear power plants.) National Association of Regulatory Utility Commissioners. (The Association represents public utility commissions and other state-level rate-setting entities.) National Nuclear Safety Network (a public interest organization). public utility commissions of Oregon (Salem), Maryland (Baltimore), and New Hampshire (Concord). Portland General Electric (Portland, Oregon); Commonwealth Edison (Chicago, Ill.); Office of Consumer Advocate (Concord, NH.); and Moody’s Investors Service (New York, N.Y.). To address the adequacy of assurance that NRC’s licensees are accumulating enough decommissioning funds, we also met with, and obtained documentation from, TLG Services, Inc., which prepares decommissioning cost estimates for owners/licensees of nuclear power plants and Dr. Bruce Biewald, a consultant to groups that participate in state public proceedings on setting electricity rates, including charges for decommissioning. We also analyzed whether licensees or their parent companies have (1) accumulated decommissioning funds at a rate consistent with the percentages of their reactors’ operating life already used up (i.e., the fund for each reactor should equal this percentage times the present value of its future decommissioning cost) and are (2) currently (viz., 1997) adding enough money to their decommissioning funds (i.e., assuming that contributions in future years will increase at the funds’ after-tax rate of return) to accumulate sufficient funds to decommission their plants when they are retired. The scope and methodology that we used in these two analyses are discussed in appendix I. To address whether NRC is adequately considering the effects of electricity deregulation on the funds that will eventually be needed for decommissioning, we also obtained and reviewed public comments on NRC’s advance notice of proposed rulemaking for decommissioning financial assurances and on the subsequent proposed rule. We conducted our review from October 1997 through March 1999 in accordance with generally accepted government auditing standards. We analyzed the status of decommissioning funding as of December 31, 1997, (the year of the most recent data available) for 76 licensees that own all or part of 118 operating and retired nuclear power plants. We performed this analysis because NRC had not, for its own regulatory purposes, systematically collected and analyzed information on its licensees’ decommissioning funds. Our analysis showed that, under likely assumptions about future rates of cost escalation, net earnings on the investments of funds, and other factors, 36 of the licensees had not accumulated funds at a rate that is sufficient for eventual decommissioning. Under these conditions, these licensees will have to increase the rates at which they accumulate funds to meet their future decommissioning financial obligations. Under more pessimistic (unfavorable) and more optimistic (favorable) assumptions, 72 and 8 licensees, respectively, had not accumulated funds at a sufficient rate. We also analyzed whether licensees had recently increased the amount of funds that they had collected to make up for under-collections in earlier years. For this analysis, we compared the amounts collected in 1997 with the annual average of the present value of the amount of funds needed to meet licensees’ funding obligations when their plants’ licenses expire. We found that, under likely assumptions, 17 companies collected less funds in 1997 than they need to collect each year over their plants’ remaining operating life. The 17 companies included 15 companies that had not collected sufficient funds through 1997. Under more pessimistic and optimistic assumptions, 66 and 4 licensees, respectively, need to increase the amount of funds that they collect in future years. Our funding analysis generally assumes that nuclear power plants would operate for their current licensed operating period—usually 40 years—and that the licensees will remain financially solvent. No plant, however, has yet operated for the full period of its operating license, and electricity deregulation is expected to cause or contribute to more premature plant retirements. Furthermore, 19 of 26 plants that one Wall Street firm considers at risk for early retirement are owned, in whole or in part, by companies that have been slow to accumulate funds to decommission their plants. So far, however, neither early plant retirements nor licensee bankruptcies have adversely affected decommissioning. Economic regulators have allowed utilities to charge their customers rates that included amounts for decommissioning plants that were retired early, and courts have permitted the continued accumulation of decommissioning funds during bankruptcy proceedings. From 1990 through 1997, most licensees’ estimates of the costs to decommission their plants have increased rapidly. Likewise, the utilities’ periodic calculations, using a formula contained in NRC’s regulations, of the minimum amount that they must accumulate in their decommissioning funds generally have been escalating more rapidly (particularly in recent years) than the site-specific cost estimates. Also, there are uncertainties over what the actual decommissioning costs might be. For example, the eventual resolution of a protracted dispute between NRC and the Environmental Protection Agency (EPA) over appropriate radiation standards for decommissioned sites could affect final decommissioning costs. NRC requires licensees using external sinking funds for decommissioning financial assurance to deposit funds collected for decommissioning into their funds each year. For two reasons, however, NRC does not know if licensees are accumulating decommissioning funds at rates that will provide enough funds to decommission their plants when the plants have been retired. First, NRC leaves the amounts to be put aside up to licensees and their public utility commissions. Second, until recently, NRC has not required that licensees report on the status of their decommissioning funds. We analyzed the status of decommissioning funds, as of the end of 1997, for 118 operating and retired nuclear plants owned by 76 licensees (or the parent companies of subsidiaries that are the legal owners of the plants). In our first analysis, we compared the total amount of each licensee’s decommissioning funds with the expected amount of funds that should have been accumulated by that date. To determine the expected amount, we assumed that licensees would accumulate increasing (but constant present-value) amounts annually. Once in the fund, each yearly contribution would continue to grow at the fund’s after-tax rate of return. The sum of these annual amounts, plus the income earned on the investments of the funds, would equal the total estimated decommissioning costs when the licensees’ plants’ operating license expires. For example, at the end of 1997, a licensee’s decommissioning fund for a plant that had operated half of a 40-year license period (begun in 1977) should equal one-half of the present value of the estimated cost to decommission the plant beginning after 2017. This expected level of funding is not the only funding stream that could accrue to equal future decommissioning costs but provides us with both a common standard for comparisons among licensees and, from an equity perspective among ratepayers in different years, a financially reasonable growing current-dollar funding stream over time. Appendix I describes our methodology, assumptions, and results for each of the 76 licensees. Performing this analysis required that we make assumptions about future economic and plant-operating conditions. Key assumptions included initial decommissioning cost estimates, rates of cost escalation, net earnings on the investments of funds (discount rate), plant-operating periods, and the use of decommissioning funds for both radiation- and non-radiation-related decommissioning activities. Because of the inherent uncertainty associated with assuming future conditions over many years, we used assumptions of the most likely future conditions to develop a baseline scenario. And, to bound the results of the baseline scenario, we developed pessimistic and optimistic scenarios using unfavorable and favorable economic and plant-operating conditions, respectively. For our baseline scenario, 36 of the 76 licensees (47 percent) had not accumulated funds at a rate that is sufficient for eventual decommissioning. Under these conditions, these licensees will have to increase the rates at which they accumulate funds to meet their future decommissioning financial obligations. Changing assumptions to reflect the pessimistic and optimistic scenarios, greatly affects the adequacy of the licensees’ funding. Under pessimistic and optimistic assumptions, 72 (95 percent) and 8 (11 percent) licensees, respectively, had not accumulated funds at a sufficient rate for eventual decommissioning. The fact that a licensee might have collected funds for decommissioning at a lesser rate than the expected rate does not, by itself, mean that the licensee will not meet its financial obligations by the time it retires its plants. By increasing their rates of collection, these licensees can still accumulate the funds that are necessary. Therefore, to obtain insights on whether licensees are now collecting funds at adequate rates, we undertook a second analysis. We compared the available amounts that each licensee collected in 1997 with the average yearly present value of the amounts that the licensees would have to accumulate each year over the remaining life of their plants to have enough decommissioning funds upon the retirement of the plants. This analysis assumes that the licensees will increase their yearly future funding at the after-tax rate of return on the investments of their funds. And, once in the fund, these yearly contributions will grow at this same rate. Our analysis shows these results for the baseline (most likely), pessimistic, and optimistic scenarios. For the baseline, the results show that only 17 of 76 licensees (22 percent) were not yet collecting the amounts that they will need to meet their decommissioning obligations. Thus, while 47 percent of the licensees had less than expected levels of funds at the end of 1997, only 22 percent did not appear to be currently on track, as represented by the funds that they collected in 1997, to eventually meet their decommissioning financial obligations. In other words, while licensees might not have funded sufficiently in the early years of their plants’ operating life, our results suggest that most licensees have recently increased funding to make up the funding shortfalls from earlier years. But if conditions deteriorate from those assumed in our baseline scenario, as represented by the pessimistic scenario, 66 licensees (87 percent) under-collected funds in 1997. Conversely, under the optimistic scenario, only 4 licensees (5 percent) are currently accumulating funds too slowly. If a nuclear power plant is retired prematurely, sufficient funds may not have been collected by the retirement date to pay all decommissioning costs. To date, 21 plants have been retired before their licenses expired. So far, however, public utility commissions have permitted licensees to continue collecting the funds for decommissioning from the licensees’ electricity customers after these plants were retired. To date, no plant has operated for its full licensed operating life, and 21 plants have been retired before their operating license would have expired. (See table 2.1.) Two of the 20 plants operated for as long as 25 years. Fifty-two of the 104 plants that are currently licensed to operate have operated from 20 to 30 years. Nine commercial nuclear power plants were permanently shut down before NRC issued its original decommissioning regulations. Eight of these retired plants are in safe storage. The ninth plant (Pathfinder), which was a small demonstration plant, has been decommissioned. Twelve commercial nuclear power plants have been retired since NRC issued its decommissioning financial assurance regulations. Four of these plants are in safe storage. Two plants—Fort St. Vrain and Shoreham—have been decommissioned. Five plants are currently being dismantled, and the owner of one plant has not yet decided whether to dismantle the plant soon or put it in safe storage. The five plants that are now being dismantled—Big Rock Point, Haddam Neck, Maine Yankee, Trojan, and Yankee Rowe—were retired before their owners had accumulated sufficient funds to decommission them. For example, the Trojan plant was retired in 1992 after 17 years of operation. At that time, the plant’s licensees estimated that decommissioning the plant would cost $198 million (in 1993 dollars). However, the licensees had accumulated only $43 million, or 22 percent, of that amount. The Maine Yankee plant was permanently shut down in 1997 after 24 years of operation. When the plant was retired, the licensee had accumulated $188 million for decommissioning. That amount was only 53 percent of the $357 million (in 1997 dollars) that the licensee estimated would be needed to decommission the plant. In both of these cases, as well as in other states where retired nuclear plants are located, public utility commissions are permitting the licensees to continue collecting decommissioning funds from their customers even if their plants were retired early. Industry experts, such as major financial institutions, and DOE’s Energy Information Administration anticipate that the deregulation and restructuring of the electricity industry could result in the early retirement of from 9 to 40 percent of the nation’s nuclear power plants because these plants may not be competitive with other sources of electricity. In April 1998, Standard & Poor’s predicted that poor economics would cause the early retirements of six plants by 2001. (See table 2.2.) The company also concluded that another 20 units are “at risk” through 2020 for early retirement on the basis of expected poor operating and economic performance over the remainder of the plants’ license. According to the company, in a competitive market, plant owners will attempt to improve profitability; however, the vulnerability of these plants to unscheduled outages may squeeze operating margins and cause the plants to lose their long-term value. In commenting on our report, NRC pointed out that one plant that Standard & Poor’s listed as “at risk” for premature retirement—Pilgrim—is in the process of being sold. The prospective buyer, NRC added, intends to operate the plant for its full license term and will consider seeking a license extension for the plant. This example, NRC said, serves to illustrate both the speculative and controversial nature of projecting the premature retirements of nuclear power plants. Other experts, however, have reached conclusions that are similar to Standard & Poor’s. For example, in January 1999, Synapse Energy Consultants, Inc., a firm that often testifies in electricity rate proceedings conducted by state public utility commissions, concluded in a report that, depending upon the assumptions used, from 20 to 90 nuclear power plants may be retired early. The most likely case, according to the authors of the report, is that 34 plants will be retired early. Nineteen of the 26 plants that Standard & Poor’s predicts may be retired early are also included in Synapse’s list of 34 plants that it believes may be retired early. Compounding the risk that more nuclear power plants may be retired prematurely is the possibility that the licensees that own these plants may have, so far, under-accumulated funds to decommission these plants. For example, 19 of the 26 plants that may be retired early, according to Standard and Poor’s predictions, are owned, in whole or in part, by 14 licensees that have not accumulated sufficient decommissioning funds, according to our analysis. Additional predictions of more early plant retirements have also been made. For example, in December 1997, EIA projected that 24 nuclear plants would retire as early as 10 years before their license expires. In 1995, Moody’s concluded that at least 10 nuclear plants may be closed for economic reasons if the generation of electric power is completely deregulated. One year later, Moody’s downgraded the bond ratings of 24 electric utilities that operate nuclear plants. Again, in 1997, Moody’s said that the frequency that certain nuclear plants tend to require expensive capital additions to comply with their operating license increases the likelihood of even more early plant retirements. The premature retirement of the Zion-1 and Zion-2 nuclear power plants in January 1998 illustrates the effect of deregulation on power plant economics. The Commonwealth Edison Company determined that the plants could not generate electricity at competitive prices in the deregulated environment. Therefore, the utility decided to retire both plants after about 24 years, or 60 percent, of their licensed operating life. When the plants were permanently shut down, the utility had put aside $362 million, or less than 43 percent of the $834 million estimated to be needed to decommission the two units. According to officials of Commonwealth Edison, however, under Illinois law the utility is authorized and directed to include in the rates that it charges its electricity customers amounts for the necessary and prudent decommissioning costs for these plants. In addition to early plant retirements, licensees of nuclear power plants have declared bankruptcy in a few cases. So far, the continuing availability of decommissioning funding has been protected in these cases. For example, the Cajun Electric Cooperative owned 30 percent of the River Bend, Louisiana, plant. The Cooperative went bankrupt in 1994, and a bankruptcy settlement was approved on August 26, 1996. The settlement provided for the transfer of $125 million to an external trust to satisfy Cajun’s share of River Bend’s estimated decommissioning cost of $419 million (in 1996 dollars). But the settlement left the successor to Cajun’s share of the plant open. The court order provided that the bankruptcy trustee and parties to the settlement were to take all necessary and appropriate actions to consummate the settlement by June 1, 1997, including finding a buyer for Cajun’s share of River Bend. On November 28, 1997, NRC’s staff approved the transfer of Cajun’s portion of River Bend’s license to Entergy Gulf States, Inc., which is now the sole owner of this plant. NRC’s staff concluded that Entergy Gulf States was financially qualified to contribute appropriately to the plant’s decommissioning. Another bankruptcy case involved the El Paso Electric Company, which owns 16 percent of the three-unit Palo Verde Nuclear Generating Station in Arizona. The company filed for bankruptcy protection in 1992, primarily because of excess generating capacity and insufficient rates to cover the costs of power. The settlement of the bankruptcy filing became effective in 1996, at which time, the company emerged with reduced debt and a stronger financial position. During the bankruptcy proceeding, according to an NRC official, the company continued to make its required decommissioning payments. For our funding analyses, we assumed, among other things, that current estimates of decommissioning costs are accurate. Because actual decommissioning experience is limited, however, actual costs could be lower or higher. From 1990 through 1997, cost estimates increased rapidly for both site-specific studies by licensees and calculations using NRC’s cost-estimating formula. Moreover, uncertainties about the actual scope of decommissioning affects costs. Utilities, for example, sometimes consider the cost to empty a spent fuel storage pool (to permit dismantling a retired plant) as a decommissioning cost. NRC, however, excludes the cost of emptying the storage pool from the scope of its formula for estimating decommissioning costs. The storage of spent fuel in facilities outside of the plant’s storage pool, and the cost of such storage, are addressed in parts of NRC’s regulations that are not directly related to decommissioning. In addition, the eventual resolution of a protracted dispute between NRC and EPA over appropriate radiation standards for decommissioned sites could affect the scope of decommissioning and, therefore, total decommissioning costs. Cost estimates since 1990, developed through both NRC’s formula and licensees’ site-specific cost estimates, show that both estimates have increased. Although NRC has not routinely monitored the amounts of decommissioning funds that its licensees have been accumulating, its 1988 regulations required licensees to annually calculate the minimum amount of funds that must be accumulated to pay future decommissioning costs. For each plant using NRC’s mathematical formula, the utility must make an initial calculation in 1986 dollars that is based on the size and type of plant. Then, the utility must escalate the initial calculated value to that of the current year on the basis of prescribed escalation factors. Also, to support proposed charges to electricity customers, plant owners periodically develop detailed estimates of the cost to decommission their specific plants and submit the estimates to their public utility commission regulators. In the absence of significant actual experience, site-specific estimates of decommissioning costs provide the best check on the reasonableness of NRC’s formula for calculating potential decommissioning costs. Since 1990, decommissioning cost estimates prepared on a site-specific basis and calculated using through NRC’s formula have increased substantially. For example, site-specific cost estimates (excluding costs that licensees may incur during decommissioning, such as spent fuel storage costs, that NRC does not consider to be decommissioning costs) have increased, on average, at a rate of about 6.6 percent per year. One reason for this increase is the expansion of the scope of decommissioning. The estimates made through NRC’s formula are now, on the average, about one-third higher than the site-specific estimates for the same plants. The main reason for this condition is that the waste disposal part of NRC’s formula was not designed to reflect licensees’ efforts to reduce the volume of waste from decommissioning in response to increasing prices for disposal that have traditionally been based on waste volume. In December 1998, NRC corrected this weakness, which brought calculations through its formula more in line with licensees’ site-specific cost estimates. Largely because DOE is not taking spent fuel from licensees’ nuclear power plants, licensees that intend to immediately dismantle their retired plants must store their spent fuel outside of their plants. For the purpose of estimating and accounting for decommissioning costs, some licensees treat storage costs related to the retirement of their plants as decommissioning costs. The inclusion by licensees of these storage costs in their decommissioning costs is a major reason why licensees’ cost estimates have increased in recent years. A second reason is that licensees may include the cost to dismantle nonradioactive structures, such as administrative buildings, in their estimates of decommissioning costs. In contrast, NRC excludes both spent fuel management costs and non-radioactive-related cleanup costs from its formula for calculating the funds that licensees must accumulate to decommission their nuclear power plants. NRC’s reasons for excluding these types of costs are that it (1) regulates independent spent fuel storage facilities (facilities that are separate from the spent fuel pool, which is an integral part of a nuclear power plant) under regulations that are separate from those applicable to the construction, operation, and decommissioning of nuclear power plants and (2) only regulates the possession, use, and disposal of radioactive materials. Nevertheless, spent fuel management costs have been and will continue to be a real cost for utilities that choose to immediately dismantle their retired plants. For example, in 1995 the licensee for the retired Trojan plant in Oregon estimated that spent fuel management costs to construct, operate, and maintain a dry storage facility at that plant would cost about $102 million (in 1993 dollars). Uncertainty over the standards for residual radiation that utilities will have to meet in cleaning up the sites of their retired nuclear power plants affects the accuracy of the current estimates of future decommissioning costs. EPA is responsible for setting acceptable radiation limits outside of the boundaries of nuclear facilities and for developing residual radiation standards to protect the health and safety of the public and to protect the environment. EPA has been responsible since 1970 for establishing radiation standards for all aspects of decommissioning, including acceptable levels of residual contamination. To date, however, EPA has not issued such standards. “A site will be considered acceptable for unrestricted use if the residual radioactivity that is distinguishable from background radiation does not exceed 25 [millirem ] per year, including that from groundwater sources of drinking water, and that the residual radioactivity has been reduced to levels that are as low as reasonably achievable.” EPA does not agree with NRC’s standard. In fact, the disagreement between the two agencies has been characterized by both its length and its acrimony. EPA started to develop residual radiation standards in 1984 but has not yet finalized these standards. Nevertheless, EPA’s position is that NRC’s licensees should be required to decontaminate nuclear plant sites to a residual radioactivity level of 15 millirems per year and to limit the exposure to an individual from his/her consumption of groundwater to 4 millirems per year. Most recently, EPA’s administrator stated that the agency would apply the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to sites that are being decommissioned if NRC and EPA do not reach an agreement on applicable standards. Also, in April 1998, one of NRC’s commissioners publicly commented that the impasse between EPA and NRC over appropriate radiation protection standards may have to be resolved by the Congress. In fact, to resolve this disagreement, NRC has sought legislation that would eliminate the overlap in the standard-setting authority of NRC and EPA. Currently, NRC’s licensees are using NRC’s regulations and related guidance on decommissioning the sites of retired nuclear facilities to plan and/or implement the decommissioning of their nuclear power plants and related nuclear fuel facilities. If, however, EPA’s residual radiation standards are ultimately used in lieu of NRC’s standards, licensees may have to perform additional cleanup when decommissioning their nuclear plant sites. If this occurred, it would increase decommissioning costs, but by how much is uncertain. According to both NRC and EPA officials, retroactively applying more stringent EPA standards to nuclear plant sites that have already been decommissioned according to NRC’s standards could be very costly. Late in 1998, NRC amended its decommissioning regulations in anticipation of the deregulation and restructuring of the electricity industry. The amended regulations do not allow licensees to rely exclusively on their external sinking funds to ensure that funds are available for decommissioning if its regulators no longer guarantee that moneys can be collected from the licensees’ customers through electricity rates. In such a case, NRC now requires a licensee to provide additional financial assurance for the portion of the licensee’s estimated decommissioning cost that would not be guaranteed. There is, however, uncertainty over the availability and affordability of some of these additional options for providing financial assurance. NRC will also now require licensees to periodically report financial information on decommissioning; however, NRC did not specify how it would use this information. Effective November 23, 1998, NRC amended its decommissioning financial assurance regulations out of concern that the deregulation and restructuring of the electricity industry could reduce confidence that the owners of nuclear power plants will be able to accumulate sufficient funds to decommission their plants. The new regulations provide that, to the extent that the collection of estimated decommissioning costs from customers is no longer guaranteed, a licensee may not exclusively rely on external sinking funds to provide adequate financial assurance of decommissioning. For any portions of decommissioning costs for which the collection of funds is not guaranteed, licensees will have to provide one or more additional types of financial assurance. Electric utilities have almost exclusively relied on the collection of fees from their electricity customers, deposited into externally managed sinking funds, to provide decommissioning financial assurance. In anticipation of electricity deregulation initiatives, NRC, in September 1998, amended its regulations (effective in Nov. 1998) to address situations in which a licensee’s continued collection of decommissioning fees from its electricity customers may no longer be guaranteed by the economic regulation of electricity rates. To the extent that the collection of decommissioning funds is no longer guaranteed, a licensee may provide up-front financial assurance. The options available to licensees include the prepayment of the estimated decommissioning cost or purchase of surety bonds or insurance to cover decommissioning costs. The assurances may also be in the form of guarantees of payments by the licensees or, as appropriate, their parent company, provided that such guarantees are accompanied by the passing of specified financial tests. Both NRC and the nuclear industry have expressed concern about whether these up-front payment methods would be affordable for licensees. However, in commenting on our draft report, NRC stated that the terms for the recent sales of the Three Mile Island Unit 1, Pilgrim, and Seabrook (partial sale) nuclear power plants have included the prepayment of all estimated decommissioning costs. NRC added that it believes that the prepayment option will likely be the preferred means of assuring decommissioning funds in future sales transactions. When NRC published its proposed amended regulations for public comment in September 1997, it expressed concern that surety instruments and insurance may not be available to some nuclear power plant licensees; therefore, NRC specifically asked for comments on this issue. In response, some commenters said they were concerned about the feasibility of the up-front methods (prepayment, surety instruments, and insurance) for assuring decommissioning funding. For example, the Edison Electric Institute, which represents electric utilities, stated that it could be difficult, if not impossible, for licensees to provide such assurances. Also, seven licensees jointly stated that these funding methods would bar prospective new owners from purchasing interests in nuclear power plants. The seven utilities added that the (then) proposed regulations could impose a financial burden that would likely prevent the sale of a nuclear plant. Finally, the utilities stated that (1) it is uncertain if an insurance product or a surety bond could be procured to secure a nonelectric utility’s share of decommissioning costs, and (2) the cost of procuring such a bond could potentially exceed the cost of prepaying decommissioning expenses. The difficulty in obtaining a surety bond or insurance product is illustrated by the experience of one of NRC’s licensees. Great Bay Power Corporation, which owned 12 percent of the Seabrook nuclear power plant in New Hampshire, was formed out of bankruptcy proceedings involving four former part-owners of the Seabrook plant. NRC concluded that Great Bay, as a part owner of the plant, did not appear to meet the definition of an “electric utility” because its ability to collect funds for decommissioning from its electricity customers was not guaranteed by the traditional regulation of electricity prices. Therefore, according to NRC’s regulation, Great Bay could not rely exclusively on external sinking funds to provide decommissioning financial assurance. Although NRC gave Great Bay until July 1998 to obtain a surety bond or other financial guarantee to fulfill its decommissioning obligations, the company was unable to obtain such a guarantee. Out of concern for the possible bankruptcy of Great Bay if NRC were to mandate that the company prepay its decommissioning obligation, the state of New Hampshire, in June 1998, passed legislation that would make the co-owners of Seabrook proportionately responsible for making Great Bay’s decommissioning payments if the company defaults on this obligation. According to NRC, this approach qualifies as an acceptable “other method” of providing decommissioning financial assurance. In addition to the traditional financial assurance methods discussed above, NRC adopted other methods that licensees may use to provide decommissioning financial assurance. Other guarantee methods, including parent company guarantees and self-guarantees coupled with financial tests. For parent company guarantees, a licensee’s parent company must, among other things, have net working capital, tangible net worth, and assets located in the United States worth at least six times the amount of decommissioning funds being assured by the parent company for all of its nuclear power plants. Tangible net worth must exclude the net book value of the nuclear unit(s). For self-guarantees, tangible net worth and assets located in the United States must be 10 times the amount of the decommissioning funds being assured. Contractual obligations of a licensee’s customers to purchase enough electricity to provide the licensee’s total share of uncollected funds for decommissioning. Any other method, or combination of methods, that provides, as determined by NRC upon its evaluation of the specific circumstances, assurance of decommissioning funding equivalent to that provided by the other acceptable methods. These methods are similar to financial assurance methods that NRC permitted in its 1988 decommissioning regulations for other types of licensees, such as operators of nuclear fuel facilities. Prior to November 1998, NRC had reserved the right to inspect licensees’ decommissioning fund arrangements and status. Under the 1998 amendments, NRC also explicitly reserved the right to take additional action, either independently or in cooperation with economic regulators. These actions could include modifying a licensee’s schedule for accumulating additional funds. In addition, NRC’s 1998 decommissioning regulations required licensees, beginning by the end of March 1999, to report to NRC, every 2 years, certain financial information that would ensure that licensees are collecting their required decommissioning funds. Information that must be provided in licensees’ financial reports includes (1) the amount of decommissioning funds estimated to be required according to NRC’s formula; (2) the funds accumulated as of the end of the year prior to the report date; (3) the annual amounts remaining to be collected; (4) the assumptions used to escalate decommissioning costs, project rates of earnings on investments of external sinking funds, and discount funding projections; and (5) modifications to external sinking fund agreements. Utility representatives have not opposed financial reporting. For example, the Edison Electric Institute told NRC that periodic reporting on the status of external sinking funds for decommissioning is appropriate. In addition, in commenting on the proposed regulations, a group of seven utilities stated that a comprehensive reporting requirement is long overdue and is particularly appropriate, given that economic regulators have not been actively monitoring the status of licensees’ external sinking funds on an ongoing basis. When NRC published its final regulations, it stated that, after licensees have submitted their initial reports by the end of March 1999, it would review the reports and consider whether to issue additional guidance on the format and content for subsequent licensee reports. Also, in June 1997, when NRC’s commissioners approved the proposed regulations for public comment, the commissioners stated that after NRC’s staff has reviewed licensees’ initial reports, the staff should advise the commissioners on the need for further rulemaking. When NRC issued the 1998 amendments to its decommissioning regulations, however, it did not explain when and how it intends to act on the financial information reported by individual licensees if that information does not clearly demonstrate that an individual licensee is accumulating decommissioning funds at a satisfactory rate. The lack of any criteria for acting on licensees’ decommissioning financial reports contrasts with the agency’s ongoing efforts to establish a more objective, understandable, and predictable approach to safety oversight of nuclear power plants. According to NRC, an independent regulatory oversight process is based on unbiased assessments of licensees’ performances; logical, coherent, and predictable actions by NRC; clear ties to NRC’s regulations and goals; and opportunities for public awareness of process results. The new safety oversight process should, according to NRC, allow for the integration of various information sources relevant to a licensee’s safety performance, make objective conclusions regarding the significance of the integrated performance information, take actions based on these conclusions in a predictable manner, and effectively communicate these results to the licensees and to the public. Therefore, NRC is in the process of establishing a new oversight approach in which it will, among other things, use indicators of nuclear power plants’ performance to establish thresholds for clearly identifying acceptable levels of performance. In conjunction with this, NRC plans to establish criteria for identifying and responding to unacceptable licensee performance. A similar approach in the area of providing adequate financial assurances for decommissioning would appear to offer the same benefits of objectivity and predictability that NRC seeks in its safety oversight of nuclear power plants. NRC’s new financial assurance regulations do not address the option of accelerating the rate at which licensees must accumulate decommissioning funds on the basis of the actual longevity of plants. NRC rejected this option because it believes that some plants will probably continue operating for their licensed operating period of up to 40 years and, with license extensions, beyond 40 years. Therefore, NRC said, requiring all licensees to accelerate their accumulation of decommissioning funds because of some premature plant retirements would be arbitrary and lead to widely varying effects on licensees. Thus, NRC intends to continue its practice of addressing early plant retirements on a case-by-case basis. NRC’s position, as expressed in the supplementary information accompanying the publication of its amended decommissioning regulations, is that accelerated funding is inequitable. NRC believes that accelerated funding places too much of the financial burden on current utility ratepayers and a lesser burden on ratepayers in the later years of a nuclear power plant’s operation. However, when licensees have retired plants before the plants’ operating license expired, the licensees’ electricity customers have had to pay decommissioning costs for plants from which they no longer receive electricity. The Trojan, Maine Yankee, and Zion cases, discussed earlier, demonstrate this fact. During the years that the Trojan and Zion plants operated, the respective licensees’ customers paid for less than half of the costs to decommission the plants. The customers of the Maine Yankee plant paid for 53 percent of the decommissioning cost. Now, although these retired plants no longer generate electricity, the current and future customers of the licensees will pay the remaining decommissioning costs without receiving comparable benefits from the plants. NRC elaborated on its reasons for opposing accelerated decommissioning funding in its comments on our draft report. NRC said that requiring accelerated funding for decommissioning would cause substantial cost increases to be incurred by either licensees’ stockholders or their ratepayers. Also, there would be a myriad of difficulties in determining the appropriate rate of acceleration; for example, at what rate should the collection of funds be accelerated? These issues, NRC added, were considered in its evaluation of accelerated funding as part of its process of amending its decommissioning regulations. NRC concluded that accelerated funding does not provide sufficiently increased decommissioning funding assurance commensurate with its potential cost impacts. State legislatures, state public utility commissions, and FERC appear to be addressing assurances for decommissioning funding in their electricity deregulation initiatives. Utility officials in Illinois, New Hampshire, and Oregon, for example, pointed out that laws in those states provide for the collection of necessary and prudent funds for decommissioning nuclear power plants regardless of whether the plants operate until their current licenses expire or are retired prematurely. Thus, licensees have continued collecting from electricity customers the fees earmarked for decommissioning three prematurely retired plants in Illinois and one in Oregon. Similar examples are occurring in California and Massachusetts. With respect to the bankruptcy of licensees, New York’s Public Service Commission, in commenting on NRC’s proposed amendments to its decommissioning regulations, urged NRC and states to consider proposing legislation that would make decommissioning liabilities a first priority in the event of the bankruptcy of a private nuclear facility owner. Current bankruptcy law does not make the subject of nuclear decommissioning costs a priority, but NRC has said it does enter bankruptcy proceedings to protect the integrity of decommissioning funding. Moreover, at NRC’s request, the Administration included a provision in its 1999 electricity deregulation bill that would give priority to funding decommissioning of nuclear power plants in bankruptcy proceedings involving licensees. Several factors have come together at this time that make it imperative for NRC to ensure that its licensees accumulate sufficient funds to decommission their plants regardless of when they are permanently shut down. Specifically, some licensees have not set aside sufficient amounts of funds for decommissioning, and there is uncertainty over the availability and affordability of the up-front payment methods of providing financial assurance. With electricity deregulation emerging, the possibility exists that a licensee may, in the future, prematurely retire a plant and be faced with paying the remaining decommissioning funds from its own resources. The ability of the licensee to do so might then depend upon its overall financial condition. Thus, self-guarantees that decommissioning funds will be available are only as good as the financial condition of the licensee. (We recognize that to date, early plant retirements have not resulted in a shortfall in decommissioning funds because regulators have allowed licensees to continue collecting funds after plants have been retired.) To NRC’s credit, it recognized its need to increase its oversight of decommissioning financial assurance when it modified its decommissioning regulations by requiring licensees to provide financial reports every 2 years. NRC did not, however, explain what it intends to do with these reports. For example, NRC did not establish the thresholds for clearly identifying acceptable levels of financial assurances or establish criteria for identifying and responding to unacceptable levels of assurances. In the absence of such explanations, there is no logical, coherent, and predictable oversight of licensees’ financial assurance for decommissioning their nuclear power plants. After NRC reviews licensees’ initial reports on decommissioning financial assurances, we recommend that the Chairman, NRC, provide licensees and the interested public with information on the (1) objectives, scope, and methodologies of NRC’s reviews of the reports; (2) thresholds for identifying, on the basis of these reviews, acceptable, questionable, and unacceptable indications of financial assurances; and (3) criteria for the actions to be taken on the results of these reviews. We provided NRC with a draft of our report for review and comment. NRC said that our recommendation merits serious consideration with respect to its future uses of licensees’ biennial reports on decommissioning funds. NRC added, however, that it is premature to expend significant staff resources on establishing thresholds for identifying problems with licensees’ financial assurances for decommissioning until NRC knows, on the basis of its reviews of the initial status reports from licensees, that such problems exist. Thus, NRC differs with us not on the substance of our recommendation but on the timing of its implementation. NRC’s position is that it does not need to establish performance thresholds unless actual performance problems exist. In our opinion, a proactive, rather than reactive, approach would more appropriately provide licensees and the public with a more complete understanding of NRC’s expectations in the area of financial assurance for decommissioning. NRC also stated that our report does not adequately represent the complex changes that are occurring in the electric utility industry and the interactions among NRC, state public utility commissions and FERC, and the nuclear power industry. According to NRC, a host of complex, interrelated variables must be analyzed before any threshold for determining funding shortfalls can be established. These variables include, NRC added, (1) the actual rates that licensees are accumulating for decommissioning funds, (2) the stated intents of rate regulators (such as state public utility commissions) on allowing the ultimate collection of decommissioning funds, (3) the provisions for decommissioning funding in state deregulation initiatives, and (4) for licensees no longer subject to the traditional regulation of their electricity rates, the extent to which the future collection of decommissioning funds may be based on non-bypassable wire charges. Where appropriate, we have either added NRC’s comments to, or revised the text of, our report. The full text of NRC’s written comments and our response appear in appendix II. | Pursuant to a congressional request, GAO provided information on the potential cost to decommission nuclear power plants and the implications of competition within the electricity industry, focusing on whether: (1) there is adequate assurance that the Nuclear Regulatory Commission's (NRC) licensees are accumulating sufficient funds for decommissioning; and (2) NRC is adequately addressing the effects of electricity deregulation on the funds that will eventually be needed for decommissioning. GAO noted that: (1) although the estimated cost to decommission a nuclear power plant is on the order of $300 million to $400 million in today's dollars, NRC does not know if licensees are accumulating sufficient funds for this future expense; (2) GAO's analysis showed that, under likely assumptions, 36 of 76 licensees had not accumulated sufficient decommissioning funds through 1997; (3) however, all but 15 of these 36 licensees appeared to be making up their funding shortfalls with recent increases in the rates that they are accumulating decommissioning funds; (4) using more pessimistic and optimistic assumptions would increase or decrease the number of underfunded licensees, respectively; (5) although utility commissions have permitted licensees to continue charging their customers for the costs of decommissioning prematurely-retired plants, this financial safeguard could be affected by states' efforts to deregulate the electricity industry; (6) to address the movement toward deregulating the electricity industry, in November 1998 NRC began requiring its licensees to provide additional financial assurances if the Federal Energy Regulatory Commission or state utility commissions will no longer guarantee, through the regulation of electricity rates, the collection of sufficient funds for decommissioning; (7) however, one additional form of financial assurance--the early payment of decommissioning costs--may not be practicable or affordable; (8) also, NRC considered requiring licensees to accelerate decommissioning funding as a hedge against the premature retirement of plants but rejected the concept because of possible adverse effects on licensees' finances; (9) on the other hand, NRC's alternative methods to the collection of decommissioning funds earlier essentially rely on the continued financial health of the licensee or its parent company; (10) thus, the effectiveness of NRC's 1998 regulatory changes will likely depend on how vigorously NRC monitors the financial health of its licensees; (11) in this regard, licensees must now provide financial reports every 2 years to NRC so it can monitor financial assurances for decommissioning; and (12) however, NRC did not establish thresholds for clearly identifying acceptable levels of financial assurances or establish criteria for identifying and responding to unacceptable levels of assurances. |
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Before enactment of the Employee Retirement and Income Security Act (ERISA) of 1974, few rules governed the funding of defined benefit pension plans, and participants in these plans had no guarantees they would receive the benefits promised. When Studebaker’s pension plan failed in the 1960s, for example, many plan participants lost their pensions. Such experiences prompted the passage of ERISA to better protect the retirement savings of Americans covered by private pension plans. Along with other changes, ERISA established PBGC to pay the pension benefits of participants, subject to certain limits, in the event that an employer could not. ERISA also required PBGC to encourage the continuation and maintenance of voluntary private pension plans and to maintain premiums set by the corporation at the lowest level consistent with carrying out its obligations. Under ERISA, the termination of a single-employer defined-benefit plan results in an insurance claim with the single-employer program if the plan has insufficient assets to pay all benefits accrued under the plan up to the date of plan termination. PBGC may pay only a portion of the claim because ERISA places limits on the PBGC benefit guarantee. For example, PBGC generally does not guarantee annual benefits above a certain amount, currently about $44,000 per participant at age 65. Additionally, benefit increases in the 5 years immediately preceding plan termination are not fully guaranteed, though PBGC will pay a portion of these increases. The guarantee is limited to certain benefits, including so-called “shut-down benefits,”—significant subsidized early retirement benefits that are triggered by layoffs or plant closings that occur before plan termination. The guarantee does not generally include supplemental benefits, such as the temporary benefits that some plans pay to participants from the time they retire until they are eligible for Social Security benefits. Following enactment of ERISA, however, concerns were raised about the potential losses that PBGC might face from the termination of underfunded plans. To protect PBGC, ERISA was amended in 1986 to require that plan sponsors meet certain additional conditions before terminating an underfunded plan. (See app I.) For example, sponsors could voluntarily terminate their underfunded plans only if they were bankrupt or generally unable to pay their debts without the termination. Concerns about PBGC finances also resulted in efforts to strengthen the minimum funding rules incorporated by ERISA in the Internal Revenue Code (IRC). In 1987, for example, the IRC was amended to require that plan sponsors calculate each plan’s current liability, and make additional contributions to the plan if it is underfunded to the extent defined in the law. As discussed in a report, we issued earlier this year, concerns that the 30-year Treasury bond rate no longer resulted in reasonable current liability calculations has led both the Congress and the Administration to propose alternative rates for these calculations. Despite the 1987 amendments to ERISA, concerns about PBGC’s financial condition persisted. In 1990, as part of our effort to call attention to high- risk areas in the federal government, we noted that weaknesses in the single-employer insurance program’s financial condition threatened PBGC’s long-term viability. We stated that minimum funding rules still did not ensure that plan sponsors would contribute enough for terminating plans to have sufficient assets to cover all promised benefits. In 1992, we also reported that PBGC had weaknesses in its internal controls and financial systems that placed the entire agency, and not just the single- employer program, at risk. Three years later, we reported that legislation enacted in 1994 had strengthened PBGC’s program weaknesses and that we believed improvements had been significant enough for us to remove the agency’s high-risk designation. Since that time, we have continued to monitor PBGC’s financial condition and internal controls. For example, in 1998, we reported that adverse economic conditions could threaten PBGC’s financial condition despite recent improvements; in 2000, we reported that contracting weaknesses at PBGC, if uncorrected, could result in PBGC paying too much for required services; and this year, we reported that weaknesses in the PBGC budgeting process limited its control over administrative expenses. PBGC receives no direct federal tax dollars to support the single-employer pension insurance program. The program receives the assets of terminated underfunded plans and any of the sponsor’s assets that PBGC recovers during bankruptcy proceedings. PBGC finances the unfunded liabilities of terminated plans with (1) premiums paid by plan sponsors and (2) income earned from the investment of program assets. Initially, plan sponsors paid only a flat-rate premium of $1 per participant per year; however, the flat rate has been increased over the years and is currently $19 per participant per year. To provide an incentive for sponsors to better fund their plans, a variable-rate premium was added in 1987. The variable-rate premium, which started at $6 for each $1,000 of unfunded vested benefits, was initially capped at $34 per participant. The variable rate was increased to $9 for each $1,000 of unfunded vested benefits starting in 1991, and the cap on variable-rate premiums was removed starting in 1996. After increasing sharply in the 1980s, flat-rate premium income declined from $753 million in 1993 to $654 million in 2002, in constant 2002 dollars. (See fig. 1.) Income from the variable-rate premium fluctuated widely over that period. The slight decline in flat-rate premium revenue over the last decade, in real dollars, indicates that the increase in insured participants has not been sufficient to offset the effects of inflation over the period. Essentially, while the number of participants has grown since 1980, growth has been sluggish. Additionally, after increasing during the early 1980s, the number of insured single-employer plans has decreased dramatically since 1986. (See fig. 2.) The decline in variable-rate premiums in 2002 may be due to a number of factors. For example, all else equal, an increase in the rate used to determine the present value of benefits reduces the degree to which reports indicate plans are underfunded, which reduces variable-rate premium payments. The Job Creation and Worker Assistance Act of 2002 increased the statutory interest rate for variable-rate premium calculations from 85 percent to 100 percent of the interest rate on 30-year U.S. Treasury securities for plan years beginning after December 31, 2001, and before January 1, 2004. Investment income is also a large source of funds for the single-employer insurance program. The law requires PBGC to invest a portion of the funds generated by flat-rate premiums in obligations issued or guaranteed by the United States, but gives PBGC greater flexibility in the investment of other assets. For example, PBGC may invest funds recovered from terminated plans and plan sponsors in equities, real estate, or other securities and funds from variable-rate premiums in government or private fixed-income securities. According to PBGC, however, by policy, it invests all premium income in Treasury securities. As a result of the law and investment policies, the majority of the single-employer program’s assets are invested in U.S. government securities. (See fig. 3.) Since 1990, except for 3 years, PBGC has achieved a positive return on the investments of single-employer program assets. (See fig 4.) According to PBGC, over the last 10 years, the total return on these investments has averaged about 10 percent. For the most part, liabilities of the single-employer pension insurance program are comprised of the present value of insured participant benefits. PBGC calculates present values using interest rate factors that, along with a specified mortality table, reflect annuity prices, net of administrative expenses, obtained from surveys of insurance companies conducted by the American Council of Life Insurers. In addition to the estimated total liabilities of underfunded plans that have actually terminated, PBGC includes in program liabilities the estimated unfunded liabilities of underfunded plans that it believes will probably terminate in the near future. PBGC may classify an underfunded plan as a probable termination when, among other things, the plan’s sponsor is in liquidation under federal or state bankruptcy laws. The single-employer program has had an accumulated deficit—that is, program assets have been less than the present value of benefits and other liabilities—for much of its existence. (See fig. 5.) In fiscal year 1996, the program had its first accumulated surplus, and by fiscal year 2000, the accumulated surplus had increased to almost $10 billion, in 2002 dollars. However, the program’s finances reversed direction in 2001, and at the end of fiscal year 2002, its accumulated deficit was about $3.6 billion. PBGC estimates that this deficit grew to $5.7 billion by July 31, 2003. Despite this large deficit, according to a PBGC analysis, the single-employer program was estimated to have enough assets to pay benefits through 2019, given the program’s conditions and PBGC assumptions as of the end of fiscal year 2002. Losses since that time may have shortened the period over which the program will be able to cover promised benefits. The financial condition of the single-employer pension insurance program returned to an accumulated deficit in 2002 largely due to the termination, or expected termination, of several severely underfunded pension plans. In 1992, we reported that many factors contributed to the degree plans were underfunded at termination, including the payment at termination of additional benefits, such as subsidized early retirement benefits, which have been promised to plan participants if plants or companies ceased operations.These factors likely contributed to the degree that plans terminated in 2002 were underfunded. Factors that increased the severity of the plans’ unfunded liability in 2002 were the recent sharp decline in the stock market and a general decline in interest rates. The current minimum funding rules and variable-rate premiums were not effective at preventing those plans from being severely underfunded at termination. Total estimated losses in the single-employer program due to the actual or probable termination of underfunded plans increased from $705 million in fiscal year 2001 to $9.3 billion in fiscal year 2002, in 2002 dollars. In addition to $3.0 billion in losses from the unfunded liabilities of terminated plans, the $9.3 billion included $6.3 billion in losses from the unfunded liabilities of plans that were expected to terminate in the near future. Some of the terminations considered probable at the end of fiscal year 2002 have already occurred. For example, in December 2002, PBGC involuntarily terminated an underfunded Bethlehem Steel Corporation pension plan, which resulted in the single-employer program assuming responsibility for about $7.2 billion in PBGC-guaranteed liabilities, about $3.7 billion of which was not funded at termination. Much of the program’s losses resulted from the termination of underfunded plans sponsored by failing steel companies. PBGC estimates that in 2002, underfunded steel company pension plans accounted for 80 percent of the $9.3 billion in program losses for the year. The three largest losses in the single-employer program’s history resulted from the termination of underfunded plans sponsored by failing steel companies: Bethlehem Steel, LTV Steel, and National Steel. All three plans were either completed terminations or listed as probable terminations for 2002. Giant vertically integrated steel companies, such as Bethlehem Steel, have faced extreme economic difficulty for decades, and efforts to salvage their defined-benefit plans have largely proved unsuccessful. According to PBGC’s executive director, underfunded steel company pension plans have accounted for 58 percent of PBGC single-employer losses since 1975. The termination of underfunded plans in 2002 occurred after a sharp decline in the stock market had reduced plan asset values and a general decline in interest rates had increased plan liability values, and the sponsors did not make the contributions necessary to adequately fund the plans before they were terminated. The combined effect of these factors was a sharp increase in the unfunded liabilities of the terminating plans. According to annual reports (Annual Return/Report of Employee Benefit Plan, Form 5500) submitted by Bethlehem Steel Corporation, for example, in the 7 years from 1992 to 1999, the Bethlehem Steel pension plan went from 86 percent funded to 97 percent funded. (See fig. 6.) From 1999 to plan termination in December 2002, however, plan funding fell to 45 percent as assets decreased and liabilities increased, and sponsor contributions were not sufficient to offset the changes. A decline in the stock market, which began in 2000, was a major cause of the decline in plan asset values, and the associated increase in the degree that plans were underfunded at termination. For example, while total returns for stocks in the Standard and Poor’s 500 index (S&P 500) exceeded 20 percent for each year from 1995 through 1999, they were negative starting in 2000, with negative returns reaching 22.1 percent in 2002. (See fig. 7.) Surveys of plan investments by Greenwich Associates indicated that defined-benefit plans in general had about 62.8 percent of their assets invested in U.S. and international stocks in 1999. A stock market decline as severe as the one experienced from 2000 through 2002 can have a devastating effect on the funding of plans that had invested heavily in stocks. For example, according to a survey, the Bethlehem Steel defined-benefit plan had about 73 percent of its assets (about $4.3 billion of $6.1 billion) invested in domestic and foreign stocks on September 30, 2000. One year later, assets had decreased $1.5 billion, or 25 percent, and when the plan was terminated in December 2002, its assets had been reduced another 23 percent to about $3.5 billion—far less than needed to finance an estimated $7.2 billion in PBGC-guaranteed liabilities. Over that same general period, stocks in the S&P 500 had a negative return of 38 percent. In addition to the possible effect of the stock market’s decline, a drop in interest rates likely had a negative effect on plan funding levels by increasing plan termination costs. Lower interest rates increase plan termination liabilities by increasing the present value of future benefit payments, which in turn increases the purchase price of group annuity contracts used to terminate defined-benefit pension plans. For example, a PBGC analysis indicates that a drop in interest rates of 1 percentage point, from 6 percent to 5 percent, increased the termination liabilities of the Bethlehem Steel pension plan by about 9 percent, which indicates the cost of terminating the plan through the purchase of a group annuity contract would also have increased. Relevant interest rates may have declined 3 percentage points or more since 1990. For example, interest rates on long-term high-quality corporate bonds approached 10 percent at the start of the 1990s, but were below 7 percent at the end of 2002. (See fig. 8.) IRC minimum funding rules and ERISA variable rate premiums, which are designed to ensure plan sponsors adequately fund their plans, did not have the desired effect for the terminated plans that were added to the single- employer program in 2002. The amount of contributions required under IRC minimum funding rules is generally the amount needed to fund benefits earned during that year plus that year’s portion of other liabilities that are amortized over a period of years. Also, the rules require the sponsor to make an additional contribution if the plan is underfunded to the extent defined in the law. However, plan funding is measured using current liabilities, which a PBGC analysis indicates have been typically less than termination liabilities. Additionally, plans can earn funding credits, which can be used to offset minimum funding contributions in later years, by contributing more than required according to minimum funding rules. Therefore, sponsors of underfunded plans may avoid or reduce minimum funding contributions to the extent their plan has a credit balance in the account, referred to as the funding standard account, used by plans to track minimum funding contributions. While minimum funding rules may encourage sponsors to better fund their plans, the rules require sponsors to assess plan funding using current liabilities, which a PBGC analysis indicates have been typically less than termination liabilities. Current and termination liabilities differ because the assumptions used to calculate them differ. For example, some plan participants may retire earlier if a plan is terminated than they would if the plan continues operations, and lowering the assumed retirement age generally increases plan liabilities, especially if early retirement benefits are subsidized. With respect to two of the terminated underfunded pension plans that we examine, for example, a PBGC analysis indicates: The retirement age assumption for the Anchor Glass pension plan on an ongoing plan basis was 65 for separated-vested participants. However, the retirement age assumption appropriate for those participants on a termination basis was 58—a decrease of 7 years. According to PBGC, changing retirement age assumptions for all participants, including separated-vested participants, resulted in a net increase in plan liabilities of about 4.6 percent. The retirement age assumption for the Bethlehem Steel pension plan on an ongoing plan basis was 62 for those active participants eligible for unreduced benefits after 30 years of service. On the other hand, the retirement age assumption for them on a plan termination basis was 55 – the earliest retirement age. According to PBGC, decreasing the assumed retirement age from 62 to 55 approximately doubled the liability for those participants. Other aspects of minimum funding rules may limit their ability to affect the funding of certain plans as their sponsors approach bankruptcy. According to its annual reports, for example, Bethlehem Steel contributed about $3.0 billion to its pension plan for plan years 1986 through 1996. According to the reports, the plan had a credit balance of over $800 million at the end of plan year 1996. Starting in 1997, Bethlehem Steel reduced its contributions to the plan and, according to annual reports, contributed only about $71.3 million for plan years 1997 through 2001. The plan’s 2001 actuarial report indicates that Bethlehem Steel’s minimum required contribution for the plan year ending December 31, 2001, would have been $270 million in the absence of a credit balance; however, the opening credit balance in the plan’s funding standard account as of January 1, 2001, was $711 million. Therefore, Bethlehem Steel was not required to make any contributions during the year. Other IRC funding rules may have prevented some sponsors from making contributions to plans that in 2002 were terminated at a loss to the single- employer program. For example, on January 1, 2000, the Polaroid pension plan’s assets were about $1.3 billion compared to accrued liabilities of about $1.1 billion—the plan was more than 100 percent funded. The plan’s actuarial report for that year indicates that the plan sponsor was precluded by the IRC funding rules from making a tax-deductible contribution to the plan. In July 2002, PBGC terminated the Polaroid pension plan, and the single-employer program assumed responsibility for $321.8 million in unfunded PBGC-guaranteed liabilities for the plan. The plan was about 67 percent funded, with assets of about $657 million to pay estimated PBGC-guaranteed liabilities of about $979 million. Another ERISA provision, concerning the payment of variable-rate premiums, is also designed to encourage employers to better fund their plans. As with minimum funding rules, the variable-rate premium did not provide sufficient incentives for the plan sponsors that we reviewed to make the contributions necessary to adequately fund their plans. None of the three underfunded plans that we reviewed, which became losses to the single-employer program in 2002 and 2003, paid a variable-rate premium in the 2001 plan year. Plans are exempt from the variable-rate premium if they are at the full-funding limit in the year preceding the premium payment year, in this case 2000, after applying any contributions and credit balances in the funding standard account. Each of these four plans met this criterion. Two primary risks threaten the long-term financial viability of the single- employer program. The greater risk concerns the program’s liabilities: large losses, due to bankrupt firms with severely underfunded pension plans, could continue or accelerate. This could occur if returns on investment remain poor, interest rates stay low, and economic problems persist. More troubling for liabilities is the possibility that structural weaknesses in industries with large underfunded plans, including those greatly affected by increasing global competition, combined with the general shift toward defined-contribution pension plans, could jeopardize the long-term viability of the defined-benefit system. On the asset side, PBGC also faces the risk that it may not receive sufficient revenue from premium payments and investments to offset the losses experienced by the single-employer program in 2002 or that this program may experience in the future. This could happen if program participation falls or if PBGC earns a return on its assets below the rate it uses to value its liabilities. Plan terminations affect the single-employer program’s financial condition because PBGC takes responsibility for paying benefits to participants of underfunded terminated plans. Several factors would increase the likelihood that sponsoring firms will go bankrupt, and therefore will need to terminate their pension plans, and the likelihood that those plans will be underfunded at termination. Among these are poor investment returns, low interest rates, and continued weakness in the national economy and or specific sectors. Particularly troubling may be structural weaknesses in certain industries with large underfunded defined-benefit plans. Poor investment returns from a decline in the stock market can affect the funding of pension plans. To the extent that pension plans invest in stocks, the decline in the stock market will increase the chance that plans will be underfunded should they terminate. A Greenwich Associates survey of defined-benefit plan investments indicates that 59.4 percent of plan assets were invested in stocks in 2002. Clearly, the future direction of the stock market is very difficult to forecast. From the end of 1999 through the end of 2002, total cumulative returns in the stock market, as measured by the S&P 500, were negative 37.6 percent. In 2003, the S&P 500 has partially recovered those losses, with total returns (from a lower starting point) of 14.7 percent through the end of September. From January 1975, the beginning of the first year following the passage of ERISA, through September 2003, the average annual compounded nominal return on the S&P 500 equaled 13.5 percent. A decline in asset values can be particularly problematic for plans if interest rates remain low or fall, which raises plan liabilities, all else equal. The highest allowable discount rate for calculating current plan liabilities, based on the 30-year U.S. Treasury bond rate, has been no higher than 7.1 percent since April, 1998, lower than any previous point during the 1990s.Falling interest rates raise the price of group annuities that a terminating plan must purchase to cover its promised benefits and increase the likelihood that a terminating plan will not have sufficient assets to make such a purchase. An increase in liabilities due to falling interest rates also means that companies may be required under the minimum funding rules to increase contributions to their plans. This can create financial strain and increase the chances of the firm going bankrupt, thus increasing the risk that PBGC will have to take over an underfunded plan. Economic weakness can also lead to greater underfunding of plans and to a greater risk that underfunded plans will terminate. For many firms, slow or declining economic growth causes revenues to decline, which makes contributions to pension plans more difficult. Economic sluggishness also raises the likelihood that firms sponsoring pension plans will go bankrupt. Three of the last five annual increases in bankruptcies coincided with recessions, and the record economic expansion of the 1990s is associated with a substantial decline in bankruptcies. Annual plan terminations resulting in losses to the single-employer program rose from 83 in 1989 to 175 in 1991, and, after declining to 65 in 2000, the number reached 93 in 2001. Weakness in certain industries, particularly the airline and automotive industries, may threaten the viability of the single-employer program. Because PBGC has already absorbed most of the pension plans of steel companies, it is the airline industry, with $26 billion of total pension underfunding, and the automotive sector, with over $60 billion in underfunding, that currently represent PBGC’s greatest future financial risks. In recent years, profit pressures within the U.S. airline industry have been amplified by severe price competition, recession, terrorism, the war in Iraq, and the outbreak of Severe Acute Respiratory Syndrome (SARS), creating recent bankruptcies and uncertainty for the future financial health of the industry. As one pension expert noted, a potentially exacerbating risk in weak industries is the cumulative effect of bankruptcy; if a critical mass of firms go bankrupt and terminate their underfunded pension plans, others, in order to remain competitive, may also declare bankruptcy to avoid the cost of funding their plans. Because the financial condition of both firms and their pension plans can eventually affect PBGC’s financial condition, PBGC tries to determine how many firms are at risk of terminating their pension plans and the total amount of unfunded vested benefits. According to PBGC’s fiscal year 2002 estimates, the agency is at potential risk of taking over $35 billion in unfunded vested benefits from plans that are sponsored by financially weak companies and could terminate. Almost one-third of these unfunded benefits, about $11.4 billion, are in the airline industry. Additionally, PBGC estimates that it could become responsible for over $15 billion in shutdown benefits in PBGC-insured plans. PBGC uses a model called the Pension Insurance Modeling System (PIMS) to simulate the flow of claims to the single-employer program and to project its potential financial condition over a 10-year period. This model produces a very wide range of possible outcomes for PBGC’s future net financial position. To be viable in the long term, the single-employer program must receive sufficient income from premiums and investments to offset losses due to terminating underfunded plans. A number of factors could cause the program’s revenues to fall short of this goal or decline outright. For example, fixed-rate premiums would decline if the number of participants covered by the program decreases, which may happen if plans leave the system and are not replaced. Additionally, the program’s financial condition would deteriorate to the extent investment returns fall below the assumed interest rate used to value liabilities. Annual PBGC income from premiums and investments averaged $1.3 billion from 1976 to 2002, in 2002 dollars, and $2 billion since 1988, when variable-rate premiums were introduced. Since 1988, investment income has on average equaled premium income, but has varied more than premium income, including 3 years in which investment income fell below zero. (See fig. 9.) In 2001, total premium and investment was negative and in 2002 equaled approximately $1 billion. Premium revenue for PBGC would likely decline if the total number of plans and participants terminating their defined-benefit plans exceeded the new plans and participants joining the system. This decline in participation would mean a decline in PBGC’s flat-rate premiums. If more plans become underfunded, this could possibly raise the revenue PBGC receives from variable-rate premiums, but would also be likely to raise the overall risk of plans terminating with unfunded liabilities. Premium income, in 2002 dollars, has fallen every year since 1996, even though the Congress lifted the cap on variable-rate premiums in that year. The decline in the number of plans PBGC insures may cast doubt on its ability to increase premium income in the future. The number of PBGC- insured plans has decreased steadily from approximately 110,000 in 1987 to around 30,000 in 2002. While the number of total participants in PBGC-insured single-employer plans has grown approximately 25 percent since 1980, the percentage of participants who are active workers has declined from 78 percent in 1980 to 53 percent in 2000. Manufacturing, a sector with virtually no job growth in the last half-century, accounted for almost half of PBGC’s single-employer program participants in 2001, suggesting that the program needs to rely on other sectors for any growth in premium income. (See fig 10.) In addition, a growing percentage of plans have recently become hybrid plans, such as cash-balance plans that incorporate characteristics of both defined-contribution and defined- benefit plans. Hybrid plans are more likely than traditional defined-benefit plans to offer participants the option of taking benefits as a lump-sum distribution. If the proliferation of hybrid plans increases the number of participants taking lump sums instead of retirement annuities, over time this would reduce the number of plan participants, thus potentially reducing PBGC’s flat-rate premium revenue. Unless something reverses these trends, PBGC may have a shrinking plan and participant base to support the program in the future and that base may be concentrated in certain, potentially more vulnerable industries. Even more problematic than the possibility of falling premium income may be that PBGC’s premium structure does not reflect many of the risks that affect the probability that a plan will terminate and impose a loss on PBGC. While PBGC charges plan sponsors a variable-rate premium based on the plan’s level of underfunding, premiums do not consider other relevant risk factors, such as the economic strength of the sponsor, plan asset investment strategies, the plan’s benefit structure, or the plans demographic profile. Because these affect the risk of PBGC having to take over an underfunded pension plan, it is possible that PBGC’s premiums will not adequately and equitably protect the agency against future losses. The recent terminations of Bethlehem Steel, Anchor Glass, and Polaroid, plans that paid no variable-rate premiums shortly before terminating with large underfunded balances, lend some evidence to this possibility. Sponsors also pay flat-rate premiums in addition to variable-rate premiums, but these reflect only the number of plan participants and not other risk factors that affect PBGC’s potential exposure to losses. Full- funding limitations may exacerbate the risk of underfunded terminations by preventing firms from contributing to their plans during strong economic times when asset values are high and firms are in the best financial position to make contributions. It may also be difficult for PBGC to diversify its pool of insured plans among strong and weak sponsors and plans. In addition to facing firm- specific risk that an individual underfunded plan may terminate, PBGC faces market risk that a poor economy may lead to widespread underfunded terminations during the same period, which potentially could cause very large losses for PBGC. Similarly, PBGC may face risk from insuring plans concentrated in vulnerable industries that may suffer bankruptcies over a short time period, as has happened recently in the steel and airline industries. One study estimates that the overall premiums collected by PBGC amount to about 50 percent of what a private insurer would charge because its premiums do not account for this market risk. The net financial position of the single-employer program also depends heavily on the long-term rate of return that PBGC achieves from the investment of the program’s assets. All else equal, PBGC’s net financial condition would improve if its total net return on invested assets exceeded the discount rate it used to value its liabilities. For example, between 1993 and 2000 the financial position of the single-employer program benefited from higher rates of return on its invested assets and its financial condition improved. However, if the rate of return on assets falls below the discount rate, PBGC’s finances would worsen, all else equal. As of September 30, 2002, PBGC had approximately 65 percent of its single- employer program investments in U.S. government securities and approximately 30 percent in equities. The high percentage of assets invested in Treasury securities, which typically earn low yields because they are considered to be relatively “risk-free” assets, may limit the total return on PBGC’s portfolio. Additionally, PBGC bases its discount rate on surveys of insurance company group annuity prices, and because PBGC invests differently than do insurance companies, we might expect some divergence between the discount rate and PBGC’s rate of return on assets. PBGC’s return on total invested funds was 2.1 percent for the year ending September 30, 2002, and 5.8 percent for the 5-year period ending on that date. For fiscal year 2002, PBGC used an annual discount rate of 5.70 percent to determine the present value of future benefit payments through 2027 and a rate of 4.75 percent for payments made in the remaining years. The magnitude and uncertainty of these long-term financial risks pose particular challenges for the PBGC’s single-employer insurance program and potentially for the federal budget. In 1990, we began a special effort to review and report on the federal program areas we considered high risk because they were especially vulnerable to waste, fraud, abuse, and mismanagement. In the past, we considered PBGC to be on our high-risk list because of concerns about the program’s viability and about management deficiencies that hindered that agency’s ability to effectively assess and monitor its financial condition. The current challenges to PBGC’s single-employer insurance program concern immediate as well as long-term financial difficulties, which are more structural weaknesses rather than operational or internal control deficiencies. Nevertheless, because of serious risks to the program’s viability, we have placed the PBGC single-employer insurance program on our high-risk list. Although some pension professionals have suggested a “wait and see” approach, betting that brighter economic conditions improving PBGC’s future financial condition are imminent, agency officials and other pension professionals have suggested taking a more prudent, proactive approach, identifying a variety of options that could address the challenges facing PBGC’s single-employer program. In our view, several types of reforms might be considered to reduce the risks to the single-employer program’s long-term financial viability. These reforms could be made to strengthen funding rules applicable to poorly funded plans; modify program guarantees; improve the availability of information about plan investments, termination funding, and program guarantees. Several variations exist within these options and each has advantages and disadvantages. In any event, any changes adopted to address the challenge facing PBGC should provide a means to hold sponsors accountable for adequately funding their plans, provide plan sponsors with incentives to increase plan funding, and improve the transparency of the plan’s financial information. Funding rules could be strengthened to increase minimum contributions to underfunded plans and to allow additional contributions to fully funded plans. This approach would improve plan funding over time, while limiting the losses PBGC would incur when a plan is terminated. However, even if funding rules were to be strengthened immediately, it could take years for the change to have a meaningful effect on PBGC’s financial condition. In addition, such a change would require some sponsors to allocate additional resources to their pension plans, which may cause the plan sponsor of an underfunded plan to provide less generous wages or benefits than would otherwise be provided. The IRC could be amended to: Base additional funding requirement and maximum tax-deductible contributions on plan termination liabilities, rather than current liabilities. Since plan termination liabilities typically exceed current liabilities, such a change would likely improve plan funding and therefore reduce potential claims against PBGC. One problem with this approach is the difficulty plan sponsors would have determining the appropriate interest rate to use in valuing termination liabilities. As we reported, selecting an appropriate interest rate for termination liability calculations is difficult because little information exists on which to base the selection. Raise threshold for additional funding requirement. The IRC requires sponsors to make additional contributions under two circumstances: (1) if the value of plan assets is less than 80 percent of its current liability or (2) if the value of plan assets is less than 90 percent of its current liability, depending on plan funding levels for the previous 3 years. Raising the threshold would require more sponsors of underfunded plans to make the additional contributions. Limit the use of credit balances. For sponsors who make contributions in any given year that exceed the minimum required contribution, the excess plus interest is credited against future required contributions. Limiting the use of credit balances to offset contribution requirements might also prevent sponsors of significantly underfunded plans from avoiding contributions. Such limitations might also be applied based on the plan sponsor’s financial condition. For example, sponsors with poor cash flow or low credit ratings could be restricted from using their credit balances to reduce their contributions. Limit lump-sum distributions. Defined benefit pension plans may offer participants the option of receiving their benefit in a lump-sum payment. Allowing participants to take lump-sum distributions from severely underfunded plans, especially those sponsored by financially weak companies, allows the first participants who request a distribution to drain plan assets, which might result in the remaining participants receiving reduced payments from PBGC if the plan terminates. However, the payment of lump sums by underfunded plans may not directly increase losses to the single employer program because lump sums reduce plan liabilities as well as plan assets. Raise the level of tax-deductible contributions. The IRC and ERISA restrict tax-deductible contributions to prevent plan sponsors from contributing more to their plan than is necessary to cover accrued future benefits. Raising these limitations might result in pension plans being better funded, decreasing the likelihood that they will be underfunded should they terminate. Modifying Program Guarantee Would Decrease PBGC from underfunded plans. This approach could preserve plan assets Plan Underfunding Modifying certain guaranteed benefits could decrease losses incurred by by preventing additional losses that PBGC would incur when a plan is terminated. However, participants would lose benefits provided by some plan sponsors. ERISA could be amended to: Phase-in the guarantee of shutdown benefits. PBGC is concerned about its exposure to the level of shutdown benefits that it guarantees. Shutdown benefits provide additional benefits, such as significant early retirement benefit subsidies to participants affected by a plant closing or a permanent layoff. Such benefits are primarily found in the pension plans of large unionized companies in the auto, steel, and tire industries. In general, shutdown benefits cannot be adequately funded before a shutdown occurs. Phasing in guarantees from the date of the applicable shutdown could decrease the losses incurred by PBGC from underfunded plans. However, modifying these benefits would reduce the early retirement benefits for participants who are in plans with such provisions and are affected by a plant closing or a permanent layoff. Dislocated workers, particularly in manufacturing, may suffer additional losses from lengthy periods of unemployment or from finding reemployment only at much lower wages. Expand restrictions on unfunded benefit increases. Currently, plan sponsors must meet certain conditions before increasing the benefits of plans that are less than 60 percent funded. Increasing this threshold, or restricting benefit increases when plans reach the threshold, could decrease the losses incurred by PBGC from underfunded plans. Plan sponsors have said that the disadvantage of such changes is that they would limit an employer’s flexibility with regard to setting compensation, making it more difficult to respond to labor market developments. For example, a plan sponsor might prefer to offer participants increased pension payments or shutdown benefits instead of offering increased wages because pension benefits can be deferred—providing time for the plan sponsor to improve its financial condition—while wage increases have an immediate effect on the plan sponsor’s financial condition. PBGC’s premium rates could be increased or restructured to improve PBGC’s financial condition. Changing premiums could increase PBGC’s revenue or provide an incentive for plan sponsors to better fund their plans. However, premium changes that are not based on the degree of risk posed by different plans may force financially healthy companies out of the defined-benefit system and discourage other plan sponsors from entering the system. Various actions could be taken to reduce guaranteed benefits. ERISA could be amended to: Increase or restructure variable-rate premium. The current variable- rate premium of $9 per $1,000 of unfunded liability could be increased. The rate could also be adjusted so that plans with less adequate funding pay a higher rate. Premium rates could also be restructured based on the degree of risk posed by different plans, which could be assessed by considering the financial strength and prospects of the plan’s sponsor, the risk of the plan’s investment portfolio, participant demographics, and the plan’s benefit structure—including plans that have lump-sum, shutdown benefit, and floor-offset provisions. One advantage of a rate increase or restructuring is that it might improve accountability by providing for a more direct relationship between the amount of premium paid and the risk of underfunding. A disadvantage is that it could further burden already struggling plan sponsors at a time when they can least afford it, or it could reduce plan assets, increasing the likelihood that underfunded plans will terminate. A program with premiums that are more risk-based could also be more challenging for PBGC to administer. Increase fixed-rate premium. The current fixed rate of $19 per participant annually could be increased. Since the inception of PBGC, this rate has been raised four times, most recently in 1991 when it was raised from $16 to $19. Such increases generally raise premium income for PBGC, but the current fixed-rate premium has not reflected the changes in inflation since 1991. By indexing the rate to the consumer price index, changes to the premium would be consistent with inflation. However, any increases in the fixed-rate premium would affect all plans regardless of the adequacy of their funding. Improving the availability of information to plan participants and others about plan investments, termination funding status, and PBGC guarantees may give plan sponsors additional incentives to better fund their plans, making participants better able to plan for their retirement. ERISA could be amended to: Disclose information on plan investments. While some asset allocation information is reported by plans in form 5500 filings with the IRS, some plan investments may be made through common and collective trusts, master trusts, and registered investment companies, which make it difficult or impossible for participants and others to determine the asset classes–such as equity or fixed-income investments–for many plan investments. Improving the availability of plan asset allocation information may give plan sponsors an incentive to increase funding of underfunded plans or limit risky investments. Information provided to participants could also disclose how much of plan assets are invested in the sponsor’s own securities. This would be of concern because should the sponsor becomes bankrupt; the value of the securities could be expected to drop significantly, reducing plan funding. Although this information is currently provided in the plan’s form 5500, it is not readily accessible to participants. Additionally, if the defined-benefit plan has a floor-offset arrangement and its benefits are contingent on the investment performance of a defined- contribution plan, then information provided to participants could also disclose how much of that defined-contribution plan’s assets are invested in the sponsor’s own securities. Disclose plan termination funding status. Under current law, sponsors are required to report a plan’s current liability for funding purposes, which often can be lower than termination liability. In addition, only participants in plans below a certain funding threshold receive annual notices of the funding status of their plans. As a result, many plan participants, including participants of the Bethlehem Steel pension plan, did not receive such notifications in the years immediately preceding the termination of their plans. Expanding the circumstances under which sponsors must notify participants of plan underfunding might give sponsors an additional incentive to increase plan funding and would enable more participants to better plan their retirement. Disclose benefit guarantees to additional participants. As with the disclosure of plan funding status, only participants of plans below the funding threshold receive notices on the level of program guarantees should their plan terminate. Termination of a severely underfunded plan can significantly reduce the benefits participants receive. For example, 59- year old pilots were expecting annual benefits of $110,000 per year on average when the US Airways plan was terminated in 2003, while the maximum PBGC-guaranteed benefit at age 60 is $28,600 per year.Expanding the circumstances under which plan sponsors must notify participants of PBGC guarantees may enable more participants to better plan for their retirement. The current financial challenges facing PBGC and the array of policy options to address those challenges are more appropriately viewed within the context of the agency’s overall mission. In 1974, ERISA placed three important charges on PBGC: first, protect the pension benefits so essential to the retirement security of hard working Americans; second, minimize the pension insurance premiums and other costs of carrying out the agency’s obligations; and finally, foster the health of the private defined- benefit pension plan system. While addressing one or even two of these goals would be a challenge, it is a far more formidable endeavor to fulfill all three. In any event, any changes adopted to address the challenges facing PBGC should provide plan sponsors with incentives to increase plan funding, improve the transparency of the plan’s financial information, and provide a means to hold sponsors accountable for funding their plans adequately. Ultimately, however, for any insurance program, including the single-employer pension insurance program, to be self-financing, there must be a balance between premiums and the program’s exposure to losses. A variety of options are available to the Congress and PBGC to address the short-term vulnerabilities of the single-employer insurance program. Congress will have to weigh carefully the strengths and weaknesses of each option as it crafts the appropriate policy response. However, to understand the program’s structural problems, it helps to understand how much the world has changed since the enactment of ERISA. In 1974, the long-term decline that our nation’s private defined-benefit pension system has experienced since that time might have been difficult for some to envision. Although there has been some absolute growth in the system since 1980, active workers have comprised a declining percentage of program participants, and defined-benefit plan coverage has declined as a percentage of the national private labor force. The causes of this long-term decline are many and complex and have turned out to be more systemic, more structural in nature, and far more powerful than the resources and bully pulpit that PBGC can bring to bear. This trend has had important implications for the nature and the magnitude of the risk that PBGC must insure. Since 1987, as employers, both large and small, have exited the system, newer firms have generally chosen other vehicles to help their employees provide for their retirement security. This has left PBGC with a risk pool of employers that is concentrated in sectors of the economy, such as air transportation and automobiles, which have become increasingly vulnerable. As of 2002, almost half of all defined-benefit plan participants were covered by plans offered by firms in manufacturing industries. The secular decline and competitive turmoil already experienced in industries like steel and air transportation could well extend to the other remaining strongholds of defined-benefit plans in the future, weakening the system even further. Thus, the long-term financial health of PBGC and its ability to protect workers’ pensions is inextricably bound to this underlying change in the nature of the risk that it insures, and implicitly to the prospective health of the defined-benefit system. Options that serve to revitalize the defined benefit system could stabilize PBGC’s financial situation, although such options may be effective only over the long term. The more immediate challenge, however, is the fundamental consideration of the manner in which the federal government protects the defined-benefit pensions of workers in this increasingly risky environment. We look forward to working with the Congress on this crucial subject. Mr. Chairman, members of the committee, that concludes my statement. I’d be happy to answer any questions you may have. As part of the Employee Retirement and Income Security Act (ERISA) of 1974, the Congress established the Pension Benefit Guaranty Corporation (PBGC) to administer the federal insurance program. Since 1974, the Congress has amended ERISA to improve the financial condition of the insurance program and the funding of single-employer plans (see table 1). | More than 34 million workers and retirees in 30,000 single-employer defined benefit pension plans rely on a federal insurance program managed by the Pension Benefit Guaranty Corporation (PBGC) to protect their pension benefits, and the program's long-term financial viability is in doubt. Over the last decade, the program swung from a $3.6 billion accumulated deficit (liabilities exceeded assets), to a $10.1 billion accumulated surplus, and back to a $3.6 billion accumulated deficit, in 2002 dollars. Furthermore, despite a record $9 billion in estimated losses to the program in 2002, additional severe losses may be on the horizon. PBGC estimates that financially weak companies sponsor plans with $35 billion in unfunded benefits, which ultimately might become losses to the program. This testimony provides GAO's observations on the factors that contributed to recent changes in the single-employer pension insurance program's financial condition, risks to the program's long-term financial viability, and changes to the program that might be considered to reduce those risks. The single-employer pension insurance program returned to an accumulated deficit in 2002 largely due to the termination, or expected termination, of several severely underfunded pension plans. Factors that contributed to the severity of plans' underfunded condition included a sharp stock market decline, which reduced plan assets, and an interest rate decline, which increased plan termination costs. For example, PBGC estimates losses to the program from terminating the Bethlehem Steel pension plan, which was nearly fully funded in 1999 based on reports to IRS, at $3.7 billion when it was terminated in 2002. The plan's assets had decreased by over $2.5 billion, while its liabilities had increased by about $1.4 billion since 1999. The single-employer program faces two primary risks to its long-term financial viability. First, the losses experienced in 2002 could continue or accelerate if, for example, structural problems in particular industries result in additional bankruptcies. Second, revenue from premiums and investments might be inadequate to offset program losses experienced to date or those that occur in the future. Revenue from premiums might fall, for example, if the number of program participants decreases. Because of these risks, we recently placed the single-employer insurance program on our high-risk list of agencies with significant vulnerabilities to the federal government. While there is not an immediate crisis, there is a serious problem threatening the retirement security of millions of American workers and retirees. Several reforms might reduce the risks to the program's longterm financial viability. Such changes include: strengthening funding rules applicable to poorly funded plans, modifying program guarantees, restructuring premiums, and improving the availability of information about plan investments, termination funding, and program guarantees. Any changes adopted to address the challenge facing PBGC should provide a means to hold plan sponsors accountable for adequately funding their plans, provide plan sponsors with incentives to increase plan funding, and improve the transparency of plan information. |
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Many firms of varying sizes make up the U.S. petroleum industry. While some firms engage in only limited activities within the industry, such as exploration for and production of crude oil and natural gas or refining crude oil and marketing petroleum products, fully vertically integrated oil companies participate in all aspects of the industry. Before the 1970s, major oil companies that were fully vertically integrated controlled the global network for supplying, pricing, and marketing crude oil. However, the structure of the world crude oil market has dramatically changed as a result of such factors as the nationalization of oil fields by oil-producing countries, the emergence of independent oil companies, and the evolution of futures and spot markets in the 1970s and 1980s. Since U.S. oil prices were deregulated in 1981, the price paid for crude oil in the United States has been largely determined in the world oil market, which is mostly influenced by global factors, especially supply decisions of the Organization of Petroleum Exporting Countries (OPEC) and world economic and political conditions. The United States currently imports over 60 percent of its crude oil supply. In contrast, the bulk of the gasoline used in the United States is produced domestically. In 2001, for example, gasoline refined in the United States accounted for over 90 percent of the total domestic gasoline consumption. Companies that supply gasoline to U.S. markets also post the domestic gasoline prices. Historically, the domestic petroleum market has been divided into five regions: the East Coast region, the Midwest region, the Gulf Coast region, the Rocky Mountain region, and the West Coast region. Proposed mergers in all industries, including the petroleum industry, are generally reviewed by federal antitrust authorities—including FTC and the Department of Justice (DOJ)—to assess the potential impact on market competition. According to FTC officials, FTC generally reviews proposed mergers involving the petroleum industry because of the agency’s expertise in that industry. FTC analyzes these mergers to determine if they would likely diminish competition in the relevant markets and result in harm, such as increased prices. To determine the potential effect of a merger on market competition, FTC evaluates how the merger would change the level of market concentration, among other things. Conceptually, the higher the concentration, the less competitive the market is and the more likely that firms can exert control over prices. The ability to maintain prices above competitive levels for a significant period of time is known as market power. According to the merger guidelines jointly issued by DOJ and FTC, market concentration as measured by HHI is ranked into three separate categories: a market with an HHI under 1,000 is considered to be unconcentrated; if HHI is between 1,000 and 1,800 the market is considered moderately concentrated; and if HHI is above 1,800, the market is considered highly concentrated. While concentration is an important aspect of market structure—the underlying economic and technical characteristics of an industry—other aspects of market structure that may be affected by mergers also play an important role in determining the level of competition in a market. These aspects include barriers to entry, which are market conditions that provide established sellers an advantage over potential new entrants in an industry, and vertical integration. Over 2,600 merger transactions occurred from 1991 through 2000 involving all three segments of the U.S. petroleum industry. Almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for over 2 percent. The vast majority of the mergers—about 80 percent—involved one company’s purchase of a segment or asset of another company, while about 20 percent involved the acquisition of a company’s total assets by another so that the two became one company. Most of the mergers occurred in the second half of the decade, including those involving large partially or fully vertically integrated companies. Petroleum industry officials and experts we contacted cited several reasons for the industry’s wave of mergers in the 1990s, including achieving synergies, increasing growth and diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers. Ultimately, these reasons mostly relate to companies’ desire to maximize profit or stock values. Mergers in the 1990s contributed to increases in market concentration in the downstream segment of the U.S. petroleum industry, while the upstream segment experienced little change overall. We found that market concentration, as measured by the HHI, decreased slightly in the upstream segment, based on crude oil production activities at the national level, from 290 in 1990 to 217 in 2000. Moreover, based on benchmarks established jointly by DOJ and FTC, the upstream segment of the U.S. petroleum industry remained unconcentrated at the end of the 1990s. The increases in market concentration in the downstream segment varied by activity and region. For example, the HHI of the refining market in the East Coast region increased from a moderately concentrated level of 1136 in 1990 to a highly concentrated level of 1819 in 2000. In the Rocky Mountain and the West Coast regions, it increased from 1029 to 1124 and from 937 to 1267, respectively, in that same period. Thus, while each of these refining markets increased in concentration, the Rocky Mountain remained within the moderately concentrated range but the West Coast changed from unconcentrated in 1990 to moderately concentrated in 2000. The HHI of refining markets also increased from 699 to 980 in the Midwest and from 534 to 704 in the Gulf Coast during the same period, although these markets remained unconcentrated. In wholesale gasoline markets, market concentration increased broadly throughout the United States between 1994 and 2002. Specifically, we found that 46 states and the District of Columbia had moderately or highly concentrated markets by 2002, compared to 27 in 1994. In both the refining and wholesale markets of the downstream segment, merger activity and market concentration were highly correlated for most regions of the country. Evidence from various sources indicates that, in addition to increasing market concentration, mergers also contributed to changes in other aspects of market structure in the U.S. petroleum industry that affect competition—specifically, vertical integration and barriers to entry. However, we could not quantify the extent of these changes because of a lack of relevant data. Vertical integration can conceptually have both pro- and anticompetitive effects. Based on anecdotal evidence and economic analyses by some industry experts, we determined that a number of mergers that have occurred since the 1990s have led to greater vertical integration in the U.S. petroleum industry, especially in the refining and marketing segment. For example, we identified eight mergers that occurred between 1995 and 2001 that might have enhanced the degree of vertical integration, particularly in the downstream segment. Concerning barriers to entry, our interviews with petroleum industry officials and experts provide evidence that mergers had some impact on the U.S. petroleum industry. Barriers to entry could have implications for market competition because companies that operate in concentrated industries with high barriers to entry are more likely to possess market power. Industry officials pointed out that large capital requirements and environmental regulations constitute barriers for potential new entrants into the U.S. refining business. For example, the officials indicated that a typical refinery could cost billions of dollars to build and that it may be difficult to obtain the necessary permits from the relevant state or local authorities. At the wholesale and retail marketing levels, industry officials pointed out that mergers might have exacerbated barriers to entry in some markets. For example, the officials noted that mergers have contributed to a situation where pipelines and terminals are owned by fewer, mostly integrated companies that sometimes deny access to third-party users, especially when supply is tight—which creates a disincentive for potential new entrants into such wholesale markets. According to some petroleum industry officials that we interviewed, gasoline marketing in the United States has changed in two major ways since the 1990s. First, the availability of unbranded gasoline has decreased, partly due to mergers. Officials noted that unbranded gasoline is generally priced lower than branded. They generally attributed the decreased availability of unbranded gasoline to one or more of the following factors: There are now fewer independent refiners, who typically supply mostly unbranded gasoline. These refiners have been acquired by branded companies, have grown large enough to be considered a brand, or have simply closed down. Partially or fully vertically integrated oil companies have sold or mothballed some refineries. As a result, some of these companies now have only enough refinery capacity to supply their own branded needs, with little or no excess to sell as unbranded. Major branded refiners are managing their inventory more efficiently, ensuring that they produce only enough gasoline to meet their current branded needs. We could not quantify the extent of the decrease in the unbranded gasoline supply because the data required for such analyses do not exist. The second change identified by these officials is that refiners now prefer dealing with large distributors and retailers because they present a lower credit risk and because it is more efficient to sell a larger volume through fewer entities. Refiners manifest this preference by setting minimum volume requirements for gasoline purchases. These requirements have motivated further consolidation in the distributor and retail sectors, including the rise of hypermarkets. Our econometric modeling shows that the mergers we examined mostly led to higher wholesale gasoline prices in the second half of the 1990s. The majority of the eight specific mergers we examined—Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BP-Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS—resulted in higher prices of wholesale gasoline in the cities where the merging companies supplied gasoline before they merged. The effects of some of the mergers were inconclusive, especially for boutique fuels sold in the East Coast and Gulf Coast regions and in California. For the seven mergers that we modeled for conventional gasoline, five led to increased prices, especially the MAP-UDS and Exxon-Mobil mergers, where the increases generally exceeded 2 cents per gallon, on average. For the four mergers that we modeled for reformulated gasoline, two— Exxon-Mobil and Marathon-Ashland—led to increased prices of about 1 cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger led to price decreases of less than one-half cent per gallon, on average, for branded gasoline only. For the two mergers—Tosco-Unocal and Shell-Texaco I (Equilon)—that we modeled for gasoline used in California, known as California Air Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to price increases. The increases were for branded gasoline only and exceeded 6 cents per gallon, on average. For market concentration, which captures the cumulative effects of mergers as well as other competitive factors, our econometric analysis shows that increased market concentration resulted in higher wholesale gasoline prices. Prices for conventional (non-boutique) gasoline, the dominant type of gasoline sold nationwide from 1994 through 2000, increased by less than one-half cent per gallon, on average, for branded and unbranded gasoline. The increases were larger in the West than in the East—the increases were between one-half cent and one cent per gallon in the West, and about one- quarter cent in the East (for branded gasoline only), on average. Price increases for boutique fuels sold in some parts of the East Coast and Gulf Coast regions and in California were larger compared to the increases for conventional gasoline. The wholesale prices increased by an average of about 1 cent per gallon for boutique fuel sold in the East Coast and Gulf Coast regions between 1995 and 2000, and by an average of over 7 cents per gallon in California between 1996 and 2000. Our analysis shows that wholesale gasoline prices were also affected by other factors included in the econometric models—particularly, gasoline inventories relative to demand, refinery capacity utilization rates, and the supply disruptions that occurred in some parts of the Midwest and the West Coast. In particular, wholesale gasoline prices were about 1 cent per gallon higher, on average, when gasoline inventories were low relative to demand, typically in the summer driving months. Also, prices were higher by about an average of one-tenth to two-tenths of 1 cent per gallon when refinery capacity utilization rates increased by 1 percent. The prices of conventional gasoline were about 4 to 5 cents per gallon higher, on average, during the Midwest and West Coast supply disruptions. The increase in prices for CARB gasoline was about 4 to 7 cents per gallon, on average, during the West Coast supply disruptions. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Key contributors to this testimony included Godwin Agbara, Scott Farrow, John A. Karikari, and Cynthia Norris. 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. | Gasoline is subject to dramatic price swings. A multitude of factors cause volatility in U.S. gasoline markets, including world crude oil costs, limited refining capacity, and low inventories relative to demand. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several of them between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry ( GAO-04-96 , May 17, 2004). This report examined mergers in the U.S. petroleum industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the U.S. petroleum industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level. To address these issues, GAO purchased and analyzed a large body of data and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis. One of the many factors that can impact gasoline prices is mergers within the U.S. petroleum industry. Over 2,600 such mergers have occurred since the 1990s. The majority occurred later in the period, most frequently among firms involved in exploration and production. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated on the East Coast and from unconcentrated to moderately concentrated on the West Coast. Concentration in the wholesale gasoline market increased substantially from the mid-1990s so that by 2002, most states had either moderately or highly concentrated wholesale gasoline markets. On the other hand, market concentration in the upstream (exploration and production) segment remained unconcentrated by the end of the 1990s. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as firms' ability to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon. For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. GAO also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models--particularly low gasoline inventories relative to demand, high refinery capacity utilization rates, and supply disruptions in some regions. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound. |
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The discussion summarized in this report should be interpreted in the context of two key limitations and qualifications. First, the panel was only an initial step in a possible long-term, evolving effort to develop and sustain discussion on ATC modernization. As such, it brought together generalists, rather than specialists, to address broad themes and consider how to organize a more comprehensive approach. Because our scope was limited, we could not include a large number of leading experts, institutions, and networks involved in specialized efforts. Furthermore, although many points of view were represented, the panel was not representative of all potential stakeholders. Second, even though we, in cooperation with the National Academies, conducted preliminary research and heard from national experts in their fields, a day’s conversation cannot represent the current practice in this vast arena. More thought, discussion, and research are needed to develop greater agreement on what we really know, what needs to be done, and how to do it. These two key limitations and qualifications provide contextual boundaries. Nevertheless, the panel provided a rich dialogue on ATC modernization, and the panelists developed strong messages in responding to each of the three questions. Those messages are highlighted below. The panelists attributed many of the ATC modernization program’s chronic problems to cultural and technical factors. In particular, they cited resistance to change at all levels within the agency and insufficient technical expertise as key factors impeding modernization. They identified multiple, currently available options for addressing these factors. very resistant” to having private organizations, rather than FAA, develop new procedures and systems for FAA to approve and institute. Several panelists saw resistance to change as a consequence of federal employment—of the security that comes from having a regular paycheck, cost-of-living pay increases, and protections against layoffs. A government organization is insulated from the economic pressures that the private sector faces, one of the panelists indicated. In his view, federal employees do not have the firsthand experience with layoffs and business failures to understand, as private aviation industry employees do, why improvements to the ATC system’s efficiency are needed to help revitalize the struggling aviation industry. Other panelists emphasized the reluctance of management to change. According to a panelist with experience in restructuring a foreign air traffic organization, the senior and middle managers could not or would not adjust to the change and had to be let go within the first 2 years. The other employees also had difficulty adjusting and were still adjusting in some respects, he said, but getting management on the right page was the real challenge. Another panelist emphasized that cultural change starts at the top and questioned why the ATO’s new COO had, according to the panelist’s count, replaced only two top managers in the ATO and simply reassigned other managers. Still another panelist suggested that cultural change within the ATO alone would not be sufficient to ensure the ATO’s success, because so much of the ATO’s fate depends on other organizations, including FAA, DOT, the Office of Management and Budget (OMB), and Congress. A number of panelists described the air traffic controllers’ union as also resistant to change. According to one panelist, for example, the union delayed the adoption of technologies such as the User Request Evaluation Tool (URET) because some controllers saw them as a threat to its membership. Another panelist cited the union’s long-term opposition to the implementation of a software program that tracks productivity—a key measure for a performance-based organization. The union is “very political,” several panelists asserted, and one panelist charged that it was “hindering the progress” of a performance-based organization. Resistance to change can be an issue outside FAA as well as within it, panelists noted. For example, one panelist questioned how much support the ATO was getting from DOT, OMB, and congressional committees for changing “some extremely entrenched political fiefdoms.” Another panelist said that he had found the congressional authorizing committees amenable to changes, but the appropriators liked things the way they were. what is expected of them, how they fit into the strategy, and what the vision is for their organization. In addition to having a vision, another panelist said, it is important for the ATO to tie that vision to the user constituency, not confine it to the agency. FAA cannot do everything alone from the inside, because airplanes and airports, for example, need to be equipped with the technologies that will help realize the vision. Employing a team concept could help overcome resistance to the implementation of new technologies, according to another panelist. Putting engineers, finance people, controllers, and electronic technologists together, all on the same team, he said, could unite them as they moved through the stages of implementation. Therefore, when the time comes to field a technology, the focus would be on getting it up and running and operating safely—not, the panelist implied, on obstructing its implementation because it might threaten jobs. A change in management’s approach could go a long way toward overcoming controllers’ and other employees’ resistance to change, one panelist noted. One foreign air traffic organization changed its whole approach to the unions and the staff, started talking to them as people, and began executing “participative working” programs, according to the panelist. Union representatives and managers take the same courses together and address issues of affordability together, he said, and, as a result, controllers’ pay has increased, costs have dropped, and productivity has risen. The key to these positive results, he said, is psychological change—managers have stopped seeing employees as a problem and have started to see them as part of the solution. According to other panelists, however, people find it very difficult to change, and the only way to bring about a cultural transformation is to replace those who resist change, either by allowing them to retire or by hiring others to take their places. In the corporate world, one panelist observed, a new executive brings in a new management team to support a cultural turnaround. The new team is then loyal to the new executive. In the view of this panelist, the COO’s hiring of only two new managers and reassignment of other managers would not be sufficient to turn the ATO’s culture around. Another panelist further noted that an executive in the private sector replaced the top 200 people in his organization to achieve the transformation he was seeking. Technical as well as cultural factors have impeded ATC modernization, according to several of the panelists. In the words of one speaker, FAA does not have “the engineering technical capability to deal with an extremely complex, highly nonlinear adaptive system that's got technical safety risk as a key technical parameter.” According to another panelist, FAA does not apply rigorous systems engineering expertise early in nonadvocate technical reviews of project proposals to scrub them for potential issues. As a result, a number of FAA’s programs—including complex ones such as the Wide Area Augmentation System (WAAS), as well as more “straightforward” ones such as the Standard Terminal Automation Replacement System (STARS) and the Next-Generation Air-to-Ground Communications System (NEXCOM)—had fundamental system engineering technical issues that were not identified early in the program. The risks were not mitigated, and the programs experienced significant cost growth and schedule increases. “The system engineering organization in FAA is nothing more than a process organization,” another panelist said. “The power resides with the program manager. It doesn’t matter what the systems engineering people do, their job is to keep doing plans and processes. They think that meetings are products.” good job, but who certainly have a different motivation from FAA. As this panelist put it, FAA lacks a rudder, in a technical sense, for modernization. To help address its lack of technical expertise, panelists suggested, the ATO could obtain advice from an independent board or information from other countries on technologies that they have already adopted. The panelists proposed some immediate steps that the ATO could take to address this deficiency, including the following: A technical advisory board made up of system engineers could review proposals for FAA and demand the kinds of data and tests needed to scrub the proposals and identify any big roadblocks. Hiring skilled engineers instead of relying on contractors might enable the ATO to develop systems more economically and efficiently, one panelist suggested. This panelist described how a foreign air traffic services organization develops new ATC systems in-house and seldom uses contractors. It now utilizes its engineers to build systems rather than manage contractors. As a result, he said, it is now developing the systems it needs faster and at less cost. Maximizing the use of commercial inputs was the recommendation of another panelist, who said that FAA needs to get out of the business of designing systems. According to him, most companies no longer develop their own large, complex systems; instead, they get other people to do that for them in the private sector. Another panelist also emphasized the availability of technical expertise in the private sector. However, according to a third panelist, commercial systems have a shorter economic service life than the systems that FAA designs. The ATO could profitably take advantage of the experiences of other countries’ air traffic organizations, which are technically as good as FAA ever was or ever will be, one panelist said. He maintained that the ATO should institute “a fundamental requirement and a cultural expectation” that it will review existing technologies before it buys or tries to develop its own. With a multibillion-dollar budget for software and other information technology, he said, the ATO has ample opportunity to save money. In his opening remarks and in responding to panelists’ questions, the ATO’s COO made a number of observations on FAA’s culture. He also noted that FAA plans to train or hire people with needed skills to address shortfalls in technical expertise. The following summarizes some of his key observations on FAA’s culture and provides additional information from previous GAO reports and work in progress on how FAA is addressing some of the cultural and technical factors panelists identified as affecting ATC modernization: Recognizing that cultural factors can play a critical role in an organization’s success, the ATO has initiated organizational changes that are designed to create a foundation for cultural change and deliver benefits to customers efficiently. For example, the ATO established collaborative teams of technical experts and ATC system reorganized air traffic services and the research and acquisition organization along functional lines of business to bring stakeholders together and integrate goals, as well as reward cooperation by linking investments to operations; reduced layers of management from 11 to 7 to help address the hierarchical nature of the organization; and conducted an organizationwide activity value analysis to determine the full range of activities that ATO headquarters is engaged in, the value customers place on those activities, and the potential for conducting any of those activities more effectively and efficiently. indicating a desire to improve the flow of information within the agency by sending a large number of detailed e-mails in response to a call for recommendations to improve internal communications. In the past, according to the ATO’s COO, FAA’s management culture was “intensely hierarchical, risk averse,” and “reactionary.” But now, he said, FAA is attempting to foster “results-focused, proactive and innovative behavior.” Changing the agency’s leadership model is also designed, he said, to replace a “personality-driven culture” with a sustainable, stable, viable organization that can make rational decisions that transcend changes in political leadership. The ATO is trying to better align FAA’s priorities and stakeholders’ interests by developing a strategy map that captures the outputs desired by the ATO’s owners and customers, along with the outputs that must be achieved. Called the Strategic Management Process, this effort borrows heavily from a private-sector model and uses the ATO’s strategic goals and objectives to drive investment decisions. According to FAA, the strategy map will enable owners and customers to clearly understand both the services that the ATO is providing and the effects of products in development on those services. As a result, FAA says, future budgetary conversations will revolve around the desired level of service, instead of focusing on a product, as past discussions typically did. According to FAA, the Strategic Management Process will ensure linkage between FAA’s operating and capital budgets. To become a “performance-based organization” and identify customer groups and their service needs, the ATO created “value-based” performance metrics; that is, it defined its performance in terms of customers’ needs and connected efforts to satisfy those needs with cost. Ultimately, the ATO wants to know how much every unit of output costs so that it can allocate and compare costs and measure productivity. Thus, each organizational unit and facility is developing applicable metrics for performance so that the ATO can compare costs, identify factors that affect costs, and use this information to improve performance. For example, each en route facility is determining its hourly cost to control flights. The ATO can then compare and analyze these costs to identify positive and negative factors affecting performance and productivity. plan is a response to a congressional mandate, based on a recommendation we made in 2002, that FAA develop a plan for addressing an impending wave of controller retirements and deal with productivity issues. The panelists identified and discussed the impact of funding constraints and the federal budget process on ATC modernization. In their view, the most immediate issue is a critical shortage of funds to meet the current modernization program’s plans and users’ demands. Additionally, they said, the federal budget process is slow, inflexible, and influenced by the political process; annual appropriations are uncertain and discourage planning; and the budget fails to show investment priorities and relationships between FAA’s capital and operating budgets. The panelists suggested a number of steps that the ATO could currently take to address these challenges. Panelists viewed the ATO’s apparent fiscal shortfall—which one panelist said would amount to a 20 percent deficit in 4 years—as a severe challenge. In terms of operations, the panelist said, this deficit was more likely to have a gradual than an immediately catastrophic onset. He did not expect to see major system outages but predicted, instead, “a slow but sure increase in delays.” However, as another panelist said, if the ATO did not carefully analyze demand and determine how that demand could be served, the ATO would find itself facing what a third panelist referred to as a “perfect storm,” reiterating a term the ATO itself has used. Severe reductions in the funding for ATC modernization, if required to address the currently projected shortfall, could exacerbate what one panelist described as the government’s traditional underfunding of the ATC system’s capital requirements. According to this panelist, the government undercapitalizes any complex, rapidly evolving operational system, including the ATC system, and overestimates the economic service lives of information technology investments. Whereas the government typically assumes such investments will last for 15 years, he said, a 7-year estimate would be more reasonable. showing large deficits. They suggested, for example, that FAA and DOT officials might be unwilling to publicly release data that could raise questions about their management. Several panelists maintained that the federal budget cycle is too long and inflexible to meet the needs of an ATC system. According to one panelist, it is “impossible” to run the U.S. ATC system within the classic federal structure. Such a “dramatic,” “dynamic” system requires “more managerial freedom, much more day-to-day, week-to-week, month-to-month decision- making,” he said. The federal budget process freezes plans for the system 12 or 18 months in advance, but for an ATC system to succeed, “you’ve got to be 12 or 18 days ahead.” The budget procedure requiring that capital investments be funded out of annual appropriations means that major acquisitions generally take many years to implement and projects may continue to be implemented even after they have outlived their usefulness. Particularly when annual appropriations fall short, panelists noted, projects’ development and deployment may be delayed and their costs may increase with time. Furthermore, until the acquisitions are completed, the benefits of the new technologies are deferred, aging equipment may pose risks to users, and outdated software may require costly upgrades. By the time the acquisitions are fully deployed, panelists said, they may be out of date. technology as New York, despite resource constraints and major differences in air traffic demand. The political process influences budget decisions in the administration as well as in Congress, some panelists said. According to one panelist, Congress has generally supported FAA’s modernization program, but funding difficulties have ensued because the budget is consolidated and there are always pressures on it. Other panelists added that the ATO would have difficulty “deliver the bad news”—that is, publishing a business plan that projects deficit scenarios—unless revenue increases are forthcoming. According to this panelist, OMB would deny any requests for increased funding and would, instead, tell the ATO to find another way of doing business. Panelists noted that funding from annual appropriations is uncertain, and that this uncertainty is incompatible with strategic and capital planning. The amount of money available for appropriation each year cannot be predetermined, one panelist said, and the size of the appropriation may vary from year to year. This uncertainty focuses attention on which technology will receive the funding (the inputs) rather than on what improvements in safety or capacity the technology is supposed to deliver (the outputs), he said. In debating whether this investment or that investment should receive funding, planners have lost sight of the big picture, he suggested, and the ATO has spent most of its capital investment dollars on sustaining and maintaining existing systems. Only about 14 percent of its expenditures, he recalled, were for flight enhancement. “Who anywhere would have a capital investment plan that was predominantly about standing still?” he asked. Another panelist also considered the federal budget process incompatible with strategic planning. In his words, “it is absolutely a problem at FAA” that “budget drives strategy and strategy does not drive budget.” Although FAA is good at forecasting demand, he said, it does not evaluate “the anatomy of demand” and determine how that demand will be served. Panelists noted, for example, that the number of regional jets, low-fare airlines, and unmanned aerial vehicles are increasing, but FAA has not developed a business model or plans for managing the increased air traffic. Congress,” one panelist said, rather than integrated, organized, and periodically revised. Another panelist observed that FAA asks for more than it can get and then carries the difference over from year to year, creating “a bow wave” of unfunded requests for capital projects that it seldom reduces. Furthermore, as a third panelist pointed out, the budget process establishes incentives for unrealistic planning: Project managers first overpromise capabilities and underestimate costs to increase the chances that new projects will be accepted. Then, after projects are accepted, they overestimate costs because they assume their requests will be cut. Although managers could include options in their budget submissions to indicate what could be accomplished at different funding levels, they do not do so because they assume items identified as options will be cut. Finally, managers are reluctant to revise ongoing projects because they do not want to be seen as fickle. By contrast, another panelist said, a private company that operates under a board of directors and obtains revenue from customers does not have incentives to play budget games to get projects approved. “Your money is your own money,” he said. Some panelists criticized the federal budget for failing to show priorities and relationships among proposed investments. In the budget, one panelist said, “everything is as important as everything else.” Another panelist observed that the budget sets no capital investment priorities. According to a third panelist, a line item budget tears apart a highly layered, interdependent system and does not reveal synergies between projects. Then, when the budget request goes to Congress, he said, “you have no opportunity to try to explain to anybody the interconnections of these programs.” As a result, when the appropriators decide not to fund a project, they may not understand how their decision will affect other projects. firewall discourages analyses of life-cycle costs and may lead, in some instances, to investments in technologies that end up in a warehouse because the ATO cannot afford to operate them. Similarly, another panelist observed that the separation of capital and operating costs in FAA’s accounting system makes it difficult to see the implications of capital investment decisions for operating costs, even though “everything we put in the field winds up increasing the ops budget.” Furthermore, as another panelist noted, the firewall makes it difficult to see the relationship between software replacement (capital) and maintenance (operating) costs. Thus, decisions to postpone purchases of new or upgraded software may save capital investment costs, but rising maintenance requirements may increase operating costs. Eventually, he said, the maintenance costs may “far exceed” the replacement costs. Finally, other panelists said, the budget is not integrated to show what investments buy in terms of productivity, safety, or environmental benefits, and FAA’s capital budget fails to show the impact of investments on the country. This can lead to mismatches—that is, to funding projects that will provide limited benefits for users. While recognizing the magnitude of the ATO’s projected funding shortfall over the next few years, the panelists identified a number of steps that the ATO could take to address its current financial situation. These steps included accepting the budget process as it is and reducing spending to match revenues, developing strategies for presenting the ATO’s budget request more clearly to Congress, implementing regulatory and procedural changes to allow the use of existing cost-saving technologies, contracting with the private sector to provide certain air traffic services, and obtaining information on other countries’ ATC technologies and on international technical standards. realistically be funded and to review and cut its programs in light of the current budget constraints. This panelist also recommended looking at longer term alternatives to annual appropriations that are available within the government and work well for other organizations, such as “working capital accounts and all kinds of industrial funding schemes.” Another panelist encouraged the ATO to focus its capital investment on avoiding outages—that is, on replacing equipment that would otherwise fail. This panelist also said that FAA needs a customer-oriented business strategy and a business plan. One panelist, who observed that operating costs account for about three-quarters of the ATO’s total costs, suggested that the upcoming wave of air traffic controller retirements would create “an opportunity to redistribute and even to trim the work force in some areas,” as well as reduce personnel costs by offering incentives for early retirement. Improving controllers’ productivity would be another way to save money, a fourth panelist said, but he characterized his suggestion as “touch the third rail of aviation politics.” Another panelist emphasized the importance of starting to plan now to accommodate the airplanes that are being bought today to provide service for the next generation, which he variously estimated at 20, 30, or 40 years. For example, one panelist said that the ATO needed to understand the interconnections between ATC systems and break the big picture into nuggets so that it could clarify for the appropriators why they should not break apart the ATO’s capital investment plan and selectively fund only some components. Another panelist maintained that the ATO could mitigate the effects of the firewall between its capital and operating budgets by modifying its budget submissions to show the future cost implications of current investment decisions. Several panelists identified options outside the budget process that the ATO could pursue under its current authorities. They said, for example, that the ATO could pursue procedural and regulatory changes that would take advantage of existing technologies to increase capacity, pilot test contracts with the private sector to provide certain air traffic services, and obtain information on technologies and procedures developed in other countries that could be used in the United States. Regulatory and Procedural Changes Could Allow the Use of Existing Technologies to Enhance Capacity and Efficiency Several panelists discussed the potential benefits of a more widespread use of a concept called area navigation (RNAV), which allows operators of properly equipped aircraft to use onboard navigation capabilities to fly desired flight paths without requiring direct flight over ground-based navigation aids. This provides for more direct routing, avoiding suboptimal routes prescribed by conventional “highways in the sky” that are defined by point-to-point flying over ground-based navigation aids. The RNAV concept and a major new method for exploiting it, called required navigation performance (RNP), permit flight in any airspace as long as aircraft have been certified to meet the required accuracy level for navigation performance. RNAV and RNP hold promise for saving system users time and money—largely by reducing flight times and fuel consumption by allowing users to fly shorter routes or avoid bad weather. In addition, RNAV and RNP could potentially increase the capacity of the ATC system to handle air traffic by reducing the required distance (separation) between aircraft equipped with advanced navigation capabilities if the aircraft can safely operate closer to one another than FAA’s regulations currently allow. able to use these capabilities to their full potential in the United States because FAA has not approved procedures for its use. However, the airlines are “crying for” FAA to approve RNP, one of the panelists said, because aircraft equipped with RNP capabilities could then fly alternative rolling, moving routes to avoid weather delays. Service would improve for travelers, and the airlines would avoid the substantial costs of delays, he said. Implementing RNP could also eventually lower the ATO’s costs, another panelist said, since RNP does not require any ground equipment. RNP technologies have been installed on larger aircraft for so long that some aircraft equipped with the technologies have already been retired to the desert, one panelist said. In addition, pilots have been trained to use the technologies, and the technologies are already being used in some other countries, including Canada, where a private airline company (West Jet) developed implementation procedures in collaboration with the Canadian ATC regulatory agency and the Canadian air traffic management organization. As a first step toward obtaining FAA’s approval of procedures for using RNP, a panelist said, the ATO could make policy announcements to set a tone and direction. These announcements would enlist the user community’s support at little or no cost to the ATO, give the ATO an early success, and help tie customers to the ATO’s mission. However, he also cautioned, it would be important for FAA to implement RNP in a way that did not “disenfranchise” general aviation interests and regional carriers whose aircraft are not already equipped with RNP technologies. Two panelists expressed concerns about the government’s approach to regulating the use of onboard navigation equipment and the associated procedures needed to implement RNP. According to one of these panelists, FAA has “the wrong conceptual framework” for developing regulations to implement new procedures. Its current approach is disproportionate, he said, because it establishes the same safety standards for aircraft of all sizes. “We can’t keep treating airplanes that need 100 cubic miles of airspace the same from a cost and benefit point of view as airplanes that need a quarter cubic mile of airspace,” he said. In his view, FAA needs to revise its approach to assessing and balancing risks. He maintained that the role of regulatory management on the evolution of the ATC system has been underestimated and called for significant investment in understanding risk management. The other panelist who expressed concerns about the government’s regulatory approach argued that navigational technology is evolving and shifting from ground-based to cockpit-based systems. He maintained that “you’ve got to get aircraft closer and closer together to be able to increase capacity,” and said that the government should allow the ATO to change its policies on aircraft separation to permit “the technology that exists on airplanes today to do the job.” He suggested that the private sector could assume the cost of capitalizing the equipment, but “the government’s got to allow that technology to be used, and it hasn’t.” Although one panelist emphasized the importance of conducting thorough technical evaluations of RNP to identify any roadblocks to its use, the panelists generally considered it a highly promising, low-cost option for the ATO to improve service. One panelist recommended that the ATO create incentives, such as the right to fly in preferred airspace, for users that equip their aircraft with RNP technologies, to lower the ATO’s costs. determined in its favor. The panelists, who generally assumed that the private sector could provide flight service station services and other air traffic services more efficiently than the government, suggested that if contracting for flight service station services proved to be effective, FAA could contract for other air traffic services, such as oceanic, night, en route, or airways facilities services. The A-76 process would then serve not only as a way of saving money but also as “a pilot program for how things could get done,” one panelist said. In the view of another panelist, ongoing government oversight would ensure the safety of contracted operations, and “staged outsourcing” of the NAS’s functions might build confidence in the private sector’s ability to provide air traffic services safely and efficiently. Obtaining Information on Other Countries’ ATC Technologies and on International Technical Standards Could Help the ATO Save Costs Obtaining information on technologies and procedures that other countries have already developed could help the ATO control costs, as well as help compensate for its lack of technical expertise, panelists noted. “We should be using and sharing” the technologies that have already been invented, one panelist said. According to his organization, the air navigation service business worldwide spends $3 billion to $4 billion a year on writing code for air traffic management software, and “at least half of that” is writing code for “something that’s already been invented and…works just fine somewhere else.” on the systems that are already running in countries, their performance, and their cost. Sharing information on technical standards with international organizations could also help the ATO avoid costly investments in technologies whose standards were incompatible with those of other countries. A shared vision is crucial for a globally based air traffic system, one panelist said. If every country or continent had its own technical standards—a North American switch, a European switch, a South American switch, and an Australian switch, for example—an international system could not function effectively. The following provides additional information from the ATO’s COO and from previous GAO reports and work in progress on how FAA is addressing some of the funding shortfalls and features of the federal budget process that panelists identified as affecting ATC modernization: The ATO’s COO believes that good financial management means linking FAA’s capital and operating budgets. Previously, FAA developed separate capital (Facilities and Equipment) and operating (Operations) budgets. But the ATO recognizes that capital expenditures directly affect operating costs over time, and therefore the two budgets must be developed together. Creating this linkage is important for the ATO to respond to concerns expressed by its owners and customers as well as to address internal issues, such as training, staffing, pay disparities, and infrastructure. Using the Strategic Management Process to drive budget decisions will help to ensure the establishment and maintenance of a linkage between the capital and operating budgets. financial management systems it has been putting in place. As steps toward that goal, the ATO expects everyone to learn the difference between cost and cash flow and get a better handle on unit costs as better cost accounting data become available. To gain a more complete understanding of its costs, FAA is revising its cost accounting practices and changing from a cash flow to a total cost business model for the ATO, and the ATO is developing management training in cost accounting and budgeting. Moreover, FAA plans to finish putting a new cost accounting system in place by 2006 that will allow it to assign, track, and better control costs. In the fall of 2004, FAA updated its cost estimates in light of OMB’s revenue projections for the next 4 years and arrived at a cumulative shortfall for the period of $5 billion for the operating budget and $3.2 billion for the capital budget. According to FAA, a business plan that the ATO was preparing at that time will show, when completed, how large a funding gap the ATO faces and how far it will have to go to address that gap. Whatever the exact size of the gap may be, FAA says that it is prepared to identify and eliminate redundancies in the NAS and to review its long-term ATC modernization priorities. FAA has already taken some steps to control the costs of ATC modernization. For example, it has adopted the phased approach to implementing new ATC systems that it used under Free Flight Phase 1, called “build a little, test a little.” This approach relies on the early and ongoing investment of stakeholders, who review the progress of new projects regularly and identify critical omissions and “no go” items that would prevent a system from operating as intended. Reviews of three projects with cost, schedule, and performance issues that our reports had identified—the Local Area Augmentation System, Controller-Pilot Data Link Communications, and Next-Generation Air-to-Ground Communications System—led FAA to reduce the funding for them in FAA’s fiscal year 2005 budget request. The ATO says it plans to continue this phased approach to acquiring new systems. customers that do equip. Now, during the first phase, FAA is implementing the redesign at very high altitudes. In January 2005, FAA doubled the airspace routes between 29,000 feet and 41,000 feet by spacing aircraft 1,000 feet apart instead of 2,000 feet. The procedure, invisible to passengers, is called Reduced Vertical Separation Minimum and is expected to save airlines $400 million in fuel costs during the first year. As technology allows, FAA says, more flight altitude levels will be added. Currently, FAA is implementing a number of improvements to airspace and procedures using RNP. In addition, according to FAA, five airports are developing RNP-based procedures in partnership with airlines that favor RNP. While recognizing that the ATO could make some progress in addressing its cultural, technical, and budgetary challenges under its current authorities, the panelists generally agreed that structural changes would increase the ATO’s chances of success. These changes, which would give the ATO a more predictable source of funding and greater decision-making authority, would generally require legislative action and take time to implement. To give the ATO a more predictable source of funding, panelists suggested that it be authorized to establish and manage user fees, rather than rely on appropriated tax receipts, and that it be allowed to issue revenue bonds backed by these fees. To give the ATO greater decision-making authority, panelists proposed restructuring it to streamline and strengthen its management and provide its managers with the tools needed to address its challenges. These changes would allow the ATO to implement a “sensible” capital investment program; hire the technical expertise it needs; achieve cost efficiencies; and offer better, more responsive service. Additionally, panelists said, restructuring could resolve the conflict of interest inherent in FAA’s dual responsibility as the regulator and the operator of air traffic services. When Congress authorized the ATO’s creation and generally implemented the Mineta Commission’s organizational recommendations without implementing its funding recommendations, it produced an anomaly—that is, an organization charged with becoming performance-based but deprived of the means to transform itself, according to one panelist. Other panelists also portrayed the ATO as an organization that is charged with operating like a business but is not provided with the management tools available to a business. In their view, the ATO’s chances for success are limited because the COO is being asked to turn the organization around without being given the tools to do so. One panelist, who said he was skeptical about the ATO’s ability to act like a business when it is not really one, suggested that it was only at the margins that the creators of the ATO had replicated a business. According to him, the ATO is still largely a government organization and therefore remains subject to most governmental constraints. Replacing airline ticket taxes with a user fee and allowing the ATO, rather than Congress, to manage the collected fees is a step that many panelists considered essential for the ATO’s success. While recognizing that such a fee would be controversial, since the costs for most users would likely increase, the panelists maintained that it would produce a more predictable, reliable funding stream than the annual appropriations process. and helps preclude spending for “gold-plated things that don't affect the true performance of the system and drive the costs up completely unnecessarily.” Without a direct connection to the users and their mission, another panelist said, “evolution takes very unintended and very undesirable paths over long periods of time.” As long as the customers are not directly paying the bills and providing the resources, still another panelist maintained, “it’s going to be very hard to bring about real change” and make the ATO “a customer-driven, customer-servicing organization. The ones who pay the bills are the ones you respond to and serve,” he concluded. While panelists generally favored a user fee system, they cautioned care in proposing and implementing one. As one panelist said, the fee question, once raised, would be all-consuming and would require the expenditure of political capital. In his view, it was critical that the ATO wait to achieve some successes before seeking a user fee system. Another panelist called for figuring out “not only what problem we’re solving, but what problems we might be likely to create,” and noted that the government would have to consider what it was incentivizing through user fees. For example, if the fee was based on weight, he said, it might “incentivize even smaller planes and more planes,” thereby increasing demands on the ATC system’s capacity. Another issue that would have to be worked out, is how the common costs of air traffic services (e.g., the costs of activities in the ATC system operated by the Department of the Air Force) should be allocated— whether users should pay only for the incremental costs of the services they use, as most users would argue, or whether some cross-subsidies should continue. Another panelist pointed out that implementing a user fee alone would not guarantee efficiency, because the air traffic services provider could simply raise the fee when costs increased and the users would have to pay, since the service is a monopoly. Some method of controlling costs would have to be built into the system, he said. Most panelists correctly assumed that legislation would be required to institute a user fee system. Specifically, a user fee system could be implemented in a government or a public-private type of air traffic services organization. However, one panelist cautioned, it would be “fatal” to implement the fee in any way that did not make the ATO financially independent of Congress. Once the airlines and general aviation users started to pay a fee to finance the ATO, then the ATO should be held accountable to them, he said, and “FAA should not be getting approval from government to spend its budget.” Revenue bonding based on a new user fee stream would create an “alternative to capital starvation,” one panelist said. Even if the user fee stream initially produced no more revenue than the airlines are now paying in aviation-related taxes, he said, the ATO could reap a “transition dividend” during the first 5 or 10 years after the bonds are issued, limiting its annual outlays to the debt service on the bonds. To facilitate the airlines’ recovery, he suggested, the ATO could cut what the airlines pay and “still have a robust modernization program being financed by the revenue bonds.” He characterized this strategy as “money that’s lying on the sidewalk waiting to be picked up” and saw it as an opportunity to buy some new equipment in bulk and get it installed before it becomes obsolete. Such a “sensible” approach would not be possible with annual appropriations, he said. Panelists maintained that the ATO’s organizational placement, combined with its dependence on Congress for funding, limits the COO’s ability to make decisions and take actions. The COO is not a Chief Executive Officer, as one of the panelists observed. Instead, he reports to his “owners”—who include the FAA Administrator and the DOT Secretary, who in turn receive direction from the administration (the President and OMB Director) and Congress. oversight authority, making the subcommittee purely advisory. Consequently, he said, there is no oversight group that is expected to provide constructive criticism of FAA, and FAA does not get “the kind of constructive advice that you might hope for.” According to a third panelist, Europe’s Performance Review Commission provides such constructive advice for EUROCONTROL, the European air traffic management organization. The commission serves as a panel of independent advisers and costs about $2.5 million a year, he said, and “it’s well worth the investment.” According to several panelists, the ATO’s COO lacks the management tools that would be available to a private-sector CEO. His ability to plan modernization projects, set program priorities, and implement new technologies is constrained because the FAA Administrator, DOT Secretary, and OMB Director can revise his budget request and Congress can make further changes in the ATO’s budget. In addition, the 20-year vision of the Joint Planning and Development Office (JPDO) is at odds with the ATO, according to one panelist, because it looks forward to the ATC system of 2025, rather than helping the ATO address its immediate funding needs. Other panelists observed that the controllers’ union influences management’s decisions. The COO lacks key financial data needed to determine, analyze, and manage the ATO’s costs. When he was “parachuted” into the ATO, as one panelist put it, he did not have the numbers he needed to know where the ATO stood because FAA did not maintain basic information on the costs and value of existing systems, reducing the ATO’s potential to be data driven. As a result, he spent most of his first year overseeing the implementation of a cost accounting system and collecting other key data. their performance is constrained because their terms of employment and compensation are based largely on negotiated agreements rather than on performance. In addition, salary caps limit FAA’s ability to pay for technical expertise. As one panelist observed at the end of the panel, the ATO’s creation did not address the structural conflict of interest that exists because FAA is both the regulator and the operator of air traffic services. “We didn’t have arms length regulation of air traffic control in FAA,” he said, “and the ATO didn’t do anything to accomplish that.” Another panelist noted that when his country restructured its air traffic organization, it immediately eliminated the same structural conflict of interest, and “overnight” the regulator became more effective and the operator’s safety performance “significantly improved.” According to the first panelist, other countries that have reorganized their air traffic organizations have also instituted arms’ length regulation if they did not have it already. “We remain one of the few places that somehow thinks that self-regulation is a good idea, in spite of sort of overwhelming evidence in lots of arenas that it's not a very good idea,” he said. The following is additional information from the ATO’s COO and from previous GAO reports and work in progress that indicates how FAA is addressing some of the structural changes that panelists proposed to improve the ATO’s success over time: In addition to the business plan that the ATO is developing to guide and improve its operations and financial management, FAA has worked to develop three longer term planning documents. First, it has published its Flight Plan for 2005 through 2009, a multiyear strategic effort that sets a 5-year course for FAA in the areas of safety, capacity, international leadership, and organizational excellence. Second, it has developed a rolling 10-year effort, called the Operational Evolution Plan (OEP), through which FAA plans to increase the capacity of the NAS by one- third. Finally, FAA is participating in a multiagency effort, sponsored by the JPDO, to develop a national plan for aviation in 2025 and beyond. Both the OEP and the JPDO’s plan are designed to meet the Flight Plan’s commitment to help the NAS flow smoothly and meet future needs. According to FAA, the Vice President of the Operations Planning Service Unit in the ATO is also the Director of the JPDO, helping to ensure integration of near-term and long-term planning. According to the ATO’s COO, the restructuring of U.S. air traffic services that has taken place thus far, through the establishment of a performance- based air traffic organization, constitutes “the first building block” of the longer term effort to transform the aviation system envisioned in the JPDO’s 20-year plan. According to the COO, this vision of the U.S. aviation system will incorporate both technologies and processes. However, he acknowledged that the ATO has not yet connected this long- term vision with the financial and other challenges it currently faces. He said that his goal is to establish an organization that can execute the long-term vision and manage not only its finances but also its future— an organization that can, in effect, ensure the viability of the long-term vision. Over time, he said, he plans to expand the OEP to include a strategy and the JPDO’s long-term vision, thereby “tie the vision to the viability of the future.” The OEP will then be “not just a set of projects,” but a project plan with a vision and a strategy that goes out 20 years. But given the current budget constraints, he conceded, the path to that goal is not clear. In March 2004, FAA created the Air Traffic Safety Oversight Service (AOV), under FAA’s Office of Aviation Safety. This step established separate reporting relationships for the ATO, which is responsible for managing the ATC system, and for the AOV, which is responsible for ensuring the safety of changes to air traffic standards and procedures. The establishment of the AOV responds directly to a recommendation by the 1997 National Civil Aviation Review Commission that safety oversight of FAA’s traffic function be provided by a separate part of the agency. Although both organizations remain within FAA, under the FAA Administrator, they are less closely joined than they were previously. Hence, this step is a positive move toward providing “arm’s length” safety oversight, although it does not go as far as placing the two organizations in separate federal agencies or removing one of the agencies from the federal government altogether. At our request, the panelists concluded the panel with their parting thoughts on the day’s discussion, including any advice they had for FAA or for Congress. Overall, the panelists were united in their desire for the ATO to succeed, but they generally agreed that its opportunities for success were constrained within a government system. For many, the steps taken thus far to create a performance-based organization were insufficient, in large part because the ATO lacks control over its revenues and funding priorities, and the ATO still had a long way to go to achieve its goals. Some panelists stressed the importance of progressing by small steps within the existing system, at least for the time being. Such small steps might include obtaining good performance and cost information, scoping programs in accordance with current budget projections, contracting out some air traffic services, and obtaining outside expertise from systems engineers and other technical and management experts. It was critical, one panelist said, for the ATO to “have some small early practical successes” to enlist the political support of the user community and help tie the customers to the ATO’s mission. Other panelists focused on the obstacles within the system that they believed would impede or prevent success. Among the obstacles they cited were the counterproductive incentives inherent in the budget process, the government’s refusal to allow new air traffic technologies to be used, and opposition to organizational and technological change. It was important, one panelist said, to overcome this opposition by describing “the difference between how things are and how they might be.” Descriptions of accomplishments elsewhere, together with actions to implement whatever safeguards and regulatory framework might be necessary, could perhaps make the argument for change “compelling,” he said. Still other panelists looked to the future, calling for international technical benchmarks to promote efficient development, business models that take into account operational trends (e.g., the growing market share of regional jets and low-fare airlines) and incentives to help users overcome cost barriers to acquiring new technologies. As one panelist said, “we have to target the future mix of real operations that we’re really going to see, not build the world’s most perfect system from 1956.” Despite their reservations about the ATO’s potential for success as a government organization, the panelists generally agreed that stakeholders should not “allow the concept of privatization to be the enemy of moving forward with the ATO,” as one panelist said, or “sacrifice the good for the better” in the words of another. Instead, taking a two-pronged approach— telling people “what’s to be done now to get results” and telling them “that they have an obligation to build for the future”—would be the best way, in the view of most panelists, for the ATO to meet its immediate and longer term challenges. Clinton V. Oster, Jr. (Panel Moderator) Professor of Public and Environmental Affairs, School of Public and Environmental Affairs, Indiana University Anthony J. Broderick Independent Consultant Former FAA Associate Administrator for Regulation and Certification Steven R. Bussolari Assistant Division Head, Tactical Systems Division Manager, Air Traffic Control System Group, Lincoln Laboratory, John W. Crichton President and CEO, NAV Canada George L. Donahue Director, The Center for Air Transportation Systems Research, George Former FAA Associate Administrator for Research and Acquisition John J. Fearnsides Professor of Public Policy, George Mason University Chief Strategist and Partner of MJF Strategies Xavier Fron Head, Performance Review Commission, EUROCONTROL Richard Golaszweski Executive Vice President, Gellman Research Associates (GRA), Inc. Ian Hall Director of Operations, National Air Traffic Services, United Kingdom Thomas Imrich Chief Pilot, Research, Boeing Commercial Aircraft Satish C. Mohleji Principal Engineer, Center for Advanced Aviation System Development, The MITRE Corp. Robert W. Poole, Jr. Director of Transportation Studies, Reason Foundation Michael Powderly President, Airspace Solutions John A. Sorensen Chief Executive Officer, Seagull Technology, Inc. In addition to the individual named above, Elizabeth Eisenstadt, Brandon Haller, Bert Japikse, Maren McAvoy, Beverly Norwood, and Richard Scott made key contributions to this special product. Air Traffic Control: FAA Needs to Ensure Better Coordination When Approving Air Traffic Control Systems. GAO-05-11. Washington, D.C.: November 17, 2004. Air Traffic Control: FAA’s Acquisition Management Has Improved, but Policies and Oversight Need Strengthening to Help Ensure Results. GAO-05-23. Washington, D.C.: November 12, 2004. Air Traffic Control: System Management Capabilities Improved, but More Can Be Done to Institutionalize Improvements. GAO-04-901. Washington, D.C.: August 20, 2004. Information Technology: FAA Has Many Investment Management Capabilities in Place, but More Oversight of Operational Systems Is Needed. GAO-04-822. Washington, D.C.: August 20, 2004. Federal Aviation Administration: Plan Still Needed to Meet Challenges to Effectively Managing Air Traffic Controller Workforce. GAO-04-887T. Washington, D.C.: June 15, 2004. Air Traffic Control: FAA’s Modernization Efforts--Past, Present, and Future. GAO-04-227T. Washington, D.C.: October 30, 2003. National Airspace System: Current Efforts and Proposed Changes to Improve Performance of FAA’s Air Traffic Control System. GAO-03-542. Washington, D.C.: May 30, 2003. Human Capital Management: FAA’s Reform Effort Requires a More Strategic Approach. GAO-03-156. Washington, D.C.: February 3, 2003. National Airspace System: Better Cost Data Could Improve FAA’s Management of the Standard Terminal Automation Replacement System. GAO-03-343. Washington, D.C.: January 31, 2003. National Airspace System: Status of FAA’s Standard Terminal Automation Replacement System. GAO-02-1071. Washington, D.C.: September 17, 2002. National Airspace System: FAA’s Approach to Its New Communications System Appears Prudent, but Challenges Remain. GAO-02-710. Washington, D.C.: July 15, 2002. Air Traffic Control: FAA Needs to Better Prepare for Impending Wave of Controller Attrition. GAO-02-591. Washington, D.C.: June 14, 2002. Air Traffic Control: Role of FAA’s Modernization Program in Reducing Delays and Congestion. GAO-01-725T. Washington, D.C.: May 10, 2001. National Airspace System: Problems Plaguing the Wide Area Augmentation System and FAA’s Actions to Address Them. GAO/T-RCED-00-229. Washington, D.C.: June 29, 2000. Aviation Acquisition: A Comprehensive Strategy Is Needed for Cultural Change at FAA. GAO/RCED-96-159. Washington, D.C.: August 22, 1996. FAA Budget Policies and Practices. GAO-04-841R. Washington, D.C.: July 2, 2004. Air Traffic Control: FAA’s Modernization Efforts--Past, Present, and Future. GAO-04-227T. Washington, D.C.: October 30, 2003. National Airspace System: Current Efforts and Proposed Changes to Improve Performance of FAA’s Air Traffic Control System. GAO-03-542. Washington, D.C.: May 30, 2003. National Airspace System: Reauthorizing FAA Provides Opportunities and Options to Address Challenges. GAO-03-473T. Washington, D.C.: February 12, 2003. National Airspace System: Better Cost Data Could Improve FAA’s Management of the Standard Terminal Automation Replacement System. GAO-03-343. Washington, D.C.: January 31, 2003. National Airspace System: FAA’s Approach to Its New Communications System Appears Prudent, but Challenges Remain. GAO-02-710. Washington, D.C.: July 15, 2002. National Airspace System: Free Flight Tools Show Promise, but Implementation Challenges Remain. GAO-01-932. Washington, D.C.: August 31, 2001. Federal Aviation Administration: Challenges for Transforming Into a High-Performing Organization. GAO-04-770T. Washington, D.C.: May 18, 2004. National Airspace System: Current Efforts and Proposed Changes to Improve Performance of FAA’s Air Traffic Control System. GAO-03-542. Washington, D.C.: May 30, 2003. | In 1981, the Federal Aviation Administration (FAA) began a program to modernize the national airspace system and a primary component, the air traffic control (ATC) system. The ATC component of this program, which is designed to replace aging equipment and accommodate predicted growth in air traffic, has had difficulty for more than two decades in meeting cost, schedule, and performance targets. The performance-based Air Traffic Organization (ATO) was created in February 2004 to improve the management of the modernization effort. On October 7, 2004, GAO hosted a panel to discuss attempts to address the ATC modernization program's persistent problems. Participants discussed the factors that they believed have affected FAA's ability to acquire new ATC systems. Participants also identified steps that FAA's ATO could take in the short term to address these factors, as well as longer term steps that could be taken to improve the modernization program's chances of success and help the ATO achieve its mission. The participants included domestic and foreign aviation experts from industry, government, private think tanks, and academia. They are recognized for their expertise in aviation safety, economics, and engineering; transportation research and policy; and government and private-sector management. What Participants Said: Overall, the participants identified cultural, technical, and budgetary factors that, in their view, have affected the progress of ATC modernization. To address these factors, they proposed what one participant termed a "two-pronged" approach--simultaneously taking care of "the here and now" and building a "viable future" for the ATO. Cultural and Technical Factors Have Impeded ATC Modernization: According to participants, the key cultural factor impeding modernization has been resistance to change. Such resistance is a characteristic of FAA personnel at all levels, participants said, and management, in the experience of some, is more resistant than employees who may fear that new technologies will threaten their jobs. The key technical factor affecting modernization, participants said, has been a shortfall in the technical expertise needed to design, develop, or manage complex air traffic systems. Without the technical proficiency to "scrub" project proposals for potential problems early and to oversee the contractors who implement its modernization projects, they said, FAA has to rely on the contractors, whose interests differ from its own. Budgetary Factors Have Constrained ATC Modernization: The most immediate budgetary constraint, participants said, is the multibillion-dollar shortfall that FAA is projecting between available revenues and modernization needs over the next 4 years. Participants also identified features of the federal budget process as constraints, noting, for example, that the federal budget cycle is too long and inflexible to meet the needs of a dynamic ATC system that requires much more managerial freedom and short-term decision making. They further noted that the budget process is influenced by the political process, and that the funding for capital projects is sometimes spread out over so many years that technologies are out of date by the time they are deployed. Annual funding uncertainties discourage strategic and capital planning, they said, and the budget fails to show priorities and relationships among proposed investments. Short-term and Longer Term Changes Could Promote Success: Participants suggested that the ATO could facilitate cultural transformation by creating a vision and strategy that would unite stakeholders and by assembling project teams with different skills and interests whose members could forge common organizational interests by working together to solve common technology development problems. To help offset technical inadequacies, the participants suggested that the ATO could consult an advisory board, identify and consider purchasing needed technologies that other countries have developed, and hire more skilled engineers to provide in-house expertise. To address budgetary constraints, participants suggested, among other short-term steps, reducing spending to match revenues and developing strategies for presenting FAA's budget request more clearly to Congress. Longer term suggestions included giving the ATO the predictable funding and decision-making authority it needs to carry out a "sensible" capital investment plan. |
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Under PPACA, health care marketplaces are the mechanisms through which applicants enroll in qualified health plans and apply for income- based advance PTC payments (paid directly to issuers) to offset the cost of these plans. As applicable, they also obtain eligibility determinations for other health coverage programs, such as Medicaid or the Children’s Health Insurance Program (CHIP). CMS is responsible for overseeing the establishment of state-based marketplaces and operating the FFM for states that did not establish their own marketplaces. Applicants in these states enroll in qualified health plans through the FFM. CMS operates the FFM in about two-thirds of the states. Specifically, CMS oversees implementation of certain PPACA provisions related to the FFM, including ensuring that individuals are eligible to receive health insurance coverage through the FFM and determining the amount of any advance PTC they are eligible to receive. To be eligible to enroll in a qualified health plan offered through a marketplace, applicants must be U.S. citizens or nationals, or otherwise lawfully present in the United States; reside in the marketplace service area; and not be incarcerated (unless incarcerated while awaiting disposition of charges). Marketplaces are required by law to verify certain application information to determine applicant eligibility for enrollment and, if applicable, advance PTC. The verification steps include validating applicant Social Security numbers, if provided; verifying citizenship or lawful presence status, and verifying household income. PPACA requires that applicant-submitted information be verified and that determinations of eligibility be made through either an electronic verification system or another HHS-approved method. To implement this verification process, CMS developed its Data Services Hub, which acts as a conduit for exchanging information between (1) the FFM; state-based marketplaces; Medicaid agencies; and other federal, state, and commercial entities and (2) CMS’s external partners, including IRS, the Social Security Administration (SSA), and other federal agencies. The FFM accesses this information through the Data Services Hub to verify that applicant information necessary to support an eligibility determination is consistent with external data sources. CMS generates an “inconsistency” when applicant-submitted information does not match information from trusted data sources—either because information an applicant provided does not match information contained in the data sources or because such information is not available. Inconsistencies are also created whenever the FFM is unable to solicit information from trusted data sources due to data element requirements. As required by federal regulations, when there are inconsistencies, the marketplace grants temporary eligibility using applicant attestations and ensures that advance PTC is provided to issuers on behalf of the applicants qualified to receive them while such inconsistencies are being resolved. Also, under this marketplace process, applicants are asked to provide additional information or documentation for the marketplaces to review to resolve the inconsistencies. When applicants are unable to resolve the inconsistencies within the resolution period, the marketplace may terminate advance PTC and coverage in certain circumstances. Marketplaces are required to provide Form 1095-A, Health Insurance Marketplace Statement, to recipients enrolled in qualified health plans through the marketplace and to IRS. This form includes information on covered enrollees, coverage periods, monthly premiums, and amounts of advance PTC paid to issuers on behalf of the enrollees. Enrollees are instructed to use Form 1095-A information to prepare Form 8962, Premium Tax Credit, for their federal income tax returns. Treasury regulations require marketplaces to report detailed information for each qualified health plan to IRS monthly, by the 15th day after each month of health insurance coverage. This monthly transmission—the Exchange Periodic Data (EPD) transmission—contains cumulative coverage information for the year, starting in January; thus, the EPD transmission due to IRS by January 15 should contain complete marketplace data for the entire previous coverage year. The EPD transmission is also required to include information on any exemptions from coverage requirements that are granted by the marketplace. CMS is responsible for performing certain oversight functions intended to help ensure that the plans offered through the FFM meet certification standards. These oversight functions are intended to verify that enrollees receive appropriate health insurance coverage and that federal funds are not provided to health plans and issuers that do not meet the certification standards. When plans no longer meet certification standards, CMS may decertify them. Each month, CMS is also responsible for calculating, processing, and authorizing aggregated advance PTC payments to issuers on behalf of eligible enrollees, along with cost-sharing reduction subsidies and collecting user fees from issuers in certain states. For enrollees determined eligible for advance PTC, the marketplace determines the advance PTC amounts using, among other things, enrollee-reported incomes and family sizes. IRS is responsible for determining the final amounts of PTC that taxpayers are entitled to receive based on household incomes and family sizes reported on their tax returns. Taxpayers are eligible for PTC if they meet various criteria: (1) buy qualified health insurance through a marketplace; (2) are ineligible for affordable, minimum-value coverage through an employer or government plan; (3) are within certain income limits (household income from 100 percent to 400 percent of the federal poverty level); (4) do not file a tax return with the status of married filing separately; and (5) cannot be claimed as a dependent by another person. While marketplaces determine the amounts of advance PTC for which individuals are eligible based on their anticipated family sizes and household incomes for the year reported to the marketplace, the final PTC amounts are based on actual incomes reported when those individuals file their federal income tax returns. As shown in figure 1, taxpayers use Form 1095-A, provided by marketplaces, and their actual modified adjusted gross incomes and family sizes to calculate their actual PTC amounts on Form 8962. Form 8962 is the key form that IRS uses to determine and recover advance PTC overpayments and reimburse underpayments to individuals. When the claimed amounts are greater than the total advance PTC paid to issuers on behalf of individuals, those individuals report net PTC on their federal income tax returns (e.g., Form 1040, Individual Income Tax Return). The net PTC can increase refund amounts that taxpayers receive or reduce amounts due from taxpayers. When the claimed amounts are less than the total advance PTC paid to issuers on behalf of individuals, those individuals report the excess advance PTC on their federal income tax returns (e.g., Form 1040) as an increase in tax, subject to limitations on the increase. The excess advance PTC can reduce refund amounts that taxpayers receive or increase the amounts due from taxpayers. Taxpayers are responsible for submitting their federal income tax returns to IRS for processing with an attached Form 8962. IRS is responsible for processing tax returns to determine the final amount of PTC to which taxpayers are entitled and recovering advance PTC overpayments. When IRS receives tax returns, IRS checks them for completeness and attempts to verify taxpayer identities and PTC eligibility. To verify PTC claims on federal income tax returns, IRS relies on marketplace data to confirm that taxpayers were enrolled in qualified health plans. As illustrated in figure 2, at the time of filing (i.e., before refunds are issued), IRS’s Affordable Care Act Verification Service (AVS) system compares the information taxpayers reported on their tax returns to information furnished by the marketplaces, potentially identifying math errors or discrepancies with marketplace data. For example, AVS may identify taxpayers who received advance PTC according to the marketplaces, but did not report it on their tax returns through Form 8962. AVS may also detect cases when taxpayers claim the PTC on Form 8962 but are ineligible because they were not enrolled in a marketplace plan. When discrepancies are identified, IRS may correspond with taxpayers to address the related issues, or IRS may correct certain mathematical or clerical errors on tax returns and notify taxpayers of the proper tax liabilities based on those corrections. If IRS is unable to resolve such discrepancies through correspondence with taxpayers or through its math error authority, it may refer cases to examination for further review. IPIA defines an improper payment as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes duplicate payments; any payment made for an ineligible recipient, an ineligible good or service, or a good or service not received; or any payment that does not account for credit for applicable discounts. OMB guidance also instructs agencies to treat any payments for which insufficient or no documentation is found as improper payments. IPIA also defines the scope of payments subject to assessment, estimation, and reporting. Specifically, a payment is defined as any transfer or commitment for future transfer of federal funds—such as cash, securities, loans, loan guarantees, and insurance subsidies—to any nonfederal person or entity that is made by a federal agency, a federal contractor, a federal grantee, or a governmental or other organization administering a federal program or activity. IRS has historically estimated improper payments for the Earned Income Tax Credit but not for other refundable credits. IPIA and OMB guidance together provide the specific requirements for assessing, estimating, and reporting on improper payments. Federal agencies are required to review all programs and activities that they administer and identify any program or activity that may be susceptible to significant improper payments. IPIA defines “significant improper payments” as gross annual improper payments (i.e., the total amount of overpayments and underpayments) that may have exceeded (1) both 1.5 percent of program outlays and $10 million of all program or activity payments made during the fiscal year reported or (2) $100 million (regardless of the improper payment percentage of total program outlays). Agencies must institute a systematic method of reviewing and assessing their programs, which may take the form of either through a quantitative analysis based on a statistical sample or qualitative evaluation. OMB guidance requires that agencies take into account the following nine risk factors that are likely to contribute to significant improper payments: 1. whether the program or activity reviewed is new to the agency; 2. the complexity of the program or activity reviewed, particularly with respect to determining correct payment amounts; 3. the volume of payments made annually; 4. whether payments or payment eligibility decisions are made outside of the agency, for example, by a state or local government or a regional federal office; 5. recent major changes in program funding, authorities, practices, or 6. the level, experience, and quality of training for personnel responsible for making program eligibility determinations or certifying that payments are accurate; 7. inherent risks of improper payments because of the nature of agency 8. significant deficiencies in the agency’s audit reports, including but not limited to the agency inspector general or GAO audit findings or other relevant management findings that might hinder accurate payment certification; and 9. results from prior improper payment work. OMB guidance describes these risk factors as the minimum that agencies should consider. An agency’s assessment may include other risk factors, as appropriate, specific to the program or activity being assessed. IPIA requires agencies to assess the risk of improper payments for each program and activity that they administer, at least once every 3 years for programs and activities deemed not susceptible to significant improper payments. If an agency finds that a program is susceptible to significant improper payments, the agency is required to estimate the annual amount of improper payments for the program, publish corrective action plans, set reduction targets, and annually report on the results of addressing these requirements for that program. OMB established an interagency working group, which included officials from Treasury, IRS, HHS, and CMS, to help agencies navigate OMB improper payments guidance. The interagency working group concluded that CMS would be responsible for assessing risks and developing improper payment error rates for advance PTC payments and that IRS would be responsible for assessing risk and developing improper payment error rates for net PTC in tax return processing. In fiscal year 2016, neither CMS nor IRS took all required actions for assessing, estimating, and reporting improper payments related to PTC. CMS assessed its advance PTC program as susceptible to significant improper payments by appropriately considering each of OMB guidance’s nine qualitative risk factors; however, it did not complete other key IPIA requirements for programs deemed susceptible to significant improper payments for its advance PTC program. IRS did not assess its PTC program’s susceptibility to significant improper payments in a manner consistent with IPIA requirements. In fiscal year 2016, CMS concluded that its advance PTC program was susceptible to significant improper payments. We determined that CMS instituted a systematic, qualitative method for assessing risk that was consistent with IPIA requirements and OMB guidance. CMS appropriately assessed each of the nine risk factors required by OMB guidance. For example, CMS considered the risk factor regarding whether a program is new to the agency and rated the advance PTC program, which started in 2014, as high risk. CMS also appropriately tailored risk factors to its advance PTC program. For example, in considering the risk factor regarding recent changes in program operations and funding, CMS also considered projected future changes in program operations and funding that could affect improper payments for the program. The analysis that CMS performed on the risk factors supported its conclusion that the advance PTC program was susceptible to significant improper payments, as defined by IPIA and OMB guidance. Although CMS reviewed its advance PTC program and concluded that it was susceptible to significant improper payments, it did not complete other key IPIA requirements for programs deemed susceptible to significant improper payments for its advance PTC program. Specifically, CMS did not estimate or report the annual amount of improper payments for the advance PTC program. According to the fiscal year 2016 HHS agency financial report, CMS was unable to specify the year that the rate and the improper payment estimate amount will be reported. Further, CMS officials could not provide us with a specific date when they expected to be in compliance with these IPIA requirements. CMS officials told us that they will not report improper payment estimates in fiscal year 2017 and may not be able to report estimates until at least fiscal year 2022. According to the fiscal year 2016 HHS agency financial report, the agency is unable to specify the year that it will report the improper payment rate and amount because of the complexity of the improper payment error rate measurement methodology development process. This process involves conducting pilot testing, using those tests to refine the methodology, and then undergoing the rule-making process before implementing the methodology. However, the fiscal year 2016 HHS agency financial report did not disclose a timeline for completion of the key steps necessary for developing the improper payment methodology or why challenges will result in delays in meeting IPIA requirements for estimating and reporting improper payments. According to internal control standards, management should externally communicate the necessary quality information to achieve the entity’s objectives. This involves communicating with external parties—such as legislators, oversight bodies, and the general public—using established reporting lines. Information communicated to oversight bodies includes significant matters relating to risks, changes, or issues that affect the entity’s internal controls for achieving compliance and reporting objectives. This communication is necessary for the effective oversight of internal control. Because CMS does not plan to report improper payment estimates for this program for several years, HHS’s overall improper payment estimate will continue to be understated, and CMS may be hindered in its efforts to reduce improper payments in this program. Additionally, Congress and other external stakeholders will continue to lack key payment integrity information for monitoring improper payments. Likewise, if CMS does not communicate significant matters relating to IPIA estimation, compliance, and reporting objectives for the advance PTC program; its progress and timeline for achieving those objectives; and the basis for its timeline for reporting improper payment estimates, legislators’, oversight bodies’, and the general public’s expectations for CMS improper payments reporting may not align with those set by CMS management. In its fiscal year 2016 improper payments susceptibility assessment, IRS did not assess the PTC program’s susceptibility to significant improper payments in a manner consistent with IPIA requirements. IPIA and OMB guidance require agencies to identify all programs and activities that may be susceptible to significant improper payments. OMB guidance further instructs agencies not to put programs or activities into groupings that may mask significant improper payment rates by the scope of a grouping. However, IRS did not consider key types of PTC-related errors that may result in improper payments within the scope of its assessment. IRS focused its assessment on payment errors for taxpayers who reported a net PTC amount on their tax returns—that is, individuals who reported a final PTC amount that was greater than the advance PTC amounts they reported on their tax returns. IRS did not assess payment errors for taxpayers who (1) reported final PTC amounts equal to the advance PTC amounts they reported on their tax returns or (2) reported an excess advance PTC—that is, advance PTC amounts that exceeded the final PTC amounts they reported on their tax returns. Such errors fall under the purview of IRS controls and can affect the accuracy of net PTC payments and tax collections of excess advance PTC. IRS officials told us that errors resulting in (1) final PTC claims equal to advance PTC and (2) excess advance PTC, which increase taxes owed, do not affect program outlays or improper payments. As a result, IRS maintains that these types of errors are not covered by IPIA. However, IPIA defines improper payments to include both overpayments and underpayments. Although we agree that excess advance PTC increases taxes owed, taxpayers may inaccurately complete Form 8962 and erroneously report excess advance PTC on their returns instead of claiming net PTC, or they may simply fail to report net PTC on their tax returns altogether. Such errors would result in underpayments of net PTC and therefore affect program outlays and improper payments. These error types were not considered within the scope of the IRS susceptibility assessment for improper payments. Likewise, IRS did not conclude on whether the PTC program is or is not susceptible to significant improper payments. Instead, IRS concluded that the risk of improper payments in the net PTC program was “medium.” The assessment defined a “medium” risk level as one that is partially mitigated by current mitigation measures and internal controls (see fig. 3). IRS’s fiscal year 2016 IPIA susceptibility assessment for the net PTC was prepared by a contractor under the direction and oversight of IRS management. IRS management allowed the contractor to use a risk level definition that was inconclusive for purposes of assessing whether or not the program may be susceptible to significant improper payment thresholds, as defined by IPIA. Although IRS used all of the required qualitative risk factors specified in IPIA and OMB guidance within its assessment, IRS did not analyze how each of the risk factors affected the susceptibility of the program to significant improper payments, as defined by IPIA. For example, rather than analyzing whether the volume of PTC payments made was likely to cause the program to meet applicable IPIA thresholds for susceptibility to significant improper payments, IRS compared the projected total number of taxpayers who are able to claim net PTC on their federal income tax returns to the total number of taxpayers filing federal income tax returns as a whole during the 2015 filing season. Such a comparison is not relevant to assessing whether the program’s error rates or improper payment amounts may have exceeded the applicable thresholds for susceptibility: either (1) 1.5 percent of program outlays and $10 million or (2) $100 million. Internal control standards state that management should use quality information to achieve the entity’s objectives. Management obtains relevant data from reliable internal and external sources in a timely manner based on the identified information requirements. Relevant data have a logical connection with, or bearing upon, the identified information requirements. Reliable internal and external sources provide data that are reasonably free from error and bias and faithfully represent what they purport to represent. By not considering certain types of underpayments or concluding whether its PTC program is susceptible to significant improper payments, IRS did not demonstrate whether the program met applicable thresholds for susceptibility to significant improper payments. Until IRS conducts an appropriate assessment, it will continue to be uncertain whether IRS should estimate the amount of improper PTC payments. CMS control activities were not properly designed and implemented to help achieve management objectives related to preventing and detecting improper payments of advance PTC. Specifically, we identified deficiencies in the design of key CMS control activities related to eligibility requirements for advance PTC payments and the accuracy of advance PTC calculations based on incomes and family sizes. As shown in figure 4, we found that CMS control activities related to determining the accuracy of PTC payments to certified issuers of qualified health plans were properly designed and implemented. However, we did not evaluate whether all control activities related to preventing and detecting improper payments of advance PTC were operating as designed or evaluate other internal control components, such as the control environment. Deficiencies, if any, in the internal control components that were not evaluated could impair the overall effectiveness of CMS’s control activities related to preventing and detecting improper payments in the advance PTC program. CMS did not properly design control activities related to individuals meeting key eligibility requirements for receiving advance PTC. While CMS’s procedures related to verifying citizenship and lawful presence of individuals with Social Security Administration (SSA) and the Department of Homeland Security (DHS) were properly designed and implemented and were operating as designed, CMS procedures to verify other key eligibility requirements were not properly designed. To be eligible to enroll in a qualified health plan offered through a marketplace, an individual must be a U.S. citizen or national, or otherwise lawfully present in the United States. For verifying citizenship or lawful presence of individuals, CMS relies on data in SSA and DHS information systems. According to CMS’s control activities for citizenship, CMS queries an SSA system to validate, among other things, whether an individual is a U.S. citizen. If the SSA system cannot verify citizenship, and the individual has provided an immigration document number that indicates possible citizenship or lawful presence, CMS queries a DHS system to verify the individual’s citizenship or other immigration status. We tested a statistical sample of 93 enrollment applications submitted during the 2016 open enrollment period and found that CMS verified citizenship and lawful presence with SSA or DHS for all applications. Based on our audit work, CMS control activities for verifying citizenship and lawful presence of individuals with SSA or DHS were properly designed and implemented and were operating as designed. An individual begins the marketplace enrollment process in a qualified health plan by providing basic personal information, such as name, birth date, and Social Security number. To prevent unauthorized individuals from creating marketplace accounts using the identities of others when applying for health coverage, CMS verifies some individual identities through an identity proofing process. According to CMS’s internal control documentation, for individuals applying for marketplace coverage online via HealthCare.gov, CMS validates their identities through an external source. CMS does not perform identity proofing for individuals applying for health coverage through the mail or over the phone. For paper applications submitted by mail, the marketplace requires individual signatures before the marketplace processes those applications. For phone applications, CMS does not validate identities of individuals, instead relying solely on the basis of verbal attestations made by individuals. CMS allows individuals to complete the application process on the basis of these attestations, given under penalty of perjury. According to CMS officials, PPACA does not require CMS to validate identities of individuals. However, internal control standards state that management should consider the potential for fraud when identifying, analyzing, and responding to risks and design and implement control activities to respond to risks. Further, these standards also state that management should design control activities to achieve objectives and respond to risks. Because CMS does not validate the identities of individuals who apply by phone or mail, CMS is vulnerable to enrolling ineligible individuals in qualified health plans with advance PTC. To illustrate, we previously reported on our undercover testing of CMS enrollment processes in 2014, in which we made six online applications using fictitious identities that failed to clear an identity validation step. We subsequently were able to obtain coverage for all six of these applications that we began online by completing them by phone. By following instructions to make telephone contact with the marketplace, we circumvented the initial identity-proofing control that had stopped our online applications. CMS did not properly design procedures to verify the residencies of individuals. HHS regulations permit CMS to accept attestations of residency. In order to be eligible to enroll in a qualified health plan offered through a marketplace, individuals must reside in the marketplace service area. CMS officials told us that they were unaware of a comprehensive, national electronic data source that could be used to verify residence. However, CMS did not document an evaluation of available external sources to determine the quality, relevance, and reliability of the data. Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, according to GAO’s fraud risk framework, it is a leading practice to conduct data matching to verify key information, including self-reported data and information necessary to determine eligibility. Without verifying the residencies of individuals, CMS is vulnerable to enrolling ineligible individuals in qualified health plans and improperly providing advance PTC to issuers on their behalf. We found design deficiencies in CMS’s procedures related to determining that advance PTC is not provided to issuers on behalf of individuals who are receiving or eligible for minimum essential coverage through their employers or government-sponsored programs. Specifically, CMS does not (1) use data from nonfederal employers to check for duplicate minimum essential coverage; (2) have procedures for terminating coverage for individuals who have employer-sponsored minimum essential coverage; and (3) have procedures for sharing coverage information with, and obtaining coverage information from, such employers. In addition, CMS checks for duplicate government-sponsored Medicaid and CHIP coverage only in the states where applicants attest to residing and thus would not detect whether applicants received such coverage in different FFM states. Although CMS has procedures to obtain data from the Office of Personnel Management for identifying individuals receiving health care coverage from federal employers, CMS does not have procedures that use data sources to identify individuals receiving minimum essential coverage through nonfederal employers. CMS officials stated that PPACA does not require that employers report information on employer-sponsored coverage offers to HHS. CMS officials told us that they have explored other possible data sources, including Medicare Coordination of Benefits, the National Directory of New Hires, and Equifax data, but they have been unable to identify comprehensive electronic data sources that are sufficiently current and accurate for identifying these individuals. However, CMS did not document its evaluation of the availability and reliability of potential data sources. As a result, we were unable to evaluate CMS’s review of these electronic data sources and assess whether CMS reviewed other potential data sources. CMS relies on individuals to update their marketplace applications and has not established a process for terminating advance PTC for individuals who have not updated their applications. CMS has not designed procedures for the FFM to send notices to employees who have been identified as having access to minimum essential employer-sponsored coverage regularly during each enrollment season. CMS officials told us that in 2016 they began notifying certain employers of individuals enrolled in FFM coverage with advance PTC. If employers responded and asserted that they provide individuals with access to affordable, minimum- value employer-sponsored coverage, the FFM would then send notices to those individuals notifying them to update their marketplace applications to reflect that they have access to or are enrolled in other coverage and warning them that failure to update their profiles accordingly may result in a tax liability. CMS officials told us that CMS has published information, for example, on a Frequently Asked Questions page, on the CMS website that describes the notices. However, these Frequently Asked Questions do not constitute procedures that provide guidance for sending out the notices regularly. According to GAO’s fraud risk framework, it is a leading practice to conduct data matching to verify key information, including self-reported data and information necessary to determine eligibility. In addition, internal control standards state that management should use quality information to achieve the entity’s objectives and should obtain relevant data from reliable internal and external sources based on the identified information requirements for achieving the entity’s objectives and address risks. These standards also state that management should design control activities to achieve objectives and respond to risks. Without policies and procedures for identifying individuals who have minimum essential coverage from nonfederal employers and for terminating advance PTC for those individuals, CMS is at greater risk of providing advance PTC to issuers on behalf of ineligible individuals. Individuals receiving coverage from government-sponsored programs, such as Medicare, Medicaid, and CHIP, are generally allowed PTC only for the months that one or more members of the individuals’ families are not eligible for government-sponsored coverage. CMS has designed a process that identifies some but not all cases in which individuals who are applying for the advance PTC may also have government-sponsored coverage. Specifically, CMS has procedures to identify individuals with duplicate government-sponsored coverage using data from Medicare, the Peace Corps, TRICARE, and the Veterans Health Administration. CMS did not establish a process to fully identify all individuals with duplicate government-sponsored coverage through Medicaid and CHIP. Specifically, CMS’s procedures are designed to detect duplicate coverage with Medicaid and CHIP only in the states where individuals applied for coverage through the FFM and not in any other state where the FFM operates. Consequently, its procedures do not detect when FFM applicants have duplicate coverage through Medicaid and CHIP from different FFM states than the states in which they applied and attested to residing. According to CMS officials, FFM procedures are designed to check for Medicaid and CHIP only in the states where individuals have attested to residing during the application review process and not in other FFM states. Federal regulations require the FFM to verify whether individuals have been determined eligible for coverage through Medicaid and CHIP within the state or states in which the FFM operates by using information obtained from the agencies administering such programs. Thus, the FFM is required to verify whether individuals also have Medicaid and CHIP coverage in all states covered by the FFM and not just in states where the individuals applied for coverage and attested to reside. According to CMS officials, it would be technically difficult and impracticable for all FFM states to provide information that would allow the FFM to check Medicaid and CHIP coverage for individuals in each of those states. However, CMS did not provide us with documented analyses to support this assessment. As a result, we were unable to evaluate CMS’s assessment and determine whether CMS reviewed the feasibility of using other existing resources and tools for checking for Medicaid and CHIP coverage in all FFM states. Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, these standards also state that management should design control activities to achieve objectives and respond to risks. Without procedures in place to detect duplicate coverage by Medicaid and CHIP in states other than those in which individuals applied for coverage and attested to residing, CMS is at greater risk of providing advance PTC on behalf of individuals who receive Medicaid and CHIP coverage from other FFM states and are therefore ineligible for advance PTC. Inconsistencies are generated when individual-attested information does not reasonably match information from the marketplace’s trusted data sources, or because the needed information is not available from a federal data source. In such instances, the FFM sends eligibility letters to individuals requesting explanations or supporting documentation to resolve inconsistencies within a specific time frame, referred to as an inconsistency period. Individuals are generally given 95 days to provide the requested documentation to substantiate citizenship and lawful presence and 90 days for other types of inconsistencies. During inconsistency periods, individuals may enroll in a qualified health plan and elect to receive advance PTC. Individuals can provide explanations and substantiating documents by mail or through the marketplace website. When individuals provide sufficient documentation to substantiate the attested information, the inconsistencies are resolved. When individuals do not provide sufficient documentation within the inconsistency period, the FFM “expires” those inconsistencies and determines the eligibility based on the existing information from electronic data sources. If data are not available, marketplace enrollments may be terminated or the individuals may be determined ineligible for advance PTC. We identified deficiencies in CMS’s design of key procedures related to resolving eligibility issues and terminating inconsistencies related to Social Security numbers and incarceration, as well as the timely termination of inconsistencies. CMS did not properly design and implement procedures related to preventing advance PTC on behalf of individuals who submitted inaccurate or false Social Security numbers. Based on our analysis of the CMS inconsistency data for the 2016 open enrollment, we identified about 82,000 applications with unresolved Social Security number inconsistencies as of May 2016. CMS provided about $42 million in advance PTC in May 2016 on behalf of these individuals. In February 2016, we reported that unresolved Social Security number inconsistencies are indicators of potentially fraudulent applications. Unresolved Social Security number inconsistencies may also adversely affect IRS’s ability to assess and fully recover advance PTC overpayments. In our February 2016 report, we recommended that the Secretary of Health and Human Services direct CMS to design and implement procedures to resolve Social Security number inconsistencies when the marketplace is unable to verify the numbers or individuals do not provide them. HHS concurred with our recommendation, and CMS officials told us that system functionality upgrades to address Social Security number inconsistencies were completed and deployed in March 2017. In May 2017, CMS established procedures for verifying Social Security numbers with documents submitted by the applicants but has not developed procedures to terminate advance PTC for applications with unresolved Social Security number inconsistencies. CMS officials did state that further refinements to the process are likely to occur. CMS did not properly design and implement procedures related to preventing advance PTC paid on behalf of incarcerated individuals or individuals who may be using identities of incarcerated individuals, both of which would be ineligible for advance PTC. Based on our analysis of the CMS inconsistency data for the 2016 open enrollment, we identified about 30,000 applications with unresolved incarceration inconsistencies as of May 2016. CMS provided about $10 million in advance PTC in May 2016 on behalf of these individuals. We had previously reported in February 2016 that CMS did not terminate individuals who had inconsistencies generated when verifying incarceration statuses with SSA’s Prisoner Update Processing System (PUPS) database. We reported that CMS officials told us that they did not terminate eligibility for incarceration inconsistencies because they determined that the PUPS data were unreliable for use by the marketplace. However, in the report, we stated that CMS did not provide us documentation on how it concluded that the PUPS data were unreliable for identifying incarcerated individuals or the potential cost associated with not verifying incarceration status. In the report, we recommended that the Secretary of Health and Human Services direct CMS to reevaluate the use of PUPS incarceration data in the inconsistency process. HHS concurred with our recommendation and noted in its comments to our report that PUPS data were not sufficiently current and accurate at that time. According to CMS officials, CMS continues to work with SSA to improve the quality of incarceration data used for verification. In March 2016, CMS officials stated that SSA completed developmental changes to improve the reliability of the match criteria for the incarceration database and limit the risk of receiving false positives. CMS officials stated that they are assessing whether these data improvements result in sufficiently reliable incarceration data but did not provide us a date on when the assessment will be completed. Timely Termination or Adjustment of Advance PTC Because of Inconsistencies CMS also did not properly design procedures related to terminating or adjusting advance PTC timely when inconsistency periods have expired. Specifically, CMS’s procedures call for the processing of all expiration activities, including the notifications to issuers regarding the terminations or adjustments of advance PTC, at the beginning of the month following the month that the inconsistency periods expire. However, the effective dates of the terminations or adjustments are the last day of that month, which is also the month that notifications are provided to the issuers regarding these terminations or adjustments. Thus, by not processing terminations or adjustments of advance PTC on a rolling basis based on the effective dates of the expirations of the inconsistency periods, CMS provides an extra month of advance PTC to issuers on behalf of ineligible individuals. The aggregate dollar amounts for the extra month of advance PTC that CMS pays each month on behalf of ineligible individuals can be significant. For example, based on our analysis of CMS inconsistency data for the 2016 open enrollment, we identified about 45,000 applications that were terminated by CMS for lawful presence or citizenship inconsistencies. As a result of its practice of processing advance PTC terminations, as of May 2016, CMS had paid about $19 million in extra advance PTC on behalf of these ineligible individuals during the 2016 open enrollment. According to CMS officials, the current process for terminating enrollments based on expired inconsistencies gives individuals the full inconsistency period to mail in substantiating documents—and allows CMS to confirm whether sufficient documentation was provided—prior to initiating the termination process. CMS officials also stated that the processing of inconsistencies in batches also aligns with issuer operations (allowing time to adjust billing for the next month) and allows for a more efficient process. In addition, CMS officials told us that processing terminations outside of normal system and marketplace rules would require additional manual effort on the part of the marketplace and issuers. However, we could not determine the validity of the officials’ statements because CMS did not provide us with documentation or analyses demonstrating that its current process for terminating policies and advance PTC is consistent with applicable statutory requirements, or that it is more efficient and cost-effective than processing terminations more frequently. Internal control standards state that management should identify, analyze, and respond to risks related to achieving the defined objectives. These standards also state that management should design control activities to achieve objectives and respond to risks. Without evaluating its process for terminating inconsistencies, CMS is at risk of providing an extra month of benefits to individuals who are eventually terminated from coverage because of insufficient documentation to resolve the inconsistencies. Federal regulations require marketplaces to periodically examine certain available data sources to determine, among other things, whether individuals with advance PTC remain eligible. However, CMS has not developed procedures to monitor and identify changes in circumstances, such as duplicate coverage or death, that may not be reported in a timely manner and would affect individuals’ eligibility for advance PTC. CMS checks for duplicate coverage from Medicaid in the states of individuals’ residencies at the time of initial enrollment, but CMS does not have documented procedures to regularly monitor changes in health insurance coverage throughout the year. In October 2015, we reported that CMS did not have procedures to regularly monitor unreported duplicate coverage from Medicaid in FFM states. Further, CMS had generally not provided FFM states with marketplace enrollment information that it would need to identify cases of duplicate coverage. In our report, we recommended that CMS establish a schedule for regular duplicate coverage checks and ensure that the checks are carried out according to schedule. In response to our recommendation, CMS officials told us that they completed checks for duplicate coverage. CMS officials also stated that the agency intended to perform this check at least twice per coverage year on an ongoing basis and will take steps to terminate advance PTC for any individuals identified. However, during the course of our audit, we found that CMS does not have documented procedures instructing its personnel to continue running these checks regularly. As mentioned earlier, CMS also did not provide us with documentation on the feasibility for using other existing resources and tools for checking for Medicaid and CHIP coverage in all FFM states. As such, we were unable to evaluate CMS’s assessment to determine whether CMS reviewed the feasibility of all existing resources, such as the Public Assistance Reporting Information System (PARIS). States can use PARIS to identify duplicate Medicaid coverage across other states. CMS officials told us that they have not studied the feasibility of using PARIS for the advance PTC program. CMS also did not properly design procedures related to (1) periodically verifying that individuals with advance PTC provided to issuers on their behalf did not begin receiving other government-sponsored health care coverage after enrollment, such as Medicare or Department of Veterans Affairs health benefits, and (2) terminating advance PTC for individuals who have such coverage. CMS officials told us that they have established a process to check individuals enrolled in the FFM for Medicare coverage and to send notices to them if there is a match. However, CMS officials stated that they do not terminate advance PTC for such individuals. In addition, CMS officials stated that when individuals update their FFM applications, CMS checks those individuals’ marketplace applications for duplicate government-sponsored health coverage. However, individuals may not update their applications if they elect to auto reenroll into plans. In such instances, CMS does not have mechanisms to terminate advance PTC for individuals who obtain or gain access to duplicative government- sponsored coverage. In addition, CMS does not conduct any periodic checks during the year to determine if any individuals have subsequently died. According to CMS officials, when individuals stop paying their premiums, such as in the case of death, there is a 90-day grace period, as required by PPACA, after which the individuals’ policies would be canceled for failure to pay premiums. Thus, under the grace periods, CMS pays up to 3 months of additional advance PTC after individuals have died unless it is otherwise reported to their insurers. CMS officials told us that following the end of the grace periods and subsequent issuer terminations for failure to pay premiums, CMS retroactively recoups 2 of the 3 months of excess advance PTC by adjusting subsequent payments to issuers following the normal process that governs grace periods. Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, these standards also state that management should design control activities to achieve objectives and respond to risks. Without establishing proper procedures to periodically check for changes in circumstances, such as individuals’ eligibility for government-sponsored coverage or their deaths, CMS is at increased risk of providing advance PTC on behalf of individuals who are not eligible for it. CMS did not properly design procedures related to timely terminating advance PTC for individuals who have not filed the required federal income tax returns. Under federal regulations, marketplaces must discontinue advance PTC for individuals who did not comply with the requirement to file a federal income tax return and reconcile the advance PTC. CMS allowed 2014 advance PTC recipients to attest as to whether they had filed a 2014 tax return when making FFM eligibility determinations for 2016. CMS offered individuals the opportunity to attest they made the proper tax filing, followed by CMS post-approval checks of IRS data. CMS officials stated that they selected this approach in order to prevent erroneous advance PTC terminations because of delays in IRS processing and availability of filing data from IRS at the time of application review. However, CMS’s process for verifying individual attestation and termination of individuals who did not file tax returns was not documented in its procedures. CMS officials told us that they had terminated advance PTC in November 2016 for individuals who IRS indicated had not filed 2014 tax returns. As a result, the marketplaces continued to pay advance PTC on behalf of those individuals for over three-quarters of plan year 2016 despite their not filing the required tax returns to reconcile their advance PTC. In September 2016, IRS also began sending data to CMS on individuals or members of tax households on whose behalf CMS provided advance PTC but who did not file the required Form 8962, Premium Tax Credit, with their tax returns. The form is used to reconcile advance PTC amounts with the final PTC amounts. CMS did not terminate advance PTC for individuals who filed their tax returns but did not reconcile using Form 8962. However, CMS officials told us that they plan to terminate advance PTC for those who file but do not reconcile in the future. Internal control standards state that management should use quality information to achieve the entity’s objectives. In addition, these standards also state that management should design control activities to achieve objectives and respond to risks. Without designing and implementing policies and procedures related to preventing and detecting advance PTC to individuals who do not comply with tax filing requirements, including those who do not file Form 8962, CMS increases the risk that advance PTC will not be terminated on a timely basis. Further, the federal government is missing opportunities to recover overpayments of advance PTC as part of the IRS PTC reconciliation process. For example, as of October 2016, approximately 1 million households still had not filed the required Form 8962 with their 2014 tax returns. However, these households had approximately $2.9 billion in advance PTC paid on their behalf in 2014. Furthermore, without the required Form 8962 from individuals who received advance PTC, IRS cannot identify potential underpayments or overpayments of advance PTC. Individuals are generally only allowed to enroll in qualified health plans during the open enrollment period. However, special enrollment periods provide an opportunity for individuals who lose health insurance coverage during the year or experience certain major life changes to enroll in a qualified health plan through the marketplaces outside of the annual open enrollment period. Examples of major life changes include the loss of minimum essential coverage, permanent move of residence, birth of a child, and marriage. Beginning in June 2016, individuals who qualified to enroll during special enrollment periods were asked to provide documentation to substantiate certain life changes. However, during the period of our audit, CMS procedures did not require the verification of major life changes using applicant-submitted documentation. CMS officials told us that there is no specific legal provision that requires federal and state marketplaces to verify events that trigger special enrollment periods. However, in 2016, HHS conducted a study to confirm consumers’ eligibility for special enrollment periods based on a review of documentation submitted for a sample of special enrollment periods granted during coverage year 2016. In April 2017, CMS issued a regulation to take effect on June 19, 2017, stating, among other things, that the federal marketplace will begin performing pre-enrollment verification of life changes for special enrollment periods. In the regulation, CMS stated that pre-enrollment verification of special enrollment periods will be phased in, focusing first on the categories with the highest volume and of most concern—such as loss of minimum essential coverage, permanent move, Medicaid or CHIP denial, marriage, and adoption. However, CMS has not yet designed and implemented procedures for its contractor to implement this verification process. Internal control standards state that management should use quality information to achieve the entity’s objectives. Accordingly, management should obtain relevant data from reliable internal and external sources in a timely manner based on the identified information requirements for achieving the entity’s objectives and address risks. Management evaluates these data for reliability, obtains them on a timely basis so that they can be used for effective monitoring, and processes the obtained data into quality information to support the internal control system. In addition, these standards state that management should design control activities to achieve objectives and respond to risks. Without verifying and documenting events that trigger eligibility for enrollments during special enrollment periods, CMS may provide advance PTC and health care coverage to individuals who are not eligible to enroll outside of the annual open enrollment period. In addition, individuals may be able to receive health care coverage for sickness or injuries inappropriately because they received coverage outside of the open enrollment period by providing false information to the FFM related to a special enrollment period event. For example, in November 2016, we reported that the FFM and selected state-based marketplaces approved health insurance coverage and advance PTC for 9 of 12 of GAO’s fictitious applications made during a 2016 special enrollment period. For 5 applicants, GAO provided no documents to support the special enrollment period triggering event, but CMS approved the coverage. Individuals must meet income requirements in order to qualify for advance PTC. Specifically, individuals are expected to have household incomes equal to or between 100 and 400 percent of the federal poverty level for their given family size to be eligible for advance PTC. Although CMS designed procedures related to detecting potentially understated income amounts, its procedures do not include verifying income amounts that may be overstated. Specifically, CMS does not check for potentially overstated income amounts, despite the risk that individuals may do so in order to qualify for advance PTC. This risk is increased for states that did not expand Medicaid coverage to individuals who make less than 100 percent of the federal poverty level. To receive subsidized health care coverage in these states, individuals could overstate their income to at least 100 percent of the federal poverty level to ensure that they qualify for advance PTC. According to CMS officials, they did not check for potentially overstated income amounts because federal regulations allow CMS to accept individuals’ attestations when attested income amounts are higher than those in IRS data. However, by not checking potentially overstated income amounts, CMS may be improperly providing advance PTC to issuers on behalf of individuals not eligible for the benefit. Along with income, family size has a direct relationship to the amount of advance PTC for which enrollees are eligible. As family size increases, the percentage of the federal poverty level for that household to be eligible for the maximum amount of PTC decreases, thereby affecting the advance PTC amount. IRS provides CMS with household income and family size information for enrollees requesting eligibility determinations for advance PTC. However, when the family size provided by an enrollee does not match the family size shown in IRS records, CMS does not generate an inconsistency. CMS accepts applicant attestations without further verification. CMS officials also told us that it could be challenging to verify family size information with documentation from individuals. However, CMS could use federal income tax returns and other supporting documentation to substantiate family sizes. Internal control standards state that management should use quality information to achieve the entity’s objectives. Management obtains relevant data from reliable sources. Relevant data have a logical connection with, or bearing upon, the identified information requirements. Reliable sources provide data that are reasonably free from error and bias and faithfully represent what they purport to represent. Internal control standards also state that management should design control activities to achieve objectives and respond to risks. Without proper procedures for verifying incomes and family sizes, CMS’s risk of providing advance PTC on behalf of individuals who do not meet the minimum income eligibility requirements—including those who may purposefully misstate their incomes or family sizes in order to become eligible for advance PTC—is increased. For example, in our testing of 93 applications, we found 11 applications for individuals residing in states that did not expand Medicaid and for which the modified adjusted gross incomes for those households were less than 100 percent of the federal poverty level, according to data that IRS provided to CMS during application review. While some of these individuals may have earned additional income, they may have also overstated their incomes on their applications to become eligible for coverage and advance PTC. However, CMS did not check for potential overstatements of income amounts and generate inconsistencies to resolve such potential overstatements. Based on our audit work, CMS has properly designed and implemented procedures related to the accuracy of advance PTC to reasonably assure that payments made to issuers and qualified health plans comply with applicable requirements, including procedures to generate accurate policy-based payments to issuers based on properly review and approve of issuer payment calculations and perform compliance reviews to help ensure that issuers and qualified health plans meet applicable requirements of the marketplace; and notify issuers of noncompliance and decertify those that do not meet key requirements. As discussed earlier, we did not test whether the control activities for making payments to issuers were operating as designed because such payments include other aggregated costs and adjustments, such as cost- sharing reductions and user fees, which were outside the scope of this audit. IRS control activities were not properly designed and implemented to help achieve management objectives related to preventing and detecting improper payments of PTC. Specifically, we found deficiencies in the design of IRS control activities related to determining whether individuals met the citizenship or lawful presence requirement for PTC eligibility; had access to or enrollment in health care coverage that met minimum essential coverage, which would allow individuals to obtain PTC for the months that were not covered; properly assessed individual shared responsibility payments (SRP) on their tax returns; and were properly notified of the requirement to file if they did not file their tax returns. IRS faces several challenges that affect its ability to design and implement control activities related to PTC. These challenges include the timeliness and availability of key income data to verify taxpayers’ PTC claims, resource constraints in identifying tax returns for further review, and statutory limitations for automatically correcting tax returns and recovering excess advance PTC repayments. We did not evaluate whether all control activities related to preventing and detecting improper payments of PTC were operating as designed or evaluate other internal control components, such as control environment. Deficiencies, if any, in the internal control components that were not evaluated could further impair the overall effectiveness of IRS’s control activities related to preventing and detecting improper payments in the PTC program. (See fig. 5.) To qualify for PTC, individuals must be U.S. citizens or nationals, or otherwise lawfully present in the United States. All advance PTC for those not lawfully present must be reported on tax returns and repaid in full regardless of income level. As such, individuals are not entitled to PTC for any period during which they are not lawfully present in the United States. IRS officials told us that IRS does not perform compliance checks to verify eligibility based on individuals’ citizenship or lawful presence status. IRS officials stated that they rely on the state and federal marketplaces to determine whether the individuals met citizenship or lawful presence eligibility requirements. If IRS receives enrollment information from the state or federal marketplaces, IRS presumes that individuals met citizenship or lawful presence requirements. While information that IRS receives from state and federal marketplaces may be effective in determining whether individuals met citizenship and lawful presence requirements for PTC, it does not address situations when state or federal marketplaces conditionally provided advance PTC on behalf of individuals but subsequently terminated advance PTC payments because of failure to prove citizenship or lawful presence. Specifically, PPACA’s implementing regulations allow individuals 95 days to provide supporting information to the marketplace when the marketplace is unable to verify that the individuals met enrollment or advance PTC requirements for citizenship or lawful presence. Consequently such individuals’ attested information qualifies them to be conditionally eligible for advance PTC during this inconsistency period. At the end of the inconsistency period, the marketplace is required to terminate advance PTC for individuals who did not resolve their inconsistencies related to citizenship or lawful presence. Treasury regulations do not require the marketplaces to provide IRS with the reasons for terminating health care coverage or advance PTC for individuals. Because of this, the marketplaces do not report advance PTC payment terminations to IRS for individuals who do not meet the citizenship or lawful presence eligibility requirements when the marketplaces make final determinations at the end of the inconsistency periods. Internal control standards state that management should externally communicate the necessary quality information to achieve the entity’s objectives. As part of this standard, management should obtain quality information to reasonably assure that internal control objectives—such as necessary data to verify citizenship information or legal presence requirements for PTC—are achieved. Because Treasury does not require the state or federal marketplaces to provide information on individuals who do not meet the citizenship or lawful presence requirements, IRS has not established a mechanism to identify that individuals claiming PTC meet this key PTC eligibility requirement. Further, according to IRS officials, they have not assessed the feasibility of obtaining such information from the marketplaces and incorporating such information into their processes. The volume and dollar amount of advance PTC paid on behalf of individuals whose coverage was terminated for citizenship or lawful presence requirements can be significant. In our February 2016 report, we found that for the first enrollment period, CMS terminated about 65,000 policies from the marketplaces because individuals did not resolve their citizenship or lawful presence issues. Over $130 million in advance PTC was paid on behalf of these individuals. Thus, without access to the data needed to verify citizenship or lawful presence eligibility requirements for individuals, IRS may be missing opportunities to prevent potentially significant improper payments of PTC. IRS has not properly designed and implemented key control activities to perform the necessary post-refund checks routinely to identify individuals who are not eligible for claimed PTC amounts because of either duplicate health care coverage or availability of coverage from employers or government-sponsored programs. IRS officials stated that IRS examiners, using internal and external information systems, may check Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, filed for the individuals as part of their general examination procedures to verify all insurance coverage in and out of the marketplace. IRS officials stated that they rely on tax examiners’ judgment to evaluate available data and determine whether the presence or absence of a particular item on a tax return represents a potential issue. IRS developed a checklist that examiners could use in reviewing tax returns for duplicate coverage and SRP and included this checklist in the program used by the postcompliance units. However, IRS did not incorporate the checklist or instructions to use the checklist in the IRM to require its use as part of the routine procedures that examiners in the postcompliance units perform regularly. Internal control standards state that management should design control activities to achieve objectives and respond to risks. Control activities are the policies, procedures, and other mechanisms that enforce management’s directives to achieve the entity’s objectives and address related risks. IRS officials stated that they are reviewing the potential compliance issue related to duplicate health insurance coverage for post-refund compliance checks. IRS officials also stated that they have requested research data on the level of noncompliance for tax year 2015 and that these data will be evaluated to determine what, if any, post-refund actions are needed. Without routinely performing post-refund checks on individuals’ health insurance coverage from employers or government-sponsored health care plans, IRS is vulnerable to improperly providing PTC to ineligible recipients. The effect of IRS’s lack of routine post-refund checks on individuals’ health insurance coverage from employers or government- sponsored health care plans was illustrated in our review of a statistical sample of 93 tax returns with PTC-related amounts during the first 9 months of fiscal year 2016. Based on our testing, the number of individuals who inappropriately received PTC because of their eligibility for or receipt of minimum essential coverage outside of the marketplace could be significant. In our statistical sample of 93 PTC-related transactions for the first 9 months of fiscal year 2016, we found 7 cases in which the individuals or members of their households received subsidized coverage from the marketplaces and at the same time also had coverage through employer- or government-sponsored health care plans for at least 1 month during the year. IRS also does not have properly designed and implemented key control activities to perform the necessary post-refund checks to identify individuals who did not have health care coverage for the entire year and did not comply with SRP requirements. In our statistical sample of 93 tax returns, we found that in 17 cases the individuals or all the members of their tax households did not have qualifying health care coverage for the entire year or an exemption from health care coverage for some of the months or for the entire year. For those returns, the individuals did not pay the required SRP for the months without coverage and IRS did not assess SRPs for those individuals who did not have qualifying health care coverage or have coverage exemptions for the entire year. Without properly designed and implemented key control activities to perform the necessary post-refund checks of SRPs, IRS may not always consistently and equitably assess and collect the SRP. IRS’s ability to verify taxpayer-reported income prior to issuing tax refunds is limited because some deadlines for third parties to report key aspects of taxpayer income fall late in the tax filing season. As such, IRS does not timely receive complete income information, which impedes IRS’s ability to design control activities for verifying PTC calculations prior to issuing tax refunds. IRS’s challenge in verifying income before issuing refunds is not unique to PTC; it is an inherent risk with the tax administration processes in which refunds are issued before all compliance checks are completed. While IRS receives some income information from third parties—such as wage information from employers—by mid-February, IRS may not receive other key income information returns necessary for verifying income until later in the tax filing season. For example, Form 1099-INT, Interest Income, can be filed electronically to IRS as late as March 31, which is well into the tax filing season and too late for IRS to use for checking income reporting compliance during pre-refund processing of tax returns. Because of the timing of third parties’ submission of comprehensive information to IRS, IRS may not detect taxpayer misreporting of income before issuing refunds, which could result in improper PTC payments. As a result, IRS must rely on post-refund checks to identify any taxpayer misreporting of income after the filing season. IRS is unable to identify all tax returns that contain PTC-related errors for further review by its tax examiners. Since 2011, IRS has faced budget reductions. These budget reductions have heightened the importance of determining how best to allocate declining resources for IRS to reasonably assure that it can meet agency-wide strategic goals for increasing individual compliance, using resources more efficiently, and minimizing individual burden. As a result, IRS officials told us that IRS has prioritized its limited resources to design and implement cost-effective PTC-related key procedures to reasonably assure that it is focused on issues that may represent the greatest financial exposure to the government. To do this, IRS established dollar thresholds to limit the number of tax returns with PTC-related amounts for additional reviews by IRS examiners, as it does in other types of tax administration. As a result, IRS does not review all tax returns that may contain errors but continues to process tax returns that have the PTC exposure amount below certain threshold amounts without any adjustments or further reviews by tax examiners. We evaluated IRS’s procedures related to the PTC processing dollar thresholds and found that IRS’s use of dollar thresholds was operating as designed during the time period of testing. However, because IRS uses dollar thresholds to limit the number of individual federal income tax returns reviewed by examiners, it does not pursue errors in overstated or understated PTC amounts below the thresholds. Although the focus was not on PTC, we reported in 2016 that IRS lacked a comprehensive strategy for its refundable tax credit compliance efforts. In this report, we stated that IRS was working on a strategy to document current compliance efforts and identify and evaluate potential new solutions to address improper payments; however, its analysis focused on efforts to improve Earned Income Tax Credit compliance and did not include other refundable tax credits. As a result, we recommended that IRS develop a comprehensive operational strategy that includes all refundable tax credits. IRS agreed with the recommendation and stated that it is working on developing a comprehensive strategy to address compliance and improper payments related to its refundable tax credit programs, including PTC. A key control activity for IRS is correcting inaccuracies in individuals’ PTC calculations. IRS does this by corresponding with individuals, suspending the tax returns, or using its statutory math error authority. Based on statistical sample of 93 individual federal income tax returns with PTC- related amounts from October 2015 to June 2016, we found that IRS (1) appropriately suspended the tax returns and corresponded with individuals to resolve PTC-related issues and errors on the tax returns and (2) accurately calculated and processed PTC-related amounts in cases within its statutory authority. IRS cannot always correct individuals’ inaccuracies that it identifies while processing tax returns. As we previously reported, in cases where individuals do not reconcile advance PTC, IRS does not have the authority to automatically correct the tax returns and notify the individuals of the changes. In other circumstances, IRS has statutory math error authority to fix easily correctable calculation errors and check for other obvious noncompliance in limited circumstances. However, in cases of a discrepancy with marketplace data, such as differences in amounts of advance PTC reported by individuals on their Forms 8962, IRS does not have the authority to automatically correct the tax returns and notify individuals of the changes. According to IRS officials, having the authority to correct PTC errors related to discrepancies with marketplace data would allow IRS to process returns more quickly without having to correspond with the individuals or expend further resources to audit their compliance. In 2015, we suggested that IRS seek legislative authority to correct tax returns at filing based on the marketplace data. Correctable-error authority could help IRS meet its goals: processing tax returns timely, providing individuals with refunds more quickly, and reducing the burden on individuals of responding to IRS correspondence. It can also reduce the need for IRS to resolve discrepancies in post-filing compliance, which, as we previously concluded, is less effective and more costly than at filing compliance. For each year beginning with fiscal year 2015, Treasury has submitted legislative proposals that among other things, would establish a category of correctable errors. Under the proposals, Treasury would be granted regulatory authority to permit IRS to correct errors in cases where information provided by individuals does not match corresponding information in government databases. As of the completion of our audit, Congress has not yet granted this broad authority. The effect of IRS’s lack of authority to correct PTC-related errors on tax returns at filing was illustrated in our review of a statistical sample of 93 tax returns with PTC-related amounts during the first 9 months of fiscal year 2016. We found that for 6 of the 93 sample cases, the individuals did not submit the required Forms 8962 to reconcile PTC, when marketplace data indicated that these individuals had advance PTC paid on their behalf. In addition, for an additional 2 of the 93 cases, the individuals reported different amounts on their Forms 8962 than what the marketplace data indicated. For these 8 out of 93 cases, IRS issued refunds to the individuals without adjusting the refund amounts for the PTC-related differences. Thus, without the ability to automatically correct the tax returns, IRS is not able to fully collect excess advance PTC overpayments and reimburse PTC underpayments. IRS cannot design control activities to recover all excess advance PTC repayment amounts. Marketplaces determine the amounts of advance PTC for which individuals are eligible, in part, based on each applicant’s anticipated household income for the year. The PTC amount is based on actual income reported when individuals file income tax returns. If the amounts of advance PTC paid on behalf of individuals are greater than the amounts final PTC claimed on their tax returns, then the individuals must repay excess advance PTC. However, federal law limits the amount of excess advance PTC overpayments that individuals must repay, based on their household incomes as a percentage of the federal poverty level and filing status. As a result, IRS is prohibited from recovering the full amount of excess advance PTC payments that may otherwise be due from individuals. (See table 1.) According to IRS, for fiscal year 2016, individuals had over $800 million in excess advance PTC that they were not required to repay because of repayment limitations. Under current federal law, IRS will continue to only recover the excess advance PTC repayment amounts up to the statutory repayment limitation. IRS did not properly design control activities that notified nonfilers of the requirement to file tax returns. We found that in 2015 and 2016, IRS used an ad hoc process to send notices to individuals who had advance PTC paid on their behalf during the previous calendar year and failed to file tax returns and to those who requested an extension to file. The notices alerted the individuals of the requirement to file a tax return and reconcile the advance PTC and warned that the failure to file could result in the loss of advance PTC for the following calendar year. However, IRS did not design policies and procedures for sending these notices regularly. According to IRS officials, IRS has not decided whether sending notices will be an ongoing process. IRS officials stated that if it becomes an ongoing process, then IRS will likely develop policies and procedures for sending these notices. Internal control standards state that management should design control activities to achieve objectives and respond to risks. Control activities are the policies, procedures, and other mechanisms that enforce management’s directives to achieve the entity’s objectives and address related risks. Without such policies and procedures in place, there is an increased risk that the ad hoc notification process will not be followed consistently in each filing season. As a result, individuals may be at risk for losing their subsidized health care coverage from the marketplaces in the future because they were not aware of the requirement to file their tax returns and reconcile the advance PTC since there is a year’s interval between when individuals first apply for advance PTC and when they are supposed to reconcile it on their tax returns. In addition, without an assessment or claim being made by individuals through tax return filing, the federal government may not be fully collecting on excess advance PTC that may be owed or pay any additional PTC that is due to individuals. Individuals’ claims are especially important because, as discussed later, IRS currently does not have the system capability to use marketplace data to calculate PTC through the Automated Substitute for Return (ASFR) program. Until IRS incorporates marketplace data into its automated process, this notification process will be key to identifying and collecting any overpayments of advance PTC made for individuals who did not file their tax returns. IRS was unable to incorporate PTC information in the ASFR program, a key process for preparing substitute tax returns for individuals who did not file. IRS has the authority to prepare a tax return for a nonfiling individual if the individual appears to be liable for the return and the individual required to file the return either does not file it or instead files a false, fraudulent, or frivolous return. IRS exercises this authority through its ASFR program. If IRS is unable to secure a valid income tax return from an individual, the ASFR program automatically estimates the tax liability by computing the individual’s tax, penalties, and interest, based on third- party and other available information in its systems. However, IRS officials stated that IRS faces challenges in incorporating the PTC program into the ASFR program. Specifically, the ASFR program does not have the PTC calculators necessary to calculate the PTC amounts. The program does consider PTC-related information in determining whether a substitute for return (SFR) should be created or in calculating taxes owed when an SFR is created for an individual for other reasons. Thus, IRS cannot automatically prepare the Form 8962 or calculate PTC for non-filing individuals who had advance PTC paid on their behalf. IRS officials stated that they recognize the lack of PTC-related calculations in the ASFR program as a gap in the collection mechanism. However, IRS officials told us that they did not have the budgetary resources to incorporate the complex calculations into the agency-wide ASFR program in 2016. Without incorporating this important programming change, IRS may not be able to recover the full extent of excess advance PTC amounts. IRS officials stated that they will consider incorporating this programming change in the ASFR program in the future subject to budgetary resource availability. Preventing and detecting improper payments in the PTC programs is a complex undertaking. In fiscal year 2016, CMS assessed its PTC program as susceptible to significant improper payments, in accordance with IPIA and OMB requirements. However, CMS did not provide a specific, expeditious time frame for complying with statutory requirements to estimate and report on improper payments related to the program. As a result, HHS’s overall improper payment estimate will continue to be understated. In addition, Congress and other stakeholders will continue to lack key payment integrity information for monitoring HHS’s improper payments. IRS did not assess the susceptibility of its PTC program in a manner consistent with IPIA requirements. Specifically, IRS did not include all types of errors that result in improper payments within the scope of its assessment and did not assess whether its PTC program met the applicable statutory thresholds for susceptibility to significant improper payments, as required by IPIA. Without estimating and reporting improper payments, IRS and external stakeholders, such as Congress, may not be able to fully assess the extent to which payment integrity objectives for the program are achieved. Although CMS properly designed and implemented control activities related to the verification of citizenship and lawful presence and the accuracy of advance PTC payments, it did not properly design other control activities related to preventing and detecting improper payments of advance PTC. CMS often relies on insufficient, unreliable, and incomplete information for ensuring eligibility for advance PTC and accurately calculating the amounts of advance PTC. By not obtaining relevant data from reliable sources in a timely manner to meet the identified information requirements, and establishing procedures to verify eligibility of enrollees and the accuracy of advance PTC, CMS cannot reasonably assure that its payment integrity objectives are achieved. IRS did not properly design and implement certain key control activities related to preventing and detecting PTC improper payments, including recovering excess advance PTC overpayments. While IRS may not receive key information from marketplaces to identify individuals who did not demonstrate that they met citizenship or lawful presence requirements, IRS has not assessed the feasibility of requiring such information from the marketplaces and incorporating such information in its processes to recover advance PTC made for those individuals. In addition, IRS lacks certain key procedures to verify health care coverage on individuals routinely during its post-filing compliance checks. Without such checks, IRS may be missing opportunities to identify individuals who are not eligible for PTC because they can obtain health care coverage outside of the marketplaces or identify individuals who did not properly report their SRPs on their income tax returns. Finally, although IRS used an ad hoc process for notifying nonfilers of the requirement to file tax returns, IRS did not establish procedures for sending these notices regularly during each filing season to facilitate compliance. Without addressing these key deficiencies in control activities, IRS is at increased risk of making improper payments to individuals and may not be fully collecting excess advance PTC or reimbursing PTC underpayments. IRS also faces data limitations, such as the availability of key income information from third parties, and statutory challenges that impede its ability to prevent improper payments, recover excess payments of advance PTC, and reimburse underpayments. For instance, in cases of discrepancies with marketplace data, IRS does not have the authority to automatically correct the tax returns and notify the taxpayers of the changes. In addition, there are statutory repayment limitations on the amount of excess advance PTC that taxpayers are required to return to the government. As a result, opportunities to recover PTC improper payments are limited in these areas unless statutory changes are made. In addition, resource constraints necessitate IRS making difficult decisions about how best to use its resources to identify taxpayer noncompliance and set objectives related to preventing and detecting improper payments for the PTC program. In 2016, we recommended that IRS develop a comprehensive operational strategy that includes all refundable tax credits for which IRS is responsible. Implementing our 2016 recommendation could help IRS determine whether its current allocation of resources for PTC is optimal and, if not, what adjustments may be needed. To improve annual reporting on PTC improper payments, control activities related to eligibility determinations, and calculations of advance PTC, we recommend that the Secretary of Health and Human Services direct the Administrator of CMS to take the following 10 actions: 1. Annually report improper payment estimates and error rates for the advance PTC program. 2. Until annual reporting of improper payment estimates and error rates for the advance PTC program is performed, disclose significant matters relating to IPIA estimation, compliance, and reporting objectives for the advance PTC program in the agency financial report, including CMS’s progress and timeline for expediting the achievement of those objectives and the basis for any delays in meeting IPIA requirements. 3. Design and implement procedures for verifying the identities of phone and mail applicants to reasonably assure that ineligible individuals are not enrolled in qualified health plans in the marketplaces or provided advance PTC. 4. Assess and document the feasibility and availability of obtaining sufficiently reliable data to verify individuals’ residencies and lack of minimum essential coverage from nonfederal employers and, if appropriate, design and implement procedures for using such data in its verification processes. 5. Design and implement procedures for sending notices to nonfederal employers routinely and terminating advance PTC for individuals who have access to minimum essential coverage from their employers. 6. Assess and document the feasibility of approaches for (1) identifying duplicate government-sponsored coverage for individuals receiving Medicaid and CHIP coverage in FFM states outside of the states where they attest to residing and (2) periodically verifying individuals’ continued eligibility by working with other government agencies to identify changes in life circumstances that affect advance PTC eligibility—such as commencement of duplicate coverage or deaths— that may occur during the plan year and, if appropriate, design and implement these verification processes. 7. Assess and document the feasibility of approaches for terminating advance PTC on a timelier basis and, as appropriate, design and implement procedures for improving the timeliness of terminations. 8. Design and implement procedures for verifying compliance with applicable tax filing requirements—including the filing of the federal tax return and the Form 8962, Premium Tax Credit—necessary for individuals to continue to be eligible for advance PTC. 9. Design and implement procedures for verifying major life changes using documentation submitted by applicants enrolling during special enrollment periods. 10. Design and implement procedures for verifying with IRS (1) household incomes, when attested income amounts significantly exceed income amounts reported by IRS or other third-party sources, and (2) family sizes. To comply with improper payments reporting requirements and improve procedures related to processing PTC information on tax returns, we recommend that the Commissioner of Internal Revenue direct the appropriate officials to take the following 5 actions: 1. Assess the program against applicable IPIA-defined thresholds and conclude on its susceptibility to significant improper payments, and revise the scope of its improper payments susceptibility assessment for the PTC program to include instances in which advance PTC is greater than or equal to the amount of PTC claimed on the tax return. If the program meets the IPIA definition for being susceptible to significant improper payments based on this assessment, estimate and report improper payments associated with the PTC program consistent with IPIA requirements. 2. Assess and document the feasibility of approaches for incorporating information from the marketplaces on individuals who did not demonstrate that they met the eligibility requirements for citizenship or lawful presence in the tax compliance process. If determined feasible, IRS should work with Treasury to require marketplaces to periodically provide such information on individuals and use such information to recover advance PTC made for those individuals. 3. Assess whether IRS should require its examiners to verify health care coverage of individuals to determine eligibility for PTC. To do this, IRS should complete its evaluation of the level of noncompliance related to duplicate health insurance coverage. Based on this evaluation and if cost effective, IRS should design and implement formal policies and procedures to routinely identify individuals inappropriately receiving PTC because of their eligibility for or enrollment in health care programs outside of the marketplaces and notify such individuals of their ineligibility for PTC. 4. Design and implement procedures in the IRM for examiners in the post-filing compliance units to review tax returns for health insurance coverage for the entire year, and to identify and assess individual SRPs from those who are not appropriately reporting SRPs on their tax returns. 5. Design and implement procedures in the IRM to regularly notify nonfilers of the requirement to file tax returns in order to continue to receive advance PTC in the future. We provided a draft of this report to HHS, IRS, and OMB for comment. In its comments, reproduced in appendix III, HHS concurred with seven of our recommendations and neither agreed nor disagreed with the remaining three recommendations. In its comments, reproduced in appendix IV, IRS agreed with two recommendations, partially agreed with two other recommendations, and disagreed with the remaining recommendation. OMB’s liaison to GAO stated in an e-mail that OMB had no comments on the report. HHS and IRS also provided technical comments, which we incorporated as appropriate. In its comments, HHS stated that it is committed to ensuring access to high quality healthcare for all Americans by verifying the eligibility of consumers who apply for enrollment in qualified health plans through a marketplace and providing coverage to eligible individuals. HHS stated that it takes seriously its responsibilities to protect taxpayer funds while reducing the burden on consumers, employers, and other individuals and entities involved in the marketplace and other insurance affordability programs. In its response, HHS described its initiatives to enhance the integrity of its program, including conducting a fraud risk assessment for potential risk in the marketplace and working towards estimating and reporting improper payments for advance PTC. In addition, HHS described its process for verification of identity, determination of eligibility of enrollment through the marketplace, confirmation of individuals’ compliance with tax filing requirements, and payments of advance PTC to certified issuers. HHS stated that it looked forward to continuing to benefit from suggestions from GAO and HHS’s Office of Inspector General on ways to improve its operations so eligible individuals can gain coverage through the marketplaces and insurance affordability programs in a way that prevents consumer harm and protects taxpayer money. HHS stated that it concurred with 7 of our 10 recommendations and described actions it has taken or plans to take to address these 7 recommendations. Such actions include (1) reporting on its progress in designing and implementing an improper payment estimate for the advance PTC program in future agency financial reports, (2) documenting the feasibility of modifying certain verification procedures, and (3) verifying key eligibility requirements, such as compliance with tax filing requirements and changes in life circumstances that qualified applicants for enrollment during special enrollment periods. The actions by HHS, if implemented effectively, would address our recommendations. For the remaining three recommendations, HHS did not state whether or not they concurred with the recommendations. In response to our third recommendation regarding verification of filer identity, HHS stated that for individuals starting a new application via phone, the call center representatives use verbal attestations for identity verifications from individuals. HHS stated that for paper applications, individuals must provide names and complete addresses as well as other information. In addition, HHS stated that individuals must attest that the information they provide on all applications is accurate by signing under penalty of perjury. However, we continue to believe that because CMS does not validate the identities of individuals who apply by phone or mail, CMS is vulnerable to enrolling ineligible individuals in qualified health plans with advance PTC. For our fifth recommendation on sending notices to nonfederal employers, HHS stated that it is evaluating its 2016 employer notice program to determine the best approach for notifying employers in the future. Such an evaluation may provide useful information; however, we continue to believe that designing and implementing procedures for sending notices to nonfederal employers and terminating advance PTC to individuals with access to employer-sponsored coverage can reduce the risk of providing advance PTC to issuers on behalf of ineligible individuals. In response to our tenth recommendation regarding verification of household income and family sizes, HHS stated that as part of its eligibility verification requirements, it verifies consumer-reported income with data from IRS. However, HHS stated that because household incomes may fluctuate year to year, it is difficult for consumers to project income for the year in advance. According to HHS, in instances where applicant-reported income is higher than the IRS data, HHS accepts the consumer attestation. However, HHS stated that it will assess the feasibility and burden on individuals of setting a reasonable threshold for the generation of annual household income inconsistencies that would require additional verification for consumer-attested income that significantly exceeds income amounts reported by IRS or other third party sources. We believe that such an evaluation is a reasonable step to address our recommendation to enhance the effectiveness and efficiency of the program related to verification of household income. In addition, HHS stated that it currently accepts attestation when the family size provided by the individual does not match IRS’s records. HHS stated that establishing a process to verify family size with IRS would require significant operational and privacy complexity. While we recognize that there may be certain complexities in the verification of family sizes, it is important that CMS develop policies and procedures to reasonably assure that such verifications are made on a regular basis. In its comments, IRS stated that it faces significant challenges administering refundable tax credits given their complex structural design and the difficulty in validating eligibility criteria. IRS stated that it also faces significant challenges in the use of third party and other data to validate information provided by filers because many potential sources contain information that is incomplete, out-of-date, or otherwise unsuitable for use in tax administration. IRS also stated that the complexity of the law means that not every situation is a matter for simple adjudication. IRS added that it must take all these factors into account when designing and implementing pre-filing and post-filing approaches to tax compliance. IRS also stated that its refundable tax credits may have compliance-related risks that differ from those associated with other tax provisions and that administration of these provisions must address these unique risks. According to IRS, it has committed to OMB that it will conduct a quantitative analysis of PTC in fiscal year 2018, the first year that National Research Program data will be available to perform such analysis. IRS stated that that it agreed with two of our recommendations, partially agreed with another two recommendations, and disagreed with the remaining recommendation. IRS agreed with our second and third recommendations related to meeting eligibility requirements for citizenship and identifying individuals with duplicate health insurance coverage. IRS outlined several actions it plans to take to address those recommendations. These actions, if implemented effectively, would address our recommendations. IRS partially agreed with our first recommendation related to an improper payment assessment for the PTC program. IRS stated that instances in which the advance PTC is greater than or equal to the PTC amount claimed on the tax return do not result in the IRS increasing the outlay related to PTC and so these occurrences are not subject to IPIA. While we acknowledge that IRS’s interpretation of the IPIA definition of “payments” excludes reductions in tax receipts, we nonetheless believe that these instances should be considered within the scope of the IRS susceptibility assessment for improper payments. Taxpayers may inaccurately complete Form 8962 and erroneously report excess advance PTC on their returns instead of claiming net PTC, or they may simply fail to report net PTC on their tax returns altogether. Such errors would result in underpayments of net PTC and therefore affect program outlays and improper payments. In addition, IPIA defines improper payments to include both overpayments and underpayments. IRS also stated that it conducted its fiscal year 2016 PTC improper payment risk assessment consistent with OMB guidance but will discuss with OMB a future change to the approach for assessing PTC improper payments as part of a larger discussion about the administration of refundable tax credits. However, IRS did not conclude whether or not the program may be susceptible to significant improper payments. Further, although we found that IRS used all of the required qualitative risk factors specified in IPIA and OMB guidance within its assessment, IRS did not analyze how each of the risk factors affected the susceptibility of the program to significant improper payments. Until IRS conducts an appropriate assessment consistent with IPIA and OMB guidance, it will continue to be uncertain about whether it should estimate the amount of improper PTC payments. IRS also partially agreed with our fifth recommendation related to notifying non-filers of the need to file to continue receiving advance PTC. IRS stated that using a research-based approach to evaluate the 2015 tax filing season, it developed a post-compliance process for sending notices to individuals who received advance PTC paid on their behalf in the previous calendar year but failed to file a tax return and also to those who requested an extension to file. IRS stated that being flexible in its approach has allowed IRS to refine the process to improve efficiency and effectiveness. IRS further stated that based on the 2017 research analysis, IRS will determine whether the information should be included in an existing IRM. We agree that IRS should review its process to improve the efficiency and effectiveness of its operations. However, we continue to believe that designing and implementing procedures to regularly notify non-filers of the need to file to continue receiving advance PTC decreases the risk that the ad hoc notification process will not be followed consistently in each filing season. IRS disagreed with our fourth recommendation related to reviewing tax returns to those who are not reporting SRP. However, IRS stated that, among other things, it has drafted a new IRM section for examiners who are responsible for reviewing tax returns to determine whether health insurance is reflected for the taxpayer for the entire year, and for identifying and assessing SRP on taxpayers who are not appropriately reporting SRP on their tax returns. IRS stated that the IRM section is pending approval by Exam Policy. Although IRS stated that it disagreed with our recommendation, we believe that the actions that IRS described in its response to our draft report would sufficiently address our recommendation if implemented effectively. We are sending copies of this report to the appropriate congressional committees, the Director of the Office of Management and Budget, the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, the Commissioner of Internal Revenue, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2623 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. The objectives of this report are to determine the extent to which (1) the Centers for Medicare & Medicaid Services (CMS) and the Internal Revenue Service (IRS) assessed the susceptibility of their premium tax credit (PTC) programs to significant improper payments and, if the programs were deemed susceptible, whether CMS and IRS took actions required by the Improper Payments Information Act, as amended (IPIA), and Office of Management and Budget (OMB) guidance; (2) CMS properly designed and implemented key internal control activities related to preventing and detecting improper payments of advance PTC; and (3) IRS properly designed and implemented key control activities related to preventing improper payments of PTC in processing federal income tax returns, detecting and recovering advance PTC overpayments made to issuers on behalf of policyholders, and reimbursing underpayments made to policyholders. Further, for those key control activities assessed that we determined were properly designed and implemented, we evaluated the extent to which they were operating as designed. To address our first objective, we reviewed improper payments reporting requirements and guidance, such as that in IPIA and the related guidance in Appendix C to OMB Circular No. A-123, Requirements for Effective Estimation and Remediation of Improper Payments, to identify requirements that agencies must meet to ascertain whether their programs are susceptible to significant improper payments. We interviewed key officials from CMS and IRS to gain an understanding of their processes for implementing IPIA requirements, including how each of their risk assessments were performed and their plans, if any, to estimate and report on improper payments related to PTC. We also analyzed CMS and IRS risk assessments for fiscal year 2016 to determine whether they were consistent with IPIA and OMB guidance. Specifically, we examined documentation to determine whether the CMS and IRS risk assessments (1) considered the qualitative risk factors specified by the improper payments requirements, (2) provided a basis for the risk determination, and (3) sufficiently concluded whether the programs met the criteria for susceptibility for significant improper payments. In addition, we considered relevant IPIA requirements, OMB guidance, and Standards for Internal Control in the Federal Government to assess whether the Departments of Health and Human Services and the Treasury externally communicated necessary quality information in their 2016 agency financial reports regarding improper payments for the PTC programs. To address our second objective, we first reviewed the Patient Protection and Affordable Care Act (PPACA), its implementing regulations, relevant internal control standards, and leading practices for measuring fraud risks in federal programs. Based on this review, we identified CMS’s relevant risk areas and the key control activities needed to prevent and detect improper payments of advance PTC. These control activities included those related to verifying applicants’ eligibility requirements to receive advance PTC, accurately determining advance PTC amounts based on expected household incomes and family sizes, and making accurate PTC payments to certified issuers for qualified health plans. The key control activities we selected are those that we viewed as critical for addressing the various types of key risks that CMS faces that are likely to result in improper payments of advance PTC. For this objective, we evaluated CMS’s key control activities related to CMS’s federally facilitated marketplace (FFM) for plan year 2016. We selected the FFM because it represented about two-thirds of the states and about 75 percent of all enrollees receiving advance PTC at the time of our audit. For our audit, we assessed whether the key control activities at CMS, both individually and in combination with other control activities, were properly designed to prevent and detect improper payments of advance PTC. We then evaluated the design of these key control activities at CMS by reviewing CMS policies, procedures, and other relevant documents, such as interagency agreements and standard operating procedures for eligibility support workers. We evaluated the key control activities to determine whether they sufficiently addressed the key risk areas that we identified by inspecting and analyzing relevant policies and procedures and directly testing the design of certain controls contained therein using the sample method described below. For key control activities that we determined were properly designed, we then performed walk-throughs and reviewed documents related to the control activities to determine whether CMS had properly implemented them. For key control activities that we determined were properly designed and implemented, we evaluated whether they were operating as designed by testing a statistically random sample of FFM policyholders with advance PTC payment transactions from CMS. To evaluate whether such key control activities at CMS were operating as designed during the FFM’s PPACA’s 2016 open enrollment period, we obtained all 2016 open enrollment application transactions, including auto reenrollment application transactions that had effectuated medical policies from the FFM that were submitted from November 1, 2015, through February 1, 2016, and resulted in advance PTC. The total population of these transactions was approximately 5.0 million records. To assess the reliability of the application data, we (1) interviewed knowledgeable CMS officials about the quality control procedures the agency had in place when collecting and creating the data and (2) electronically tested the data. Based on the results of these procedures, we determined that the data were sufficiently reliable for our purposes. From the population of approximately 5.0 million applications, we randomly selected 93 applications that had effectuated policies according to CMS records. For these 93 applications, we reviewed CMS records to determine whether the agency had performed the required internal control activities related to verifying key eligibility requirements and determining payments of advance PTC. We also used the random sample to provide evidence of the effect of providing advance PTC on behalf of individuals who did not meet the minimum income eligibility requirements. We did not evaluate whether the control activities related to the accuracy of advance PTC payments to issuers were operating as designed because such payments included aggregated costs and adjustments, such as cost- sharing reduction subsidies and user fees, which were outside the scope of our audit. As a result, the focus of our work in this area was on the design and implementation of key control activities related to preventing and detecting improper payments of advance PTC made to issuers. Similar to our procedures for our second objective, to address our third objective, we first reviewed PPACA, its implementing regulations, relevant internal control standards, and leading practices for managing fraud risks in federal programs. Based on this review, we identified IRS’s relevant risk areas and the key control activities needed to prevent improper payments of PTC, including recovering overpayments and reimbursing underpayments. These key control activities were related to verifying individuals’ eligibility for PTC, accurately calculating PTC claims, recovering overpayments (and reimbursing underpayments) related to advance PTC, and appropriately resolving PTC-related errors and discrepancies on federal income tax returns. The key control activities we selected are those that we viewed as critical for addressing the various types of key risks that IRS faces that are likely to result in improper payments of PTC, including the failure to recover overpayments (and reimburse underpayments).We evaluated IRS’s key control activities from October 1, 2015, to June 18, 2016. We also did not evaluate whether key control activities that we determined were not properly designed and implemented were operating as designed because, without proper design and implementation, such control activities cannot achieve the control objectives. We assessed whether the key control activities at IRS, both individually and in combination with other controls, were properly designed to achieve their objectives and address the related risks for preventing and detecting improper payments of PTC. Specifically, we reviewed IRS’s processes and control activities, evaluated the design of key control activities, and identified any gaps and deficiencies. We evaluated the design of key control activities at IRS by inspecting and analyzing relevant policies and procedures contained in the Internal Revenue Manual and other relevant documents and directly testing the design of certain control activities contained therein using the sample methodology described below. For key control activities we found to be properly designed, we then assessed whether IRS properly implemented those key internal control activities. To do this, we performed walk-throughs and reviewed documentation of those key control activities. We tested certain key control activities at IRS to determine whether they were operating as designed. To do this, we obtained a universe of PTC transaction data from federal income tax returns that had PTC-related transactions from October 1, 2015, to June 18, 2016, and then identified a relevant total population of approximately 6.1 million transactions. To assess the reliability of the PTC-related transaction data, we (1) reviewed IRS’s Individual Income Tax Credits reports and supporting data extracts, (2) interviewed knowledgeable IRS officials about the quality control procedures IRS has in place for collecting and creating the data, and (3) electronically tested the data. Based on the results of these procedures, we determined that the data were sufficiently reliable for our purposes. From the population of approximately 6.1 million transactions, we randomly selected 93 federal income tax returns with PTC transactions for our sample. For these 93 items, we reviewed the related federal income tax returns, including the Form 8962, Premium Tax Credit, and IRS processing reports and financial records on PTC-related transactions to determine whether IRS had performed the required internal control activities related to processing the credits. We also used this random sample to provide evidentiary support and illustrative examples of the effect of IRS’s lack of statutory authority to correct PTC-related errors on tax returns and certain identified control deficiencies. Because we followed a probability procedure based on random selections, each of our samples (for both CMS and IRS) is only one of a large number of samples that we might have drawn from the respective sampling populations. 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. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Confidence intervals are provided along with each sample estimate in this audit report. The results apply to the universes of (1) all FFM application transactions received from November 1, 2015, through February 1, 2016, with effectuated medical policies that resulted in payments of advance PTC and (2) PTC transaction data from federal income tax returns occurring from October 1, 2015, through June 18, 2016. While our second and third audit objectives focused on certain significant control activities related to preventing and detecting the improper payments of PTC programs at CMS and IRS; we did not evaluate all control activities and other components of internal control. If we had done so, additional deficiencies may have been identified that could impair the effectiveness of the control activities evaluated as part of this audit. Appendix II provides additional details on standards for internal control in the federal government. We conducted this performance audit from January 2016 to July 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Standards for Internal Control in the Federal Government provides the overall framework for establishing and maintaining internal control. Internal control should be designed, implemented, and operating effectively to provide reasonable assurance that the operations, reporting, and compliance objectives of an entity will be achieved. The five components of internal control are as follows: Control environment: The foundation for an internal control system. It provides the discipline and structure to help an entity achieve its objectives. Risk assessment: Assesses the risks facing the entity as it seeks to achieve its objectives. This assessment provides the basis for developing appropriate risk responses. Control activities: The actions management establishes through policies and procedures to achieve objectives and respond to risks in the internal control system, which includes the entity’s information system. Information and communication: The quality information management and personnel communicate and use to support the internal control system. Monitoring: Activities management establishes and operates to assess the quality of performance over time and promptly resolve the findings of audits and other reviews. An effective internal control system has each of the five components of internal control effectively designed, implemented, and operating and the five components operating together in an integrated manner. In this audit, we evaluated certain significant control activities at the Centers for Medicare & Medicaid Services and the Internal Revenue Service related to preventing and detecting improper payments in the premium tax credit programs. In addition, we also used the information and communication component of internal control and related principles as a criterion for addressing our audit objectives. In addition to the contact named above, Matthew Valenta, Assistant Director; Maria Hasan, Auditor in Charge; Jeff Arkin; Laura Bednar; Marcia Carlsen; Nina Crocker; Francine DelVecchio; Maxine Hattery; Wilfred Holloway; Jason Kelly; Jason Kirwan; Heena Patel; Ricky A. Perry, Jr.; Kailey Seibert; Monasha Thompson; and Jingxiong Wu made key contributions to this report. | The Patient Protection and Affordable Care Act (PPACA) aims to expand health insurance coverage and affordability. PPACA provides eligible individuals with PTC to help cover the cost of premiums for health plans purchased through a marketplace. CMS maintains the federally facilitated marketplace known as HealthCare.gov. IRS is responsible for processing PTC-related amounts on tax returns. The estimated fiscal year 2016 net outlay for PTC that was refunded to taxpayers was about $24 billion, while the estimated revenue effect from PTC that taxpayers used to reduce their tax liabilities was about $2 billion. GAO was asked to examine improper payments related to PTC. This report assesses the extent to which (1) CMS and IRS assessed the susceptibility of their PTC programs to significant improper payments; (2) CMS properly designed and implemented key control activities related to preventing and detecting improper payments of advance PTC; and (3) IRS properly designed and implemented key control activities related to preventing and detecting improper payments of PTC, including recovering overpayments and reimbursing underpayments of PTC. GAO reviewed the improper payment susceptibility assessments completed by CMS and IRS; interviewed agency officials; reviewed policies and procedures; and tested statistical samples of (1) CMS applications with advance PTC transactions during the 2016 open enrollment period and (2) income tax returns with PTC transactions processed during the first 9 months of fiscal year 2016. In fiscal year 2016, the Department of Health and Human Services' (HHS) Centers for Medicare & Medicaid Services (CMS) assessed its advance premium tax credit (PTC) program as susceptible to significant improper payments. CMS instituted a qualitative method for assessing the susceptibility of its program that was consistent with requirements, including assessing each of the nine required qualitative risk factors. However, CMS stated that it may not report improper payment estimates for the PTC program as required until at least fiscal year 2022 because of the complexity and timing of the process for developing such estimates. As a result, HHS's overall improper payments estimate will continue to be understated, and Congress and others will continue to lack key payment integrity information for monitoring HHS's improper payments. The fiscal year 2016 Internal Revenue Service (IRS) assessment for its PTC program was not consistent with requirements nor did it demonstrate whether the program met applicable thresholds for susceptibility to significant improper payments. Until IRS conducts an appropriate assessment, it will remain uncertain whether IRS should estimate the amount of improper payments for its PTC program. Although CMS properly designed and implemented control activities related to the accuracy of advance PTC payments, it did not properly design control activities related to preventing and detecting improper payments of advance PTC, such as verifying individuals' eligibility. As a result, CMS is at increased risk of making improper payments of advance PTC to issuers on behalf of individuals. IRS did not design and implement certain key control activities related to preventing and detecting PTC improper payments, including recovering excess advance PTC overpayments. For example, IRS did not properly design procedures to routinely check for duplicate employer- or government-sponsored coverage. In addition, in 2015 and 2016, IRS used an ad hoc process for notifying nonfilers of the requirement to file tax returns; however, IRS did not establish procedures for sending these notices regularly during each filing season to facilitate compliance. Without properly designed control activities related to PTC, IRS is at increased risk of making improper payments to individuals. IRS faces challenges that affect its ability to design and implement procedures related to preventing and detecting PTC improper payments, including recovering advance PTC overpayments and reimbursing advance PTC underpayments. For example, IRS maintains that reduced resources have impaired its ability to implement needed controls. Further, statutory limitations contributed to IRS's inability to fully collect excess advance PTC overpayments and reimburse PTC underpayments and to automatically correct errors in tax returns. GAO previously suggested that IRS seek legislative authority to correct tax returns at filing based on marketplace data. The Department of the Treasury, on behalf of IRS, has submitted proposals for congressional consideration to permit IRS to correct such errors where individuals' information on tax returns does not match corresponding information provided in government databases. Congress has not yet granted this broad authority. GAO is making 10 recommendations to HHS. Of these, 2 recommendations are related to complying with annual reporting of advance PTC improper payments estimates, including assuring that CMS expedites the process for reporting such estimates. The 8 remaining recommendations address improving control activities related to eligibility determinations and calculations of advance PTC based on incomes and family sizes. HHS concurred with 7 of the recommendations and neither agreed nor disagreed with the remaining 3 recommendations, which related to improving control activities for verifying identities of individuals, preventing duplicate coverage of individuals receiving minimum essential coverage through their employers, and verifying household incomes and family sizes. GAO continues to believe that actions to implement these 3 recommendations are needed as discussed in the report. GAO is also making 5 recommendations to IRS. Of these, 1 recommendation focuses on properly assessing the susceptibility of the PTC program to significant improper payments. The remaining 4 recommendations address improving control activities related to processing PTC information on tax returns, such as recovering advance PTC made for individuals who do not meet the eligibility requirements for citizenship or lawful presence. IRS agreed with 2 recommendations, partially agreed with 2 other recommendations, and disagreed with the remaining recommendation. For the 2 partial concurrences, GAO continues to believe that actions to fully implement these recommendations are needed as discussed in the report. Although IRS disagreed with the 1 recommendation related to reviewing tax returns to those who are not reporting shared responsibility payments, the actions IRS described in its comments, if implemented effectively, would address the recommendation. |
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In an effort to promote and achieve various U.S. foreign policy objectives, trade preference programs have expanded in number and scope over the past 3 decades. The purpose of these programs is to foster economic development through increased trade with qualified beneficiary countries while not harming U.S. domestic producers. Trade preference programs extend unilateral tariff reductions to over 130 developing countries. Currently, the United States offers the Generalized System of Preferences (GSP) and three regional programs, the Caribbean Basin Initiative (CBI), the Andean Trade Preference Act (ATPA), and the African Growth and Opportunity Act (AGOA). Special preferences for Haiti became part of CBI with enactment of the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act in December 2006. The regional programs cover additional products but have more extensive criteria for participation than the GSP program. Eight agencies have key roles in administering U.S. trade preference programs. Led by USTR, they include the Departments of Agriculture, Commerce, Homeland Security, Labor, State, and Treasury, as well as the U.S. International Trade Commission (ITC). GSP—the longest standing U.S. preference program—expires December 31, 2008, as do ATPA benefits. At the same time, legislative proposals to provide additional, targeted benefits for the poorest countries are pending. U.S. trade preference programs are widely used, but some economists and others have raised questions about them. Their concerns include the potential for diversion of trade from other countries that these programs can cause; the complexity, scope of coverage, duration, and conditionality of these programs; and the potential opposition to multilateral and bilateral import liberalization preferences can create. U.S. imports from countries benefiting from U.S. preference programs have increased significantly over the past decade. Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006. Most of this growth in U.S. imports from preference countries has taken place since 2000. Whereas total U.S. preference imports grew at an annual rate of 0.5 percent from 1992 to 1996, the growth quickened to an annual rate of 8 percent from 1996 to 2000, and 19 percent since 2000. This accelerated growth suggests an expansionary effect of increased product coverage and liberalized rules of origin for LDCs under GSP in 1996 and for African countries under AGOA in 2000. There is also some evidence that leading suppliers under U.S. preference programs have “arrived” as global exporters. For example, the 3 leading non-fuel suppliers of U.S. preference imports—-India, Thailand, and Brazil—were among the top 20 world exporters and U.S. import suppliers in 2007, and their exports in 2007 grew faster than world exports, according to the World Trade Organization (WTO). Preference programs entail three critical policy trade-offs. First, the programs are designed to offer duty-free access to the U.S. market to increase beneficiary trade, but only to the extent it does not harm U.S. industries. U.S. preference programs provide duty-free treatment for over half of the 10,500 U.S. tariff lines, in addition to those that are already duty- free on a most favored nation basis. But, they also exclude many other products from duty-free status, including some that developing countries are capable of producing and exporting. GAO’s analysis showed that notable gaps remain, particularly in agricultural and apparel products. For 48 GSP-eligible countries, more than three-fourths of the value of U.S. imports that are subject to duties (i.e., are dutiable) are left out of the programs. For example, just 1 percent of Bangladesh’s dutiable exports to the United States and 4 percent of Pakistan’s are eligible for GSP. Although regional preference programs tend to have more generous coverage, they sometimes feature “caps” on the amount of imports that can enter duty-free, which may significantly limit market access. Imports subject to caps under AGOA include certain meat products, a large number of dairy products, many sugar products, chocolate, a range of prepared food products, certain tobacco products, and groundnuts (peanuts), the latter being of particular importance to some African countries. The second trade-off is related and involves deciding which developing countries can enjoy particular preferential benefits. A few LDCs in Asia are not included in the U.S. regional preference programs, although they are eligible for GSP-LDC benefits. Two of these countries—Bangladesh and Cambodia—have become major exporters of apparel to the United States and have complained about the lack of duty-free access for their goods. African private-sector spokesmen have raised concerns that giving preferential access to Bangladesh and Cambodia for apparel might endanger the nascent African apparel export industry that has grown up under AGOA. Certain U.S. industries have joined African nations in opposing the idea of extending duty-free access for apparel from these countries, arguing these nations are already so competitive in exporting to the United States that in combination they surpass U.S. FTA partners Mexico and CAFTA, as well as the Andean/AGOA regions, which are the major export market for U.S. producers of textiles. This same trade-off involves decisions regarding the graduation of countries or products from the programs. It relates to the original intention that preference programs would confer temporary trade advantages on particular developing countries, which would eventually become unnecessary as countries became more competitive. Specifically, the GSP program has mechanisms to limit duty-free benefits by “graduating” countries that are no longer considered to need preferential treatment, based on income and competitiveness criteria. Since 1989, 28 countries have been graduated from GSP, mainly as a result of “mandatory” graduation criteria such as high income status or joining the European Union. Five countries in the Central American and Caribbean region were recently removed from GSP and CBI/CBTPA when they entered free trade agreements with the United States. In the GSP program, the United States also pursues an approach of ending duty-free access for individual products from a given country by means of import ceilings—Competitive Needs Limitations (CNL). Over one-third of the trade from GSP beneficiaries—$13 billion in imports in 2006—is no longer eligible for preferences because countries have exceeded CNL ceilings for those products. Although the intent of country and product graduation is to focus benefits on those countries most in need of the competitive margin preferences provide, some U.S. and beneficiary country officials observe that remaining GSP beneficiaries will not necessarily profit from another country’s loss of preference benefits. We repeatedly heard concerns that China would be most likely to gain U.S. imports as a result of a beneficiary’s loss of preferences. In 2007, the President revoked eight CNL waivers as a result of legislation passed in December 2006. Consequently, over $3.7 billion of trade in 2006 from six GSP beneficiaries—notably Brazil, India, and Thailand—lost duty-free treatment. Members of the business community raised concerns that revocation of these waivers would harm U.S. business interests while failing to provide more opportunities for poorer beneficiaries. GAO’s analysis showed that China and Hong Kong were the largest suppliers of the precious metal jewelry formerly eligible under GSP for duty-free import by India and Thailand; Canada, Mexico, Japan, and China were the leading competitors to Brazil’s motor parts. Policymakers face a third trade-off in setting the duration of preferential benefits in authorizing legislation. Preference beneficiaries and U.S. businesses that import from them agree that longer and more predictable renewal periods for program benefits are desirable. Private-sector and foreign government representatives have complained that short program renewal periods discourage longer-term productive investments that might be made to take advantage of preferences, such as factories or agribusiness ventures. Members of Congress have recognized this argument with respect to Africa and, in December 2006, Congress renewed AGOA’s third-country fabric provisions until 2012 and AGOA’s general provisions until 2015. However, some U.S. officials believe that periodic program expirations can be useful as leverage to encourage countries to act in accordance with U.S. interests such as global and bilateral trade liberalization. Furthermore, making preferences permanent may deepen resistance to U.S. calls for developing country recipients to lower barriers to trade in their own markets. Global and bilateral trade liberalization is a primary U.S. trade policy objective, based on the premise that increased trade flows will support economic growth for the United States and other countries. Spokesmen for countries that benefit from trade preferences have told us that any agreement reached under Doha round of global trade talks at the WTO must, at a minimum, provide a significant transition period to allow beneficiary countries to adjust to the loss of preferences. Preference programs have proliferated over time. In response to differing statutory requirements, agencies pursue different approaches to monitoring the various criteria set for programs. The result is a lack of systematic review and little to no reporting on impact. U.S. trade preferences have evolved into an increasingly complex array of programs. Congress generally considers these programs separately, partly because they have disparate termination dates. Many countries participate in more than one of these programs. Of the 137 countries and territories eligible for preference programs, as of January 1, 2007, 78 benefit from more than one program, and 34 were eligible for more than two programs. While there is overlap in various aspects of trade preference programs, each program is currently considered separately by Congress based on its distinct timetable and expiration date. Typically the focus has been on issues relevant to specific programs, such as counternarcotics cooperation efforts in the case of ATPA, or phasing out benefits for advanced developing countries in the case of GSP. As a result, until last year’s hearing before this committee, congressional deliberations have not provided for cross-programmatic consideration or oversight. The oversight difficulties associated with this array of preference programs and distinct timetables is compounded by different statutory review and reporting requirements for agencies. Reflecting the relevant statutory requirements, two different approaches—a petition process and periodic reviews—have evolved to monitor compliance with criteria set for various programs. We observed advantages to each approach, but individual program reviews appear disconnected and result in gaps. The petition-driven GSP reviews of country practices and product coverage have the advantage of adapting the programs to changing market conditions and the concerns of businesses, foreign governments, and others. However, the petition process can result in gaps in reviews of country compliance with the criteria for participation: From 2001 to 2006, three-quarters of the countries eligible only for GSP did not get examined at all for their conformity with eligibility criteria. Long periods passed between overall reviews of GSP. USTR completed an overall review of the GSP program in fall 2006. USTR completed the last general review of the program approximately 20 years earlier, in January 1987. The petition-driven review process also fails to systematically incorporate other ongoing monitoring efforts. For example, the lack of review under GSP provisions of any of the 26 preference beneficiary countries cited by USTR in 2006 for having problems related to the adequate and effective protection of U.S. intellectual property rights (IPR) makes it appear no linkage exists between GSP and ongoing monitoring of IPR protection abroad. The periodic reviews under the regional programs offer more timely and consistent evaluations of country performance against the criteria for participation, but may still miss important concerns. For example, 11 countries that are in regional programs were later subject of GSP complaints in the 2001 to 2006 period: Although AGOA has the most intensive evaluation of country performance against the criteria for participation, the GSP process later validated and resulted in further progress in resolving concerns with AGOA beneficiaries Swaziland and Uganda on labor issues. The African country of Equatorial Guinea has been reviewed for AGOA eligibility and found to be ineligible. Yet, Equatorial Guinea has not been subject to a GSP country practice petition or reviewed under GSP. As a result, Equatorial Guinea remains eligible for GSP and exported more than 90 percent of its $1.7 billion in exports duty free to the United States under that program in 2006. Many developing countries have expressed concern about their inability to take advantage of trade preferences because they lack the capacity to participate in international trade. Sub-Saharan Africa has been the primary focus of U.S. trade capacity-building efforts linked to the preference programs, with the United States allocating $394 million in fiscal year 2006 to that continent. Although AGOA authorizing legislation refers to trade capacity assistance, USTR officials noted that Congress has not appropriated funds specifically for that purpose. However, USTR has used the legislative language as leverage with U.S. agencies that have development assistance funding to target greater resources to trade capacity building. In other regions of the world, U.S. trade capacity building assistance has less linkage to preference programs. Separate reporting for the various preference programs makes it difficult to measure progress toward achieving the fundamental and shared goal of promoting economic development. Only one program (CBI) requires agencies to directly report on impact on the beneficiaries. Nevertheless, in response to statutory requirements, several government agencies report on certain economic aspects of the regional trade preference programs. However, different approaches are used, resulting in disparate analyses that are not readily comparable. Agencies do not regularly report on the economic development impact of GSP. Moreover, there is no evaluation of how trade preferences, as a whole, affect economic development in beneficiary countries. To address the concerns I have summarized today, in our March 2008 report, GAO recommended that USTR periodically review beneficiary countries that have not been considered under the GSP or regional programs. Additionally, we recommended that USTR should periodically convene relevant agencies to discuss the programs jointly. In response, USTR is undertaking two actions. First, USTR will conduct a review of the operation and administration of U.S. preference programs to explore practical steps that might improve existing communication and coordination across programs. Second, beginning with the Annual Report of the President of the United States on the Trade Agreements Program to be issued on March 1, 2009, the discussion of the operation of all U.S. trade preference programs will be consolidated into its own section. We also suggested that Congress should consider whether trade preference programs’ review and reporting requirements may be better integrated to facilitate evaluating progress in meeting shared economic development goals. We believe that the hearings held by the committee last year and again today are responsive to the need to consider these programs in an integrated fashion and are pleased to be able to contribute to this discussion. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or other members of the committee may have. For further information on this testimony, please contact Loren Yager at (202) 512-4347, or by e-mail at [email protected]. Juan Gobel, Assistant Director; Kim Frankena, Assistant Director; R. Gifford Howland; Karen Deans; Ernie Jackson; and Ken Bombara made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | U.S. trade preference programs promote economic development in poorer nations by providing duty-free export opportunities in the United States. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, two of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. This testimony describes the growth in preference program imports since 1992, identifies policy trade-offs concerning these programs, and evaluates the overall U.S. approach to preference programs. The testimony is based on two recent studies on trade preference programs, issued in September 2007 and March 2008. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six trade preference beneficiary countries. Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006, with most of this growth taking place since 2000. The increases from preference program countries reflect legislation passed by Congress in 1996 and 2000 that enhanced preference programs and added new eligible products. Preference programs give rise to three critical policy trade-offs. First, preferences entail a trade-off to the extent opportunities for beneficiary countries to export products duty free must be balanced against U.S. industry interests. Some products of importance to developing countries, notably agriculture and apparel, are ineligible by statute as a result. Secondly, certain developing countries have been given additional preferential benefits for such import-sensitive products under regional programs. But some of the poorest countries, outside targeted regions, do not qualify. Third, Congress faces a trade-off between longer program renewals, which may encourage investment and undermine support for the likely greater economic benefits of broader trade liberalization, a key U.S. goal, and shorter renewals, which may provide opportunities to leverage the programs to meet evolving priorities. Trade preference programs have proliferated over time, becoming more complex, but neither Congress nor the administration formally considers them as a whole. Responsive to their legal mandates, the Office of the U.S. Trade Representative (USTR) and other agencies use different approaches to monitor compliance with program criteria, resulting in disconnected review processes and gaps in addressing some countries and issues. Disparate reporting makes it difficult to determine progress on programs' contribution to economic development in beneficiary countries. |
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GAO remains one of the best investments in the federal government, and our dedicated staff continues to deliver high quality results. In FY 2013 alone, GAO provided services that spanned the broad range of federal programs and activities. We received requests for our work from 95 percent of the standing committees of Congress and almost two-thirds of their subcommittees. We reviewed a wide range of government programs and operations including those that are at high risk for fraud, waste, abuse, and mismanagement. GAO also reviewed agencies’ budgets as requested to help support congressional decision-making. Last year, our work yielded significant results across the government, including $51.5 billion in financial benefits—a return of about $100 for every dollar invested in GAO. Also, in FY 2013, we issued 709 reports and made 1,430 new recommendations. The findings of our work were often cited in House and Senate deliberations and committee reports to support congressional action, including improving federal programs on our High Risk list; addressing overlap, duplication, and fragmentation; and assessing defense, border security and immigration issues. Our findings also supported the Bipartisan Budget Act of 2013, in areas such as aviation security fees, unemployment insurance, improper payments to inmates, the strategic petroleum reserve, and the contractor compensation cap. Senior GAO officials also provided testimony 114 times before 60 Committees or Subcommittees on a wide range of issues that touched virtually all major federal agencies. A list of selected topics addressed is included in Appendix I. GAO’s findings and recommendations produce measurable financial benefits through Congressional action or agency implementation. Examples of FY 2013 financial benefits resulting from congressional or federal agency implementation of GAO recommendations include: $8.7 billion from reducing procurement quantities of the Joint Strike Fighter Program: DOD decreased near-term procurement quantities in three successive budget submissions to lessen concurrency and the associated cost risks in light of our numerous recommendations citing the F-35 Joint Strike Fighter program’s very aggressive and risky acquisition strategy, including substantial overlap among development, testing, and production activities. $2.6 billion from revising the approach for the Navy’s Next Generation Enterprise Network (NGEN) Acquisition: Our recommendations led Navy to revise its NGEN acquisition strategy— which was riskier and potentially costlier than other alternatives identified due to a higher number of contractual relationships—thus significantly reducing program costs between 2013 and 2017. $2.5 billion from eliminating seller-funded payment assistance for FHA-insured mortgages: The Department of Housing and Urban Development and Congress took steps to prohibit seller-funded down payment assistance, citing our findings that losses associated with those loans had substantially higher delinquency and insurance claim rates than similar loans without such assistance, and were contributing to the Federal Housing Administration’s deteriorating financial performance. $2.3 billion from consolidating U.S. Forces stationed in Europe: DOD removed two brigade combat teams and support units from Europe, allowing it to further consolidate and close facilities, based in part on our work showing significant costs related to maintaining permanent Army forces in Europe and our recommendations that DOD identify alternatives that might lead to savings. $1.3 billion through improved tax compliance: Our recommendations on the use of information reporting to reduce the tax gap contributed to legislation requiring banks and others to report income that merchants receive through credit cards, third-party networks, and other means to help IRS verify information reported on merchants’ income tax returns. The estimated increased revenue through improved tax compliance is expected over the provision’s first 3 fiscal years. GAO has generated recommendations that save resources, increase government revenue, improve the accountability, operations, and services of government agencies, increase the effectiveness of federal spending as well as provide other benefits. Since FY 2003, GAO’s work has resulted in substantial financial and other benefits for the American people, including: over ½ trillion dollars in financial benefits; about 14,500 program and operational benefits that helped to change laws, improve public services, and promote sound management throughout government; and about 12,000 reports, testimony, and other GAO products that included over 22,000 recommendations. In FY 2013, GAO also contributed to 1,314 program and operational benefits that helped to change laws, improve public services, and promote sound management throughout government. Thirty six percent of these benefits are related to business process and management, 31 percent are related to public safety and security, 17 percent are related to program efficiency and effectiveness, 8 percent are related to acquisition and contract management, 5 percent are related to public insurance and benefits, and 3 percent are related to tax law administration. Examples include: enhancing coordination between DOD and the Social Security Administration (SSA) on the more timely delivery of military medical records through electronic transfer; improving Veterans Affairs (VA) oversight of its medical equipment and supply purchasing; increasing collaboration between the Army and Veterans Affairs through a joint working group to improve management of military cemeteries and help eliminate burial errors and other past problems; updating Federal Emergency Management Administration (FEMA) National Flood Insurance Program contract monitoring policies to reduce the likelihood that contractor performance problems would go unnoticed; and establishing National Oceanic and Atmospheric Administration policies outlining the processes, roles and responsibilities for transitioning tsunami research into operations at tsunami warning centers. In FY 2013 GAO issued its third annual report on overlap, duplication, and fragmentation. In it, we identified 31 new areas where agencies may be able to achieve greater efficiency or effectiveness. Within these 31 areas, we identified 81 actions that the executive branch and Congress could take to reduce fragmentation, overlap, and duplication, as well as other cost savings and revenue enhancement opportunities. This work identifies opportunities for the federal government to save billions of dollars. We also maintain a scorecard and action tracker on our external website where Congress, federal agencies, and the public can monitor progress in addressing our findings. Federal agencies and Congress have made some progress in addressing the 131 areas we identified and taking the 300 actions that we recommended in our 2011 and 2012 reports. In February 2013 GAO issued the biennial update of our High Risk report, which focuses attention on government operations that are at high risk of fraud, waste, abuse, and mismanagement, or need transformation to address economy, efficiency, or effectiveness challenges. This report, which will be updated in 2015, offers solutions to 30 identified high-risk problems and the potential to save billions of dollars, improve service to the public, and strengthen the performance and accountability of the U.S. government. Our 2013 High Risk work produced 164 reports, 35 testimonies, $17 billion in financial benefits, and 411 program and operational benefits. The major cross-cutting High Risk program areas identified as of September 2013 range from transforming DOD program management and managing federal contracting more effectively, to assessing the efficiency and effectiveness of tax law administration and modernizing and safeguarding insurance and benefit programs. The complete list of high-risk areas is shown on Appendix II. Details on each high risk area can be found at http://www.gao.gov/highrisk/overview. GAO’s FY 2014 budget request sought statutory authority for a new electronic docketing system to be funded by a filing fee collected from companies filing bid protests. The sole purpose of the filing fee would be to offset the cost of developing, implementing, and maintaining the system. We appreciate that the Consolidated Appropriations Act, 2014, directed GAO to develop an electronic filing and document dissemination system under which persons may electronically file bid protests and documents may be electronically disseminated to the parties. GAO is making progress in establishing the electronic protest docketing system. We have convened an interdisciplinary team of experts within GAO to examine matters such as technical requirements, the potential for commercially available systems, fee structure, cost-benefit analysis, and outreach to stakeholders, including representatives from the small business community. GAO will be reporting regularly to the House and Senate Committees on Appropriations on its progress in implementing the system. In September 2013, GAO launched the Watchdog website, which provides information exclusively to Members and congressional staff through the House and Senate intranets. The new site is designed to provide a more interactive interface for Members and their staff to request our assistance and to access our ongoing work. In addition, Watchdog can help users quickly find GAO’s issued reports and legal decisions as well as key contact information. In December 2013, Members and their staff were invited to comment on our draft Strategic Plan for Serving Congress in FYs 2014-2019. The draft plan was issued in February 2014 and outlines our proposed goals and strategies for supporting Congress’s top priorities. Our strategic plan framework (Appendix III) summarizes the global trends, as well as the strategic goals and objectives that guide our work. GAO’s strategic goals and objectives are shown in Figure 1. The draft strategic plan also summarizes the trends shaping the United States and its place in the world. The plan reflects the areas of work we plan to undertake, including science and technology, weapons systems, the environment, and energy. We also will increase collaboration with other national audit offices to get a better handle on global issues that directly affect the United States, including international financial markets; food safety; and medical and pharmaceutical products. These trends include: U.S. National Security Interests; Fiscal Sustainability and Challenges; Global Interdependence and Multinational Cooperation; Science and Technology; Communication Networks and Information Technology; Shifting Roles in Governance and Government; and Demographic and Societal Changes. In the upcoming decade, for example, the US will face demographic changes that will have significant fiscal impacts both on the federal budget and the economy. The number of baby boomers turning 65 is projected to grow from an average of about 7,600 per day in 2011, to more than 11,600 per day in 2025, driving spending for major health and retirement programs. To ensure the updated strategic plan reflects the needs of Congress and the nation, we have solicited comments from stakeholders in addition to Congress, including GAO advisory entities, the Congressional Budget Office, and the Congressional Research Service. To manage our congressional workload, we continue to take steps to ensure our work supports congressional legislative and oversight priorities and focuses on areas where there is the greatest potential for results such as cost savings and improved government performance. Ways that we actively work with congressional committees in advance of new statutory mandates include 1) identifying mandates real time as bills are introduced; 2) participating in ongoing discussions with congressional staff; and 3) collaborating to ensure that the work is properly scoped and is consistent with the committee’s highest priorities. In FY 2013, 35 percent of our audit resources were devoted to mandates and 61 percent to congressional requests. I have met with the chairs and ranking members of many of the standing committees and their subcommittees to hear firsthand feedback on our performance, as well as highlight the need to prioritize requests for our services to maximize the return on investment. GAO also appreciates Congress’s assistance in repealing or revising statutory mandates that are either outdated or need to be revised. This helps streamline GAO’s workload and ensure we are better able to meet current congressional priorities. During the second session of the 112th Congress, based on our input, 16 of GAO’s mandated reporting requirements were revised or repealed because over time they had lost relevance or usefulness. In addition, GAO worked with responsible committees to have 6 more mandates repealed or revised as part of the 2014 National Defense Authorization Act. GAO has identified 11 additional mandates for revision or repeal and is currently working with the appropriate committees to implement these changes. For example, our request includes language to repeal a requirement for GAO to conduct bimonthly reviews of state and local use of Recovery Act funds. As the vast majority of Recovery Act funds have been spent, GAO’s reviews in this area are providing diminishing returns for Congress. GAO is seeking authority to establish a Center for Audit Excellence to improve domestic and international auditing capabilities. The Center also will provide an important tool for promoting good governance, transparency and accountability. There is a worldwide demand for an organization with GAO’s expertise and stature to assume a greater leadership role in developing institutional capacity in other audit offices and provide training and technical assistance throughout the domestic and international auditing communities. The proposed Center would operate on a fee-basis, generating revenue to sustain its ongoing operation, including the cost of personnel and instructors. The Center would be primarily staffed with retired GAO and other auditors, and thus, would not detract from or impact the service GAO provides to Congress. In a similar vein, to provide staff from other federal agencies with developmental experiences, GAO is requesting authority to accept staff from other agencies on a non-reimbursable basis, who can learn about GAO’s work. This would allow people to develop expertise and gain experience that will enhance their work at their own agencies. We take great pride in reporting that we continue to be recognized as an employer of choice, and have been consistently ranked near the top on “best places to work” lists. In 2013, we ranked third overall among mid- sized federal agencies on the Partnership for Public Service’s “Best Places to Work” list, and again ranked number one in our support of diversity. Also, in November 2013, Washingtonian Magazine named us as one of the “50 Great Places to Work” in the Washington, D.C. region among public or private entities. In addition, earlier this year, O.C. Tanner, a company that develops employee recognition programs, cited us in its article, “Top 10 Coolest Companies to Work for in Washington, D.C.” Our management continues to work with our union (IFPTE, Local 1921), the Employee Advisory Council, and the Diversity Advisory Council to make GAO a preferred place to work. GAO’s FY 2015 budget request will preserve staff capacity and continue critical infrastructure investments. Offsetting receipts and reimbursements primarily from program and financial audits and rental income totaling $30.9 million are expected in FY 2015. The requested resources provide the funds necessary to ensure that GAO can meet the highest priority needs of Congress and produce results to help the federal government deal effectively with its serious fiscal and other challenges. A summary of GAO’s appropriations for our FY 2010 baseline and FYs 2013 to 2015 is shown in Figure 2. The requested funding supports a staffing level of 2,945 FTEs, and provides funding for mandatory pay costs, staff recognition and benefits programs, and activities to support congressional engagements and operations. These funds are essential to ensure GAO can address succession planning challenges, provide staff meaningful benefits and appropriate resources, and compete with other agencies, nonprofit institutions, and private firms who offer these benefits to the talent GAO seeks. In order to address the priorities of Congress, GAO needs a talented, diverse, high-performing, knowledgeable workforce. However, a significant proportion of our employees are currently retirement eligible, including 34 percent of our executive leadership and 21 percent of our supervisory analysts. Therefore, workforce and succession planning remain a priority for GAO. Moreover, for the first time in several years our budget allows us to replenish the much needed pipeline of entry level and experienced analysts to meet future workload challenges. In FY 2014, through a targeted recruiting GAO plans to hire entry-level staff and student interns, boosting our staff capacity for the first time in 3 years to 2,945 FTE. This will allow GAO to reverse the downward trend in our FTEs and achieve some progress in reaching our optimal staffing level of 3,250 FTE, and develop a talent pool for the future. Our FY 2015 budget request seeks funding to maintain the 2,945 FTE level. In FY 2015, pending final OPM guidance, we also plan to implement a phased retirement program to incentivize potential retirement eligible staff to remain with GAO and assist in mentoring and sharing knowledge with staff. Efforts to address challenges related to GAO’s internal operations primarily relate to our engagement efficiency, information technology and building infrastructure needs. To better serve Congress and the public, we expanded our presence in digital and social media, releasing GAO iPhone and Android applications, and launching streaming video web chats with the public. During the past year, 7,600 additional people began receiving our reports and legal decisions through our Twitter feed. More than 26,600 people now get our reports, testimonies, and legal decisions daily on Twitter. GAO remains focused on improving the efficiency of our engagements through streamlining or standardizing processes without sacrificing quality. In FYs 2012 and 2013, we continued our improvements in this area. For example, with active involvement from GAO’s managing directors, we identified changes to key steps and decision points in our engagement process and now have a revised engagement process that we began implementing on a pilot basis in January 2014. We also piloted and revised a tool to help teams better estimate expected staff days required for engagements. In FY 2014, we plan to implement a series of process changes that will transform the management of engagements, the use of resources, and message communication. More Efficient Content Creation, Review, and Publication GAO will strive to dramatically improve the efficiency of our content creation and management processes by standardizing, automating, and streamlining the currently cumbersome and manually intensive processes for creating, fact-checking, and publishing GAO products. In FY 2014, we plan to request proposals to acquire a technical solution and phase implementation in FYs 2014 and 2015. The proposed system will automate document routing and approvals, incorporate management and quality assurance steps, and generate required documentation. To ensure our message is available to both our clients and the public, the proposed system capability will also enable GAO to routinely publish content on GAO.gov, GAO’s mobile site, and various social media platforms. Greater Transparency of Engagement Information To promote transparency, increase management capabilities, and reduce duplicate data entry and costs, in FY 2014 GAO will begin implementing a modernized, one-stop engagement management system. This system automates key business rules and decision points, improves resource management, eliminates rework, and provides increased visibility for all participants. In FY 2015, we will retire legacy databases as the new system becomes fully operational. The FY 2015 budget also provides funds to maintain our information technology (IT) systems, which are a critical element in our goal to maintain efficient and effective business operations and to provide the data needed to inform timely management decisions. Improvements to our aging IT infrastructure will allow GAO to further streamline business operations, reduce redundant efforts, increase staff efficiency and productivity, improve access to information, and enhance our technology infrastructure to support an array of engagement management, human capital, and financial management systems. GAO also plans to continue upgrading aging building systems to ensure more efficient operations and security. To support these requirements our FY 2015 budget request includes resources to: begin upgrading the heating, ventilation, and air conditioning system to increase energy efficiency and reliability; repair items identified in our long-range asset management plan, such as the water heater, chiller plant, and cooling fans; enhance continuity planning and emergency preparedness address bomb blast impact mitigation efforts. In conclusion, GAO values the opportunity to provide Congress and the nation with timely, insightful analysis. The FY 2015 budget requests the resources to ensure that we can continue to address the highest priorities of Congress. Our request seeks an increase to maintain our staffing level and provide employees with the appropriate resources and support needed to effectively serve Congress. The funding level will also allow us to continue efforts to promote operational efficiency, and begin addressing long-deferred investments and maintenance. This concludes my prepared statement. I appreciate, as always, your continued support and careful consideration of our budget. I look forward to discussing our FY 2015 request with you. Limiting the Federal Government’s Fiscal Exposure by Better Managing Climate Change Risks (new) Management of Federal Oil and Gas Resources Modernizing the U.S. Financial Regulatory System and Federal Role in Housing Finance Restructuring the U.S. Postal Service to Achieve Sustainable Financial Viability Funding the Nation’s Surface Transportation System Strategic Human Capital Management Transforming DOD Program Management DOD Approach to Business Transformation DOD Business Systems Modernization DOD Support Infrastructure Management DOD Financial Management DOD Supply Chain Management DOD Weapon Systems Acquisition Ensuring Public Safety and Security Mitigating Gaps in Weather Satellite Data (new) Appendix III: GAO’s Strategic Plan Framework 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. | GAO's mission is to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the benefit of the American people. GAO provides nonpartisan, objective, and reliable information to Congress, federal agencies, and to the public and recommends improvements, when appropriate, across the full breadth and scope of the federal government's responsibilities. GAO's work supports a broad range of interests throughout Congress. In FY 2013, GAO received requests for our work from 95 percent of the standing committees of Congress and almost two-thirds of their subcommittees. Additionally, senior GAO officials testified at 114 hearings on national and international issues, before 60 committees and subcommittees that touch on virtually all major Federal Agencies. GAO remains one of the best investments in the federal government, and GAO's dedicated staff continues to deliver high quality results. In FY 2013 alone, GAO's work yielded $51.5 billion in financial benefits--a return of about $100 for every dollar invested in GAO. Since FY 2003, GAO's work has resulted in: over 1/2 trillion dollars in financial benefits; and about 14,500 program and operational benefits that helped to change laws, improve public services, and promote sound management throughout government. GAO is requesting a budget of $525.1 million to preserve its staff capacity and continue critical information technology and building infrastructure investments. GAO's fiscal year (FY) 2015 budget request of $525.1 million seeks an increase of 3.9 percent to maintain staff capacity as well as continue necessary maintenance and improvements to our information technology (IT) and building infrastructure. Additionally, receipts and reimbursements, primarily from program and financial audits, and rental income, totaling $30.9 million are expected in FY 2015. GAO recently issued our draft Strategic Plan for Serving Congress in FYs 2014-2019. The plan outlines our proposed goals and strategies for supporting Congress's top priority. I also have met with the Chairs and Ranking Members of many of the standing committees and their subcommittees to hear firsthand feedback on our performance, as well as prioritize requests for our services to maximize the return on investment. In order to address Congressional priorities, and fulfill GAO's mission, a talented, diverse, high-performing, knowledgeable workforce is essential. Workforce and succession planning remain a priority for GAO. A significant proportion of our employees are currently retirement eligible, including 34 percent of our executive leadership and 21 percent of our supervisory analysts. In 2014, through a targeted recruiting strategy to address critical skills gaps, GAO plans to boost our employment level for the first time in 3 years to 2,945 Full Time Equivalents (FTE). The requested FY 2015 funding level will preserve strides planned for FY 2014 to increase our staff capacity. In conjunction with the ongoing recruiting efforts and planning, we will revive our intern program and hire and train an increased number of entry level employees. This will reverse the downward staffing trajectory, develop a talented cadre of analyst and leaders for the future, achieve progress in reaching an optimal FTE level of 3,250 FTE, and assist GAO in meeting the high priority needs of Congress. We also take great pride in reporting that we continue to be recognized as an employer of choice, and have been consistently ranked near the top on "best places to work" lists. Improvements to our aging IT infrastructure will allow GAO to further streamline business operations, increase staff efficiency and productivity, as well as improve access to information. Planned investments in IT will address deferred upgrades and enhance our technology infrastructure to support an array of engagement management, human capital, and financial management systems. We also plan to continue upgrading aging building systems to ensure more efficient operations and security. Areas of focus include, increasing the energy efficiency and reliability of the heating, ventilation, and air conditioning system; enhancing continuity planning and emergency preparedness capabilities; and addressing bomb blast impact mitigation efforts |
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VA provides health care services nationwide through a direct delivery system of 172 hospitals, 365 outpatient clinics, and 128 nursing homes. In addition to operating its own nursing homes, VA pays for care provided to veterans by community and state veterans’ nursing homes. VA’s goal is to have 40 percent of those veterans needing VA assistance receive care through contracts with community nursing homes, 30 percent through agreements with state homes, and 30 percent in VA nursing homes. VA has 1,595 hospital beds and 600 nursing home beds in Central Florida that veterans in Orlando and Brevard County may use. These beds are located at VA medical centers in Gainesville, Tampa, and Bay Pines and serve a geographic area commonly referred to as Central Florida. VA also operates outpatient clinics in Orlando and Daytona Beach. The VA hospital in Tampa is about 125 miles west of Brevard and 80 miles west of Orlando. The VA hospital in Gainesville is about 175 miles northwest of Brevard and 109 miles northwest of Orlando. The VA hospital in Bay Pines is about 30 miles west of Tampa. In addition, VA has hospitals and nursing homes in Lake City, Miami, and West Palm Beach, which have a total of 1,367 hospital beds and 480 nursing home beds. VA also operates several outpatient clinics. These facilities, along with those in Central Florida, comprise VA’s Florida facilities. Figure 1 shows the locations of the facilities in Florida, including the former Orlando Naval Hospital and the planned Brevard Hospital. VA’s Under Secretary for Health plans to restructure the Veterans Health Administration and fundamentally change the way that veterans’ health care is provided. His plans include increasing ambulatory care access points, emphasizing primary care, decentralizing decisionmaking, and integrating the delivery assets to provide an interdependent, interlocking system of care. The structural vehicle to do this will be the Veterans Integrated Service Network. The basic budgetary and planning units of health care delivery shifts from individual medical centers to integrated service networks providing for populations of veteran beneficiaries in defined geographical areas. The network director is responsible for consolidating and realigning services within the network. The integrated network for Florida includes all six VA medical centers in Florida plus the medical center in San Juan, Puerto Rico. VA has two basic goals for serving Central Florida veterans. First, VA plans to provide hospital beds comparable to the national level of availability to serve the health care needs of veterans. Second, VA expects to improve the geographic accessibility of VA hospital beds for as many veterans as possible. VA uses an Integrated Planning Model when developing strategic management and operational plans, including construction. VA’s model is primarily driven by three variables to estimate veterans’ future use of VA hospital beds. These variables include veteran population by age groups, average lengths of hospital stays for selected medical services (such as surgery or psychiatry), and the number of patients treated in the selected medical services. In 1982, VA planners conducted a study of the health care needs of Florida veterans, including the projected future use of VA facilities through 1995. In 1991, VA planners updated this study and determined that 710 hospital and nursing home beds were needed in six counties, commonly referred to as East Central Florida. The planners concluded that these beds were needed to make VA health care more geographically accessible to veterans in East Central Florida. VA developed plans to build a 470-bed hospital and 120-bed nursing home in Brevard County and a 120-bed nursing home and outpatient clinic in Orlando. In July 1993, the Defense Base Closure and Realignment Commission recommended closing the Orlando Naval Hospital. In May 1994, the Orlando Naval Training Center Reuse Commission accepted VA’s proposal to convert the 153-bed Naval Hospital into a nursing home and outpatient clinic after the Navy moved out in June 1995. VA announced that this conversion would be done in lieu of its plan to build a new nursing home and clinic. VA estimates that it will spend $1.1 billion over the next 10 years to build and operate the new Brevard Hospital and the nursing homes in Brevard and Orlando. At VA’s request, the Congress provided VA $14 million in fiscal year 1995 to renovate the former Naval Hospital and $17.2 million to develop preliminary designs for a new 470-bed hospital and 120-bed nursing home in Brevard County. VA has requested $154.7 million in its fiscal year 1996 budget to construct the new hospital. VA estimates that it will need $115 million a year to operate the facilities in Brevard and Orlando. Veterans’ use of the 1,595 beds in the three VA hospitals serving Central Florida has decreased over the last 4 years. In 1994, veterans used 1,060 beds a day on average. They used 271 beds in the Gainesville hospital compared with almost 400 beds in both the Tampa and Bay Pines hospitals. Appendix II describes veterans’ use of VA hospitals in Central Florida in more detail. In contrast, veterans’ use of VA nursing home care has increased gradually over the last 4 years. In 1994, veterans occupied about 867 beds a day on average. VA provided about 61.5 percent of this care in its homes; it contracted with community homes for 34 percent and a state home for 4.5 percent. Appendix III describes veterans’ use of VA nursing home care in Central Florida in more detail. Community nursing homes in East Central Florida appear to be able to provide the 240 beds that VA plans to construct. There are 60 nursing homes in East Central Florida that are willing to supply beds for veterans’ use or may be willing to supply beds if contacted by VA. These homes operate 7,176 beds, including 320 beds that were empty at the time of VA’s 1993 survey. VA determined that these 60 homes would be able to provide only 105 beds based on two questionable assumptions concerning bed availability. First, VA assumed that a nursing home was fully occupied if it had an occupancy rate of 95 percent or higher. Second, VA assumed that beds occupied at the time of its survey would not be available for VA’s use. VA’s assumption that community homes are fully occupied at 95 percent of capacity seems inappropriate because VA routinely contracts with homes that have occupancy rates of 95 percent or higher. For example, VA had contracts with 22 homes in East Central Florida, 17 of which had occupancy rates of 95 percent or higher. Similarly, VA had contracts with 86 homes in other parts of Central Florida and 56 of these homes had occupancy rates of 95 percent or higher. Social workers at the three Central Florida hospitals told us that they were able to place veterans in these homes. By assuming that community homes are fully occupied at 95 percent of capacity, VA determined that only 105 of the 320 empty beds in East Central Florida would be available for its use. Of the 215 empty beds that VA excluded, 86 were in the 22 homes with which VA already had contracts. VA’s assumption that occupied beds will not be available appears inappropriate because occupied beds can be expected to turn over frequently during each year and VA should have a reasonable chance to place veterans in some of these beds. The nursing homes in East Central Florida had 6,856 occupied beds at the time of VA’s survey that were excluded from further consideration. Nationwide, about one-half of the patients admitted to community nursing homes stayed fewer than 83 days, according to the latest government survey of nursing homes. Moreover, only about one-fourth stayed longer than 12 months. Community nursing home beds appear to be available at prices that are below VA’s costs to construct and operate the 120 beds proposed at the Brevard and Orlando sites. Nationwide, VA’s contract costs average $106 a day for a bed. By contrast, VA’s costs are estimated to be $207 a day for a VA-constructed and -operated bed. These costs do not include the depreciation charges associated with the costs of initially constructing the VA nursing homes. VA also has some flexibility in placing veterans in community nursing homes in Florida. If veterans’ needs exceed the capacity of homes in East Central Florida, VA also has available beds in 204 community nursing homes in other parts of Central Florida. For example, VA had contracts with 86 homes that had 525 empty beds. Also, 118 other homes had empty beds that VA had determined to be willing and able or who may be willing to serve veterans if contacted by VA. In our view, it is reasonable to consider these community nursing homes as part of the available bed supply. Many of the veterans using the proposed Brevard hospital will likely reside in parts of Central Florida other than the six East Central Florida counties and, thus, would be placed in homes closer to their residences. Appendix IV describes VA’s assessment of its future need for nursing homes and its survey of community nursing homes in greater detail. VA has a large supply of unused beds in its three hospitals now serving Central Florida veterans and the number of unused beds is expected to increase substantially. Moreover, VA’s use of community nursing homes, as previously discussed, will allow VA to add the former Orlando Naval Hospital’s beds to this supply of available hospital beds. To achieve the most prudent and economical use of resources, VA’s hospital planning should be guided by two objectives. First, VA should make the best use of existing capacity before constructing new space. Second, VA should design new construction to meet veterans’ expected use over a facility’s useful life as efficiently and effectively as possible. Toward this end, it appears that converting unused beds to psychiatric care and using the bed capacity in the former Naval Hospital provide a viable lower-cost option to constructing a new hospital. Veterans use of VA beds in its three Central Florida hospitals has declined steadily over the last 4 years. The hospitals have a large supply of unused beds, totaling about 535 daily. Each hospital has more than 160 unused beds. In addition, these hospitals reduced their total bed capacity from 1,858 to 1,595 by removing 263 beds from service and converting the space to other uses, primarily expanded outpatient services such as ambulatory surgery or dialysis. From fiscal year 1991 to 1994, the veteran population in Central Florida was stable but VA projects the population to decrease steadily through fiscal year 2010. An estimated 1.1 million veterans lived in the Central Florida service area in 1994; about 284,000 lived in East Central Florida.By 2010, VA estimates that the veteran population will decrease by 17 percent. Figure 2 shows the expected decrease in veterans’ population in Central Florida. Veterans’ use of beds in VA’s three hospitals in Central Florida is expected to continue declining, due in large part to the decreasing veteran population. VA’s 1994 Integrated Planning Model estimates that veterans will use 350 fewer beds between 1995 and 2010. Thus, the three existing hospitals’ supply of unused beds is expected to increase, providing additional surplus capacity that could be converted to provide the psychiatric care VA plans to construct in the proposed Brevard hospital. Veterans now receive psychiatric care at all VA hospitals in Florida. The three hospitals in Central Florida operated a total of 359 psychiatric beds in fiscal year 1994. Of these, about 94 were unused. Also, the other two VA hospitals serving Florida veterans operated an additional 228 psychiatric beds, of which 39 were unused. In addition, the VA hospital in West Palm Beach added 60 more psychiatric beds for veterans’ use. These hospitals provide a range of psychiatric services. For example, each hospital initially diagnoses and treats veterans so that their conditions become stabilized. Available services include general psychiatric care (186 beds), geropsychiatric care (36 beds), and substance abuse rehabilitation (90 beds). Most of the psychiatric services are short-term with lengths of stay of fewer than 30 to 90 days. The types of inpatient psychiatric care planned for Brevard appear comparable with care now provided at these hospitals or with care being considered for implementation at the facilities. For example, VA’s psychiatric design consultant for the Brevard hospital told us that most services would be for acute diagnostic stays of fewer than 30 days and that stays would rarely exceed 90 days. Services are to include substance abuse and posttraumatic stress disorder. Moreover, he stated that veterans in need of further care would be referred to nursing homes with geropsychiatric capabilities or to other facilities. VA’s existing hospitals may be more geographically accessible to veterans, given that VA expects certain veterans from all parts of Florida to receive psychiatric care at Brevard. Using VA’s 1994 Integrated Planning Model, we estimated that veterans in the six East Central Florida counties would account for 41 percent of the expected use (95 beds) and 59 percent of the use (135 beds) would be generated by veterans from other parts of Florida. Therefore, the majority of expected psychiatric patients apparently reside closer to existing VA hospitals than they do to the proposed Brevard hospital. Figure 3 shows the locations of existing VA hospitals and the percentage of Brevard’s 230 psychiatric beds expected to be used by veterans throughout Florida. Appendix V provides additional information on veterans’ use of psychiatric beds in VA’s existing Florida hospitals and the types of psychiatric care that VA plans to provide in its proposed hospital in Brevard County. The Orlando Naval Hospital has served military beneficiaries for over 20 years. The hospital has 153 beds that provide a range of medical services. On its latest survey, the Joint Commission on the Accreditation of Hospital Organizations awarded the Naval Hospital accreditation with commendation. The hospital consists of an outpatient clinic with a large number of services on the ground floor and three floors of hospital beds. Figure 4 depicts the former Naval Hospital. The former Naval Hospital’s 153 beds could be used to meet VA’s service goals for veterans in East Central Florida. Using VA’s 1994 Integrated Planning Model, we estimated that East Central Florida veterans could be expected to use 148 medical and surgical beds in 2005. For our estimate, we applied veterans’ use rates for the three hospitals in Central Florida to the veteran population in the six counties in East Central Florida, a methodology consistent with VA planning policy. This methodology assumes that East Central Florida veterans’ future use would be comparable with Central Florida veterans’ historical use. Using the former Naval Hospital’s beds would provide a significant opportunity for new users to access VA’s hospital beds. In 1994, about 1 percent of East Central Florida veterans received VA care either at VA hospitals or at community hospitals (at VA’s expense). These veterans used an estimated 80 beds a day, which leaves a sizable number of beds for new users. Of the 80, about 70 were in VA hospitals. East Central Florida veterans’ hospital use in fiscal year 2005 will not precisely equal the projected use based on Central Florida veterans’ historical use. If veterans’ use of the former Orlando Naval Hospital should exceed its capacity, veterans could be referred to one of the other Central Florida VA hospitals that have a large supply of unused beds. In general, this would appear to be a short-term situation, given the decreasing veteran population and VA’s shifting emphasis from inpatient to outpatient services. If veterans’ use is lower than estimated, there would be unused beds and VA could convert them to other uses, such as nursing home care. VA’s justification for the hospital in Brevard County is based on questionable work load assumptions that if unfulfilled could result in a large supply of unused beds. In addition, VA did not adequately consider the potentially significant effect that the decreasing veteran population may have on veterans’ long-term use. Nor did VA adequately consider the effect that this hospital will likely have on unused beds at existing VA and community hospitals in Central Florida. VA’s decision to build 470 medical, surgical, and psychiatric beds in the Brevard hospital is based on the assumption that East Central Florida veterans’ demand for care will equal veterans’ use of VA hospitals nationwide. By using national VA hospital use rates from its 1993 Integrated Planning Model, VA estimated that veterans in East Central Florida would use 360 beds in fiscal year 2005. VA added an additional 110 beds based on its decision that Brevard would be a statewide resource for psychiatric care. VA rarely uses national VA hospital use rates as a substitute for veterans’ local hospital use rates when projecting potential future hospital use. National VA hospital use rates are almost 50 percent higher than the rates at which Central Florida veterans use existing VA hospitals. For example, veterans’ estimated use would be 199 beds (148 medical and surgical and 51 psychiatric beds), based on Central Florida veterans’ past use of the three VA hospitals. VA asserts that East Central Florida veterans’ use will equal veterans’ national use because it assumes that Florida veterans’ past use was suppressed because of the lack of adequate resources in the state and the geographic inaccessibility of VA facilities. VA concluded that resources were inadequate based largely on a bed-availability analysis in which VA showed that the number of VA hospital beds available for Florida veterans was below the national average—about 1.40 beds per 1,000 Florida veterans compared with 2.02 beds per 1,000 veterans nationwide. We do not believe that this comparative analysis demonstrates that resources are inadequate. As previously discussed, there are over 500 unused beds in VA’s Central Florida hospitals and the hospitals have converted 263 beds for outpatient care and other uses. Also, VA hospitals in Central Florida do not have waiting lists. In addition, VA hospital officials told us that sometimes elective surgeries might have to be delayed or some veterans referred to other hospitals, but the veterans get the care they need. Finally, VA’s Central Florida hospitals reported providing or scheduling more discretionary veterans for hospital care in 1993 on average than other VA hospitals nationwide (see fig. II.3). These factors suggest that the availability of VA hospital beds may not be a key factor affecting veterans’ use of VA hospitals in Florida. In this regard, VA has not adequately considered other key factors that may explain lower use rates for Florida veterans. Without information on these factors, VA’s need to build a 470-bed hospital is uncertain. Among the factors that we believe are likely to have contributed to Florida VA hospitals’ lower utilization rates are differences among Florida veterans’ health status, economic status, and insurance coverage and those of veterans nationwide. For example, Florida has the third largest total Medicare population; about 40 percent of Florida veterans are eligible for Medicare, which affords them choices for selecting health care providers. In addition, the rate disparities may be attributable to differences in the availability of private sector health care among Florida and other states. For example, 15 percent of Florida’s Medicare beneficiaries are enrolled in health maintenance organizations; only four other states have a higher percentage. Such enrollment reduces or eliminates the cost differences (copayments) between VA and private providers. Also, the disparity may be related to differences in operating practices among VA’s hospitals in Florida and its hospitals in other states. For example, our visits to the three Central Florida hospitals suggest that these hospitals may be more aggressively adopting private sector efficiency initiatives, such as shifting inpatient care to lower-cost outpatient settings or shortening lengths of hospital stays by moving patients to alternative settings. The reliability of national use rates as an indicator of future bed use in Florida also seems to be undermined by the results of VA’s 1983 study of veterans’ bed needs in Florida. VA’s Final Report on Future Bed Need and Potential Sites for New VA Hospitals in Florida significantly overestimated the number of beds needed. At the time of its report, VA had 2,916 hospital beds in Florida. The report estimated that veterans would need 5,037 beds in VA hospitals in the state in 1995, an increase of 2,121 beds. By 1994, however, VA reported having 2,642 beds in Florida—274 fewer beds than were cited in VA’s report. Of the 2,642 beds, veterans used, on average, 1,722 beds a day in VA hospitals in Florida, leaving 920 beds unused. With the new 400-bed hospital in West Palm Beach, VA has a total of 3,042 hospital beds in Florida. Our review of the report has identified two factors that may help to explain this disparity. First, VA deviated from its policy of using local VA hospital utilization rates (for example, those for Florida), and instead used nationwide average utilization rates for VA hospitals to project the future need for hospital beds in Florida. Because the average VA national rates were higher than Florida’s rates, VA’s report contained bed estimates that were higher than they would have been if rates for Florida had been used. Second, VA’s report relied solely on historical use to estimate future use. However, changes in medical practice have occurred, such as reduced lengths of stay and shifts from inpatient to outpatient care. These and other changes, in the nation’s rapidly evolving health care delivery practices have contributed to a considerable reduction in hospital bed use. To achieve the increased utilization in VA’s report, Florida VA hospitals would have needed to serve a larger share of the veteran population than they previously did. In our view, the hospitals were unable to achieve the expected level of utilization growth, possibly because VA could not attract enough new veterans or the changing nature of medical care delivery may have reduced veterans’ need for hospital care. VA has evaluated the future use of its Brevard hospital by East Central Florida veterans through the year 2005, about 5 years after the Brevard hospital is expected to open. Using 2005 as the target planning year gives VA its highest estimate of future use. By using the year 2005 without any adjustments for the expected future decrease in veteran population and increased emphasis on outpatient care, VA has essentially assumed that hospital usage will remain fixed over the useful life of the hospital. This would require the hospital to attract an increasingly larger share of a decreasing veteran population that will be receiving outpatient care intended to keep patients out of the hospital. VA’s proposed hospital in Brevard can be expected to have a 25- to 45-year useful life, based on the operating experiences of other VA hospitals. Even if veterans’ use meets VA’s expectations in 2005, it seems likely, based on VA’s estimates, that the Brevard hospital will face a decreasing work load for most of its useful life. This would result in an increasing supply of unused beds, as is now being experienced by the three VA hospitals in Central Florida as well as others throughout the nation. If veterans’ use falls below VA’s expectations, the surplus of unused beds will be exacerbated. VA has not adequately evaluated the economic impact of shifting large numbers of veterans from private care and other VA hospitals to Brevard. As previously discussed, East Central Florida veterans used about 70 beds a day in VA hospitals during 1994. Thus, VA hospitals would appear to lose this work load because the veterans could be expected to use the Brevard hospital, which would be closer to their residence. Moreover, many new veterans will need to use the Brevard hospital in order to fill the remaining 400 beds. Because these veterans would likely use community hospitals in the absence of Brevard, the local hospitals may realize a comparable decrease in work load. Currently, these hospitals have over 2,300 unused beds, on average, with almost all 22 local hospitals reporting occupancy rates of 56 percent or lower. VA’s decision to convert the former Orlando Naval Hospital to a nursing home and build a new hospital in Brevard County was driven by its Integrated Planning Model data. VA’s plans, however, rely on several questionable assumptions concerning the future availability and use of hospital and nursing home beds in Central Florida. Foremost of these is VA’s assumption that its proposed hospital in Brevard County will serve almost twice the number of veteran users as are now served in existing VA hospitals in Central Florida. VA’s ability to attract such a large supply of new users appears uncertain, given the large supply of unused hospital beds in VA and private hospitals in Central Florida as well as the decreasing veteran population and the rapid shifting of medical care from inpatient to outpatient settings. Such uncertainties subject VA to the risk of spending federal dollars to build a hospital with a large supply of beds that may not be used in future years. VA’s use of lower-cost alternatives could meet its service delivery goals and would also avoid the unneeded expenditure of government resources. For example, using available beds at the former Orlando Naval Hospital and converting unused beds at existing VA hospitals for psychiatric or nursing home care will reduce the risk of large unused bed capacity at the proposed Brevard hospital, which appears likely because of expected decreases in the veteran population and VA’s increased reliance on outpatient care to serve veterans. Also, this approach appears consistent with VA’s new network planning strategy, in that it will help to maintain the viability of existing VA hospitals. Without such planning, the existing VA hospitals’ viability may be jeopardized by declining work loads associated with a shifting of veterans to the new Brevard hospital. We recommend that the Congress deny VA’s request for funds to construct a new hospital and nursing home in Brevard County, Florida. Instead, the Congress should direct the Secretary of Veterans Affairs to develop a lower-cost alternative that reflects a network planning strategy. In this regard, the Secretary should consider using available beds at the former Orlando Naval Hospital, converting unused medical and surgical beds at existing hospitals for psychiatric use, and purchasing care in community nursing homes when beds are unavailable in existing VA nursing homes. We obtained comments on a draft of this report from VA officials, including the Deputy Under Secretary for Health. The officials disagreed with our overall conclusion that there is a more prudent and economical way to achieve VA’s service delivery goals in Central Florida than building a new 470-bed hospital and 120-bed nursing home in Brevard County and converting the former Naval Hospital in Orlando to a nursing home. They stated that their planning efforts clearly documented the need for a new hospital in Brevard to provide access to care for a veteran population that currently does not have reasonable access and gave strong justification for additional nursing home beds in East Central Florida by the year 2005. VA specifically disagreed that it should be able to obtain 240 beds by contracting with community nursing homes. Rather, VA strongly contends that the beds will not be available. This difference of opinion revolves around the soundness of two key assumptions as well as concerns over the adequacy of VA’s survey of current and future community nursing home beds. As previously discussed, VA assumes that more than 6,856 beds will always be unavailable to VA because they were occupied at the time of VA’s survey and that 215 empty beds in homes will always be unavailable to VA because the homes have occupancy rates of 95 percent or higher. VA agreed that its survey had missed homes but argues that the 580 beds would have been unavailable because the homes had an occupancy rate of 95 percent or higher. On this basis, VA determined that it could obtain only 105 beds for veterans in community nursing homes. VA’s assertion does not appear sound given the large number of community nursing home beds in East Central Florida. At the time of its nursing home survey, VA was using about two-tenths of 1 percent of the 7,100 existing community beds. At issue is whether VA could increase its use to 3 to 4 percent (240 beds) of these beds. Our report clearly demonstrates that hundreds of beds in community nursing homes will become available during each year and that VA has a reasonable opportunity to secure needed nursing home beds for veterans. Should this demand exceed supply, our evidence suggests that it is likely that more community nursing homes will be built; thereby providing beds for veterans and nonveterans. VA assumed that it is the one responsible to build new nursing home bed capacity, rather than allowing the private sector to provide the beds as needed. VA agreed with us that occupied beds will turn over during a year, but VA asserts that such turnover will be infrequent. VA officials stated that patient stays in Florida nursing homes average 247 days a year. We believe that it is misleading to use an average length of stay when assessing nursing home turnover. This is because patients with long stays tend to skew the average. As previously discussed, about one-half of the patients admitted to community nursing homes stayed fewer then 83 days, according to the latest government survey of nursing homes. We used the median duration of nursing home stays because it represents one-half of all patients that used nursing homes. The study that we cited had reported an average length of stay of 401 days. VA stated that it excluded the 215 empty community nursing home beds because the maximum occupancy rate for efficient operation of a nursing home in VA and the private sector is 95 percent. The 60 nursing homes in East Central Florida had an average occupancy rate of 96 percent, and 50 had rates over 95 percent. Given the community nursing homes’ operating practices, it seems reasonable that VA would be able to place some veterans in these beds. Therefore, VA should not exclude such beds from its consideration when planning for nursing home care. These beds seem to be a resource that can be used by VA. VA also stated that its methodology adequately considered future construction of new community nursing homes. For East Central Florida, VA’s methodology for factoring in new community nursing home construction resulted in an increased use of 14 additional community nursing home beds. As discussed in our report, East Central Florida has 7 additional community nursing homes with a capacity of 900 beds that VA had not included in its survey. In addition, in 1994 the state of Florida approved for construction 1,546 additional community nursing home beds for East Central Florida. We do not believe that VA’s addition of 14 community nursing home beds adequately considers new community nursing home beds. VA disagreed that there was a lower-cost way to improve veterans’ access to VA inpatient care than to construct a new hospital in Brevard. VA expressed concern that we reached our conclusions based on misleading use of data. First, VA questioned our analysis of hospital bed use at the three existing hospitals in Central Florida and its usefulness in evaluating lower-cost alternatives to meet VA’s service goals in Central Florida. Second, VA questioned our use of data on unused beds in community hospitals. Third, VA questioned our assumption that unused beds in VA hospitals will increase over time. VA pointed out, and we agree, that providing VA hospital beds in East Central Florida would give veterans more reasonable access to VA inpatient care than now exists. VA stated that our references to unused beds in the three existing hospitals leave the impression that those hospitals are readily accessible to veterans in East Central Florida. It is not our intent to suggest that the three VA hospitals are readily accessible and we have added the distances between the hospitals and East Central Florida to the report. Rather, our analysis shows that there are beds available for East Central Florida veterans if they desire to use them. However, we intended to demonstrate that the former Orlando Naval hospital would give veterans more reasonable access to VA inpatient care than now exists. Moreover, our analysis shows that the availability of unused beds in the three existing VA hospitals, when used in conjunction with the former Naval Hospital, could substantially enhance the availability of inpatient care to East Central Florida veterans. Our assessment of veterans’ use of the existing VA hospitals in Central Florida was twofold. First, we examined veterans use of existing VA hospitals in Central Florida to have a basis for assessing the adequacy of VA’s projections of veterans’ future demand for hospital beds in East Central Florida. Historical use data for existing VA hospitals show that VA’s use of national rather than local use rates may greatly overestimate the potential use of the proposed hospital in Brevard. Second, we identified unused beds in VA’s existing Central Florida hospitals to determine the potential bed capacity that could be available for (1) referrals if demand exceeds the capacity of the planned hospital in Brevard or the former Orlando Naval Hospital or (2) conversion for other uses, such as psychiatric care. VA stated that it was unclear why we used a work load projection methodology focusing on three existing VA hospitals in Central Florida. VA asserts that our analysis was not focused on the same planning assumptions used by VA, which focused on East Central Florida demographics. We used VA’s work load projection methodology without adjustment. We did, however, apply different veteran utilization data to VA’s East Central Florida demographics; that is, we used historical use rates for three existing VA hospitals in Central Florida, while VA used historical VA hospital use rates for veterans nationwide. As our report shows, the number of beds projected based on national rates is about double the number of beds projected based on local rates. VA stated that we have overestimated the numbers of unused beds in existing VA hospitals. VA contends that there are 158 available unused beds rather than the 535 beds we cited. VA’s adjustment is based on (1) an occupancy rate of 85 percent, which it states is the maximum occupancy rate for operating an efficient hospital, and (2) 1,433 beds in-service at the three existing VA hospitals. While we recognize that using an 85-percent occupancy rate standard may provide a reasonable means of estimating unused beds, we believe that it should be applied to the hospital’s total bed capacity rather than to just those beds now in-service. In this regard, VA’s three hospitals had 162 beds out of service. Using VA’s suggested methodology, this would result in about 300 unused beds in the three hospitals rather than the 158 VA estimated. In any case, our assessment of unused beds was intended to determine whether beds would be available for referrals from Brevard or the former Orlando Naval Hospital or for conversion to other uses, such as psychiatric care. By either VA’s or our estimate, a significant number of beds appear to be available for those purposes. VA also questioned whether the number of unused beds will increase over time. VA stated that whether this will occur due to unresolved issues of health care and eligibility reform or VA’s initiatives to improve patient privacy and increase ambulatory care activities is not known. Our position that unused beds will increase is based on VA’s future bed use estimates derived from its 1994 Integrated Planning Model. We share VA’s concern about the potential effects of such outside factors on the accuracy of its bed projections. As discussed in our report, such uncertainties raise concerns about the usefulness of basing VA’s estimate of future bed needs solely on veterans’ historical use of VA facilities. VA also expressed concern that our estimate of 2,300 unused beds in local community hospitals was overstated for the same reasons as previously expressed for VA’s unused beds. VA also stated that these beds may not be totally suitable for its use. Our discussion of community beds was focused on the potential economic impact of VA adding more hospital beds in areas that appear to have excess beds and VA’s failure to consider such impact in its planning process. VA disagrees that “unused” beds at VA hospitals in Tampa, Bay Pines, and Gainesville, Florida, could be converted to meet estimated psychiatric bed needs. VA states that there are not enough beds in contiguous space available at these VA hospitals to meet the projected need of 230 psychiatric beds, which are proposed for inclusion in the Brevard facility. Second, VA states that the psychiatry programs planned at Brevard are not comparable to care now provided at existing Florida VA hospitals. VA has 10 years to convert beds at its existing hospitals in order to achieve projected use of 230 psychiatric beds proposed for Brevard in the year 2005. While we agree that there are not now 230 unused beds in contiguous space at any one hospital, more beds will become available if VA’s inpatient work load continues to decrease as it has over the last 4 years. We believe that VA has the flexibility to consolidate wards at each hospital to provide a portion of the 230 beds. This would appear to better meet veterans’ needs, because VA expects the veterans to travel from all over the state of Florida to use Brevard’s psychiatric beds. The existing VA hospitals provide some of the same services proposed for Brevard even though these services are not available as separate programs. In discussing these programs with the officials of the existing hospitals, we found that they were planning to introduce some of the programs planned for Brevard or believed that they could introduce them if resources were available. In addition, VA may not need to provide hospital beds to serve chronically mentally ill veterans. Three of the four programs designed for the chronically mentally ill (a total of 80 long-term care beds) are residential treatment programs. These residential psychiatric treatment programs may be on VA medical center grounds or on VA-owned, -rented, or -donated property in the community, according to VA’s manual for mental health programs; that is, this care is not considered to be hospital care. We are sending copies of this report to the Secretary of Veterans Affairs; the President of the Senate and the Speaker of the House of Representatives; the Senate and House Committees on Veterans’ Affairs; the Senate and House Committees on Appropriations; and other interested parties. We also will make copies available to others upon request. Please call me on (202) 512-7101 if you or your staff have any questions concerning this report. Contributors to this report are listed in appendix VI. Representative Bill McCollum asked us to examine VA’s acquisition of the former Orlando Naval Hospital and its intended use for this facility. More specifically, he questioned whether the conversion of the former Naval Hospital to a nursing home is the most economical and prudent use of resources. Also, he asked us to explore available options and, if possible, suggest a more prudent and economical way for VA to meet its service delivery goals for Florida veterans. We reviewed VA’s policies and procedures and discussed them with officials in VA’s headquarters and its southern region and Florida hospitals. We visited VA’s Central Florida facilities— in Tampa, Bay Pines, and Gainesville—and the former Orlando Naval Hospital and discussed operating procedures and practices with directors, associate directors, and their staff. We used VA’s data from various soures, such as its Summary of Medical Programs, bed availability reports, Integrated Planning Model, Distributed Population Planning Base, strategic management planning documents, Five Year Medical Facility Development Plans, budget submissions, annual reports, and medical center documents. We also reviewed several VA studies, including A Thirty Year Study of the Needs of Veterans in Florida, December 1982; Final Report on Future Bed Need and Potential Sites for New VA Hospitals in Florida, June 1983; Florida VA Health Care Plan, July 1991; East Central Florida Siting Options, September 1991; Psychiatric Program Needs in Florida, Results of a Comprehensive One-Day Survey, December 1992; and Study for Conversion of Orlando Naval Hospital to VA Satellite Outpatient Clinic and 120 Bed Nursing Home Care Unit, July 1993. To assess VA’s nursing home planning for Central Florida, we reviewed its planning methodology, assumptions, and data. We reviewed VA’s 1993 Community Nursing Home survey and VA’s nursing home directives and guidance. We interviewed VA’s nursing home planners in VA’s central office and its southern region. In addition, we interviewed chiefs of social work services at the VA hospitals in Tampa, Bay Pines, and Gainesville and reviewed their nursing home data. We obtained nursing home cost data from the southern region and other VA documents. In addition, we contacted Florida state officials from the Agency for Health Care Administration and the Certificate of Need Office to obtain information about community nursing home beds approved for construction and the state’s future plans to approve additional community nursing home beds. Also, we contacted Florida state officials from the Department of Veterans Affairs to determine its future plans for constructing additional state nursing home beds. Veterans from East Central Florida are included in service areas of the VA hospitals in Gainesville, Tampa, and Bay Pines. To determine the total number of VA hospital beds available in these hospitals, we reviewed VA’s data, interviewed VA officials from these hospitals, and toured each hospital to observe closed and converted hospital beds. Also, we obtained documents from each facility explaining the changes in the number of beds over time. In addition, we obtained information from VA’s reports on the number of hospital beds used by veterans on an average daily basis over the last 4 years. We compared the total number of hospital beds available with the number of beds used on an average annual daily basis to determine the estimated number of unused beds at these VA hospitals. Unused VA hospital beds include beds in operating and closed wards. VA uses its Integrated Planning Model to project future veteran inpatient, outpatient, and nursing home work loads. The model assists VA in determining the future size and scope of VA health care, developing construction and operational plans, and contributing data for budget requests. The model is applied at the facility-specific level. The model is primarily driven by three variables: veterans’ ages, average lengths of hospital stays for selected medical services (for example, surgery or psychiatry), and number of patients treated in the selected medical services. VA requires that any deviations must be quantitatively justifiable. To compare the number of available VA hospital beds to the expected future veteran demand for VA hospital care in Gainesville, Tampa, and Bay Pines, we used the results from VA’s 1994 Integrated Planning Model. We totaled the VA model’s estimates of the number of future hospital beds for each of these facilities to determine veterans’ future demand for Central Florida hospital beds in the years 1995-2010 (in 5-year increments). The difference between the number of VA hospital beds available today and the total estimated future demand equals the estimated surplus or shortage of VA hospital beds in the future. For estimating the number of future hospital beds for its new hospital in Brevard County, VA used its national historical hospital use rates. To update VA’s estimate based on its 1993 Integrated Planning Model, we used more current information from VA’s 1994 Integrated Planning Model and applied it to the veteran population in VA’s defined service area for the hospital in Brevard County. In addition, we combined VA’s 1994 Integrated Planning Model results (based on historical facility usage) for Tampa, Bay Pines, and Gainesville to estimate the future number of beds for VA’s proposed hospital in Brevard County if veterans in the future continue to seek hospital care at the same level as they have in the past. VA’s proposed hospital in Brevard will serve as a statewide psychiatric resource for Florida. To assess and compare psychiatric services at the VA hospitals in Tampa, Bay Pines, and Gainesville and VA’s planned psychiatric services for its hospital in Brevard County, we interviewed the chiefs of psychiatric services at the hospitals, VA’s regional planners, the psychiatric consultant for the region who is designing the services for VA’s hospital in Brevard (VA’s chief of psychiatry in Dallas). We reviewed VA manuals and studies pertaining to psychiatric services and toured psychiatric wards in Tampa, Bay Pines, and Gainesville. In addition, we interviewed chiefs of psychiatry to gain an understanding about caring for long-term psychiatric patients and to identify studies that may assist in estimating the number of long-term care patients that may need hospital beds. In addition, we interviewed the chiefs of psychiatry at VA’s psychiatric hospitals in Tuscaloosa, Alabama, and Augusta, Georgia, to obtain information about bed availability and acceptance of patients from outside their service areas. These hospitals also serve as referral centers for Florida veterans. Also, we interviewed officials from the four Florida state psychiatric hospitals about current and future bed availability. We used three basic criteria to guide our assessment of VA’s prudent and economical use of resources in East Central Florida. First, VA should make the best use of existing space before constructing new space. Second, VA should purchase from private providers rather than constructing new facilities if needed services can be purchased at a cost savings. Third, VA should design new construction to meet veterans’ expected use over a facility’s useful life as efficiently and effectively as possible. We conducted our review between June 1994 and June 1995 in accordance with generally accepted government auditing standards. Central Florida VA hospitals are located in Bay Pines, Tampa, and Gainesville. The current service areas for these hospitals include the veterans from East Central Florida. Recent VA experience shows that: hospital bed use is declining, hospital beds are unused, and the number of unused VA hospital beds is expected to increase in future years. VA hospital bed use in Central Florida declined steadily between 1991 and 1994. The decline in bed use affects medicine, surgery, and psychiatry, as the figures below illustrate. Figure II.1: Decline in Central Florida VA Medical and Surgical Hospital Beds Occupied (Fiscal Years 1991-94) Almost all veterans receiving hospital care in Central Florida had medical conditions related to military service or low incomes. However, VA’s Central Florida hospitals reported providing/scheduling more discretionary veterans for hospital care in 1993 than other VA hospitals, on average, nationwide, as figure II.3 shows. While the veteran population was decreasing nationwide during fiscal years 1991 to 1994, the veteran population in Central Florida remained stable, as figure II.4 shows. Veteran Population (in thousands) Outpatient Visits (in thousands) In its 1983 Final Report on Future Bed Need and Potential Sites for New VA Hospitals in Florida, VA reported a need for additional hospital beds in Florida. Since then, however, the Central Florida VA hospitals converted 263 hospital beds to other uses, most of them for ambulatory services. The conversions reduced their total bed capacity from 1,858 to the present 1,595 beds. In addition, as a result of the steadily declining inpatient work loads, the VA hospitals in Central Florida have unused beds. If veterans’ hospital usage continues at the 1994 level (average 1,060 hospital beds daily), 535 of the 1,595 VA hospital beds may be unused in fiscal year 1995. All three Central Florida VA hospitals reported having unused beds, as shown in table II.1. The unused VA hospital beds are in each of its hospital services, as depicted in figure II.6. VA Hospital Bed Supply (Central Florida) VA Hospital Beds Used (Central Florida) VA planning data projects that the future veteran population in Central Florida will be decreasing. Figure II.7 shows the future veteran population estimates through fiscal year 2010. Veteran Population (in thousands) The veteran population nationwide began decreasing (1980) 14 years before Central Florida (1994). The veteran population in Central Florida is expected to decrease at a slower rate from 1995 to 2005 compared with the national rate. VA’s 1994 Integrated Planning Model estimates that the hospital bed use at its three facilities in Central Florida will be declining over the next 15 years. Figure II.8 shows that the number of unused VA hospital beds is expected to increase. The increase is depicted as the gap between the two lines in figure II.8. Estimated Bed Use (Central Florida Rates) VA Hospital Bed Supply (Central Florida) The decline in future estimated beds is attributable, in part, to the decreasing veteran population and changes in medical practice, such as shorter lengths of stay and VA’s emphasis on ambulatory care. There are three types of nursing home providers and VA has established target goals to guide hospitals in achieving a desired mix among the providers. Generally, VA discharges veterans from its hospitals to nursing homes for rehabilitation. VA’s cost of providing veterans nursing home care varies by type of provider. The number of nursing home beds that VA provides for veterans in Central Florida has been increasing over the last 4 years. The nursing home bed usage increased by about 16 percent from fiscal year 1991 to 1994, as figure III.1 shows. VA sponsors nursing home care through three programs: (1) VA-owned and -operated nursing homes, (2) contract community nursing homes, and (3) state veterans’ nursing homes. All three programs treat veterans with conditions that may be either service-connected or nonservice-connected, and all can provide either skilled or intermediate nursing home care. VA-owned nursing homes usage increased in Central Florida. VA has three nursing homes in Central Florida with a total of 600 beds. These homes served 1,218 veterans in fiscal year 1994. Figure III.2 shows veterans’ usage of VA-owned and -operated nursing homes. As of its 1993 survey, VA had contracts with 108 community nursing homes in Central Florida that have a total of 13,995 beds. In fiscal year 1994, VA’s contract nursing homes served 1,040 veterans. Figure III.3 shows veterans’ use of community nursing homes in Central Florida for the past 4 years. Florida opened its first state nursing home (120 beds) for veterans in December 1993. It reported that 135 veterans used 38 beds on an average daily basis for fiscal year 1994. The home is expected to reach its normal operating capacity in fiscal year 1995. In Central Florida, VA provides much more of the veterans’ nursing home care in its own homes than it pays for in the community or state homes. VA nursing home care is more expensive than the other two programs. VA’s nursing home goals are to provide 30 percent of the care in VA homes, 40 percent in community homes, and 30 percent in state homes. Figure III.4 shows the percentage of nursing home care that veterans received by type of provider in 1994. Provider Share (percent) VA’s 1994 Use Rate (Central Florida) VA’s costs of providing nursing home care to veterans varies by the provider. Placing veterans in state nursing homes is the cheapest to VA, followed by community nursing homes. The most expensive care is provided at VA nursing homes. VA’s nationwide average costs for providing nursing home care are shown in table III.1. Average length of stay (days) According to VA, nursing home costs are higher in VA than in community nursing homes because VA nursing homes are hospital based, with all the clinical resources VA has a much higher ratio of registered nurses; VA treats a much higher ratio of patients requiring skilled care; and VA pays its nurses more than do community nursing homes. The state veterans’ nursing homes provide a range of nursing home care that is cost effective to VA in that costs are shared by VA, veterans, and the states. The state nursing homes are state-owned and -operated. VA makes per diem payments to offset part of the cost of care for veterans residing in state homes and pays up to 65 percent of the costs of constructing or renovating state homes. VA’s planning for nursing home care consists of two principal activities. First, VA estimates veterans’ future use for a target year. Second, VA surveys the availability of community and state nursing homes. VA makes its construction decisions based on a comparison of veterans’ projected use and the potential availability of beds in community and state homes. VA has established a national nursing home care goal and VA makes construction decisions to build new VA facilities based on future demand estimates required to meet that goal. Veterans’ future demand for nursing home care is based on the premise that veterans will require nursing home care at the same rate as did male civilians. Using the male civilian nursing home use rate, VA applies it to the estimated veteran population to determine the total estimated future veteran demand for nursing home care. VA’s goal is to provide nursing home care under VA auspices to 16 percent of the total estimated future veteran demand—commonly referred to as VA’s market share. Although VA’s goal is to provide 16 percent of the total estimated future veteran demand, VA’s actual share was about 9.2 percent in the Central Florida area in fiscal year 1994. VA’s share has remained stable over the last 4 years, as figure IV.1 shows. The number of nursing home beds needed in East Central Florida depends on whether veterans will continue to use Florida nursing homes at the same rate as they have over the past 4 years or whether their use rate will increase to the higher level that VA is expecting. Table IV.1 shows the differences in estimated demand and bed supply shortage. Based on East Central Florida’s actual market share (beds) During 1993, VA evaluated 71 community nursing homes in East Central Florida. VA made judgments about future availability of 8,435 community nursing home beds based on the homes’ occupancy rates, personal knowledge, or by contacting selected homes. Table IV.2 shows the results of VA’s assessment in East Central Florida. VA determined that 11 community nursing homes in East Central Florida that had 1,259 beds were not suitable for placing veterans because these homes (1) were not interested in contracting with VA or (2) did not meet VA standards. This reduced the number of potential community nursing homes to 60 and the number of beds to 7,176. VA determined that the remaining 60 homes in East Central Florida would be able to provide 105 beds in the future. VA excluded from its consideration for future use the remaining beds based on two questionable assumptions concerning bed availability. First, VA assumed that beds occupied at the time of its survey would not be available for VA’s future use. Second, VA assumed that a nursing home was fully occupied if it had an occupancy rate of 95 percent or higher. The numbers of occupied and empty community nursing home beds in East Central Florida are shown in table IV.3. VA excluded 6,856 community nursing home beds in East Central Florida from its consideration based on its assumption that beds occupied would not be available for future VA use. Patient turnover in community nursing homes provides VA opportunities to place veterans in some of these beds. VA excluded 215 of the 320 empty community nursing home beds from its consideration based on its assumption that community nursing homes are fully occupied at 95-percent capacity. Of the 215 empty beds, 86 were in community nursing homes that had contracts with VA. VA’s determination of available and unavailable empty community nursing home beds is shown in table IV.4. VA overlooked community nursing homes in East Central Florida. At the time that VA conducted its survey, four nursing homes with a total of 580 beds were inadvertently omitted from the list of homes under consideration. In addition, we subsequently identified three new community nursing homes that are operating in East Central Florida. The three homes have a total of 320 beds. The total number of community nursing home beds in East Central Florida is 9,335, some 900 beds higher than the number VA surveyed in 1993. During 1993, VA evaluated 322 community nursing homes in Central Florida. VA made judgments about future availability of 37,892 community nursing home beds based on the homes’ occupancy rates personal knowledge, or by contacting selected homes. Table IV.5 shows VA’s survey determinations concerning licensed community nursing home beds in Central Florida. VA determined that 58 community nursing homes in Central Florida that had 6,445 beds were not suitable for placing veterans because these homes (1) were not interested in contracting with VA, (2) did not meet VA standards, or (3) were not Medicare/Medicaid certified. This reduced the number of community nursing homes to 264 and the number of beds to 31,447. VA determined that the remaining 264 community nursing homes in Central Florida would be able to provide 382 beds in the future. VA excluded from its consideration for future use the remaining beds based on two questionable assumptions concerning bed availability. First, VA assumed that beds occupied at the time of its survey would not be available for VA’s future use. Second, VA assumed that a nursing home was fully occupied if it had an occupancy rate of 95 percent or higher. The numbers of occupied and empty community nursing home beds in Central Florida are shown in table IV.6. VA excluded 30,015 community nursing home beds in Central Florida from its consideration based on its assumption that beds occupied would not be available for future VA use. Patient turnover in community nursing homes provides VA opportunities to place veterans in some of these beds. VA excluded 1,050 empty community nursing home beds in Central Florida from its consideration based on its assumption that community nursing homes are fully occupied at 95-percent capacity. Of the 1,050 empty beds, 496 were in community nursing homes that had contracts with VA. VA’s determination of available and unavailable empty community nursing home beds is shown in table IV.7. VA overlooked community nursing homes in Central Florida. At the time VA conducted its survey, nine nursing homes with a total of 1,138 beds were inadvertently omitted from the list of homes under consideration. In addition, we subsequently identified 15 new community nursing homes that are operating in Central Florida. The 15 homes have a total of 1,534 beds. The total number of community nursing home beds in Central Florida is 40,564, some 2,672 beds higher than the number VA surveyed in 1993. VA’s 1993 nursing home survey did not consider the addition of new community nursing home beds in Florida. The state’s Certificate of Need Office approved for construction 5,176 community nursing home beds in the Central Florida area, 1,546 of which will be located in East Central Florida. The certificates of need require construction to commence within one year from approval or the approval becomes void. The certificates were effective on July 1, 1994, and September 16, 1994. When completed, these additional community nursing home beds will be available to help VA better serve Florida veterans, enable VA to expand its community nursing home program, and reduce VA’s need to construct new homes of its own. VA’s 1993 survey included consideration of the one state nursing home in Florida. However, officials at the Florida Department of Veterans Affairs told us that their long-term plans include building four more 120-bed state nursing homes by 2010. Funding for the second state home is being discussed in the Florida legislature and the remaining three homes are proposed for the future. The location of the three future state nursing homes has not been determined. According to a VA official, the state nursing home currently being discussed in the state legislature will be a state home for veterans with dementia and Alzheimer’s disease. In Florida, VA has hospitals in Tampa, Bay Pines, Gainesville, Lake City, Miami, and West Palm Beach; each hospital provides psychiatric care. Recent experience shows that veterans’ use of psychiatric beds has declined slightly. The proposed VA hospital in Brevard County will also provide inpatient psychiatric care, which appears comparable to care now provided at VA’s existing hospitals in Florida. The three levels of psychiatric care traditionally identified by VA are acute, intermediate, and long-term care. Acute psychiatric care is used to diagnose and stabilize psychiatric patients and has a length of stay of about 30 to 60 days. Intermediate care is used for rehabilitation and transitional care and has a length of stay of up to 90 days. Long-term care has an indefinite length of stay and is used for chronically mentally ill veterans. VA has no designated long-term care hospital psychiatric beds in its five Florida hospitals. Patients requiring long-term psychiatric care are being evaluated and diagnosed in available hospital beds. VA attempts to transfer some of these patients either to one of Florida’s four state psychiatric facilities or to a VA psychiatric facility out of state. In addition, some of these patients are being treated in VA and community nursing homes that have such capability. VA plans to treat some of these patients in residential programs. The five VA hospitals in Florida operate a total of 587 psychiatric beds. Table V.1 shows the number of psychiatric beds in each VA hospital. Since fiscal year 1991, the availability of psychiatric beds has increased because veterans have used fewer beds, as shown in figure V.1. For fiscal year 1994, veterans occupied on average 454 beds daily, leaving 133 beds unused. VA plans to increase its number of psychiatric beds from 587 to 877. The new VA hospital in West Palm Beach adds 60 psychiatric beds. The proposed VA hospital in Brevard County will add 230 psychiatric beds. VA’s 1994 Integrated Planning Model estimates that the psychiatric bed use at its three facilities in Central Florida will be declining over the next 15 years. Figure V.2 shows that the number of unused VA psychiatric beds is expected to increase. The increase is depicted as the gap between the two lines in figure V.2. Figure V.2: Estimated Increase in Unused VA Psychiatric Beds in Central Florida (Fiscal Years 1995-2010) Estimated Bed Use (Central Florida Rates) VA Hospital Bed Supply (Central Florida) In addition to out-of-state VA facilities, many veterans in Florida in need of long-term psychiatric care received this care at one of the four state psychiatric hospitals. In December 1992, VA reported that 414 veterans resided in the state facilities, representing 14 percent of the total population in Florida state hospitals. Florida pays for this care. Current VA policy emphasizes rehabilitation of psychiatric patients. Thus, VA’s medical practice is shifting away from the custodial role. Long-term psychiatry is no longer described as a level of VA care. Rehabilitative programs are offered as alternatives to long-term care. Outpatient, residential, and community-based treatment programs are also presented as alternatives to inpatient psychiatric care. VA’s policy states that a significant number of patients who now reside in long-term care facilities may be reintegrated into the community when a comprehensive, flexible case management policy is implemented. Case management is used to provide veterans with an ongoing connection to VA so that medical, psychosocial, and vocational services can be planned and maintained for veterans whose symptoms affect their life management skills. The approach for case management involves a planned and systematic use of the full range of VA and community services and requires a dual focus on meeting the veterans’ needs and conserving agency and community resources. VA’s policy also states that patients should be encouraged to receive their treatment near their homes and within one medical center. Although VA focuses now on rehabilitative care, it recognizes that some patients may require prolonged hospital treatment because they do not respond to current medications and they behave in unpredictable and destructive ways. In addition to focusing on rehabilitative psychiatric care, more psychiatric services will be provided on an outpatient basis. These outpatient services will be provided through clinics, residential, and community-based care. For example, the Chief of Psychiatry at Bay Pines is planning to consolidate and reduce the current number of psychiatric beds from 149 to 120 to provide more outpatient psychiatric services. In another example, the Psychiatric Service at the VA hospital in Houston, Texas, adopted ambulatory care as the main mode of treatment and integrated inpatient and ambulatory care to provide a continuum of care. The state psychiatric hospitals are also considering community programs as a viable alternative to inpatient care. One state hospital closed 112 beds to use the savings for community programs. A second hospital has diverted money in the budget towards developing community programs, and a third hospital is considering closing beds to use the savings for community programs. VA’s Florida network officials justify providing psychiatric beds at the hospital planned for Brevard County on the basis that Florida currently has a lower ratio of VA psychiatric beds to veterans than the national average. The hospital is intended to provide a statewide resource of long-term care psychiatric beds that are not currently available in VA’s Florida network. Generally, long-term psychiatric care requires lengths of stay longer than 12 months. However, VA’s psychiatric design consultant told us that no long-term psychiatric hospital beds are planned for the Brevard facility. Instead of long-term inpatient care, residential psychiatric treatment programs will be used when appropriate. Furthermore, most of the inpatient psychiatric services planned for the hospital in Brevard are comparable to existing VA services or are planned at VA’s three facilities in Central Florida. The psychiatric beds planned for Brevard consist of acute, intermediate, and long-term. The psychiatric treatment programs designed for long-term care patients generally have unspecified lengths of stay. Of the four programs, the 15-bed sustained medical/psychiatric unit is the only inpatient program and the defined length of stay is shorter than 12 months. The other three programs are residential programs (nonhospital) having a total of 80 beds; including 20 beds for a substance abuse residential rehabilitation treatment program, 30 beds for a posttraumatic stress disorder residential rehabilitation program, and 30 beds for a psychiatric residential rehabilitation treatment program. VA’s manual for mental health programs states that residential programs may be on the VA medical center grounds or on VA-owned, -rented, or -donated property in the community. The following provides a description of psychiatric services planned for VA’s hospital in Brevard County as defined in VA’s manual for mental health programs. The general psychiatric unit offers psychiatric and psychosocial diagnosis and treatment in a hospital environment for new patients as well as for those patients experiencing a recurrence of an illness who cannot be assessed or treated in a lesser level of care. The primary objective is to provide this treatment in a relatively short duration, such as 10 to 20 days, and occasionally 30 to 40 days, and then assist in location of appropriate follow-up needed for successful treatment at a less intensive level of care. Length of stay: Fewer than 30 to 40 days. This unit offers the same diagnosis and treatment described above but for patients with dual diagnoses of both psychiatric and medical problems. Length of stay: Fewer than 30 to 40 days. PICU offers a smaller size unit, increased staffing, security (safe quiet/seclusion rooms), and more specialized clinical expertise than a general psychiatric ward. A PICU unit may be within or adjacent to a 20 to 30 bed admitting or general psychiatric ward. Patients admitted to this level of care will have the most severe behavioral problems including high suicide risk, assaultive behavior, severe agitation, disorganized behavior secondary to psychosis, confusion, or other severe psychiatric disorders. Psychiatric patients with such symptoms may be rapidly stabilized in such a unit, obviating the need for transfer to a long-term or more secure facility often some distance away. Length of stay: Fewer than 30 to 40 days. These programs are designed as part of a continuum of care for elderly patients with depressive, organic brain (for example, dementia), or other psychiatric disorders, including patients with medical comorbidities. Focus is on evaluation, stabilization, and relatively brief stay. Programs may include respite beds to relieve caretakers and a brief-stay Alzheimer’s/dementia unit. Length of stay: Fewer than 30 to 40 days. This program offers a short-term high-quality setting in selected VA medical centers to veterans with combined medical and psychiatric problems who are unable to be evaluated, treated, or managed appropriately in existing medical or psychiatric settings. The setting concentrates staff skilled in both medical and psychiatric areas. Length of stay: Fewer than 30 to 40 days. The essence of this level of care is its emphasis on sustained treatment and rehabilitation for varied groups of patients who have failed to achieve sufficient recovery in 90 days to be discharged to a nursing home, domiciliary, or community residential level of care. Patients in STAR I have medical, neurological, and psychiatric disorders that interact in such a way as to make care in traditional long-term psychiatric or medical programs (including traditional nursing homes) difficult or impossible. Length of stay: Fewer than 12 months. This program offers patients with drug, alcohol, and other chemical abuse and dependency disorders an intense, brief treatment of withdrawal symptoms; evaluation of physical, psychological, social, and vocational problems; family interventions; and initiation of individual and group therapies and support groups that may be continued on an outpatient basis. Patients who require longer periods of inpatient treatment may be transferred to a less intensive level of care or to community Contract Half-Way House Programs. Length of stay: Fewer than 30 days. These programs provide an inpatient rehabilitation setting for veterans with serious chemical dependency who require more than detoxification or a brief stay because they still have a significant risk of resumption of their abuse problems on return to the community. Length of stay: Fewer than 90 days. Residential programs are structured, supervised, 24-hour-a-day therapeutic settings that embody strong treatment values with peer and professional support to chronically mentally ill (CMI) veterans in need of extended rehabilitation and treatment. These veterans have mental disorders such as schizophrenia, depression, and anxiety. Residential programs may be on VA medical center grounds or rented or donated property in the community. Length of stay: Not specified. A residential program that provides intense rehabilitation for drug and alcohol addictions. Length of stay: Not specified. A residential program that provides treatment for patients with PTSD who are unable to be treated in an outpatient setting. Length of stay: Not specified. For Central Florida, the VA hospitals have or plan to have psychiatric services similar to the proposed VA hospital in Brevard County. The VA hospitals in Central Florida discharge long-term care psychiatric patients to other facilities or programs. Table V.2 shows the psychiatric bed sections currently available to veterans in Central Florida. In addition to those named above, the following individuals made important contributions to this report. Beverly Brooks-Hall provided the information on VA’s nursing home program. Bonnie Anderson provided information on VA’s psychiatric care. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) plans to provide accessible medical and other services to veterans in East Central Florida, focusing on: (1) VA acquisition of the former Orlando Naval Hospital; (2) whether the conversion of the hospital to a nursing home is the most economical use of VA resources; and (3) whether more prudent and economical options exist to meet VA service delivery goals for Florida veterans. GAO found that: (1) VA conversion of the former Naval hospital to a nursing home and the construction of a hospital and nursing home in Brevard County are not a prudent and economical use of VA resources; (2) VA planning assumptions are questionable, particularly those regarding the availability of community nursing home beds and unused VA hospital beds, and the potential decrease in future demand for VA hospital beds; (3) VA could meet its service delivery goals by using existing capacity, which would result in lower costs and greater convenience for the veterans; (4) preserving the Orlando hospital as a hospital would improve the geographic accessibility of VA medical and psychiatric services at a lower cost; (5) the number of unused VA hospital beds is expected to increase because of the projected decline in the veteran population; (6) VA could convert some of the unused medical and surgical beds in the three central Florida hospitals to psychiatric beds to make those beds more geographically accessible to all Florida veterans rather than concentrating them at the new hospital in Brevard County; (7) construction of the Brevard hospital is not justified, since VA greatly overestimated veterans' potential use of Florida VA facilities; and (8) VA needs to focus its strategy on the most prudent and economical use of its limited resources and avoid unnecessary expenditures while meeting its service delivery goals in a more timely manner. |
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unable to purchase services. However, over 30 other programs exist. (See appendix for an overview of some of these programs.) These other programs, which collectively spent more than $1 billion a year as of 1996, use one of three strategies aimed to ensure that all populations have access to care. Providing incentives to health professionals practicing in underserved areas. Under the Rural Health Clinic and Medicare Incentive Payment programs, providers are given additional Medicare and/or Medicaid reimbursement to practice in underserved areas. In 1996, these reimbursements amounted to over $400 million. In addition, over $112 million was spent on the National Health Service Corps program, which supports scholarships and repays education loans for health care professionals who agree to practice in designated shortage areas. Under another program, called the J-1 Visa Waiver, U.S. trained foreign physicians are allowed to remain in the United States if they agree to practice in underserved areas. Paying clinics and other providers caring for people who cannot afford to pay. More than $758 million funded programs that provide grants to help underwrite the cost of medical care at community health centers and other federally qualified health centers. These centers also receive higher Medicare and Medicaid payments. Similar providers also receive higher Medicare and Medicaid payments as “look-alikes” under the Federally Qualified Health Center program. Paying institutions to support the education and training of health professionals. Medical schools and other teaching institutions received over $238 million in 1996 to help increase the national supply, distribution, and minority representation of health professionals through various education and training programs under Titles VII and VIII of the Public Health Service Act. number needed to remove federal designation as a shortage area, while 785 shortage areas requesting providers did not receive any providers at all. Of these latter locations, 143 had unsuccessfully requested a National Health Service Corps provider for 3 years or more. Taking other provider placement programs into account shows an even greater problem in effectively distributing scarce provider resources. For example, HHS identified a need for 54 physicians in West Virginia in 1994, but more than twice that number—116 physicians—were placed there using the National Health Service Corps and J-1 Visa Waiver programs. We identified eight states where this occurred in 1995. While almost $2 billion has been spent in the last decade on Title VII and VIII education and training programs, HHS has not gathered the information necessary to evaluate whether these programs had a significant effect on changes that occurred in the national supply, distribution, or minority representation of health professionals or their impact on access to care. Evaluations often did not address these issues, and those that did address them had difficulty establishing a cause-and-effect relationship between federal funding under the programs and any changes that occurred. Such a relationship is difficult to establish because the programs have other objectives besides improving supply, distribution, and minority representation and because no common goals or performance measures for improving access had been established. the problem. Despite 3 decades of federal efforts, the number of areas HHS has classified as underserved using these systems has not decreased. HHS uses two systems to identify and measure underservice: the Health Professional Shortage Area (HPSA) system and the Medically Underserved Area (MUA) system. First used in 1978 to place National Health Service Corps providers, the HPSA system is based primarily on provider-to- population ratios. In general, HPSAs are self-defined locations with fewer than one primary care physician for every 3,500 persons. Developed at about the same time, the MUA system more broadly identifies areas and populations considered to have inadequate health services, using the additional factors of poverty and infant mortality rates and percentage of population aged 65 or over. We previously reported on the long-standing weaknesses in the HPSA and MUA systems in identifying the types of access problems in communities and in measuring how well programs focus services on the people who need them, including the following: The systems have relied on data that are old and inaccurate. About half of the U.S. counties designated as medically underserved areas since the 1970s would no longer qualify as such if updated using 1990 data. Formulas used by the systems, such as physician-to-population ratios, do not count all primary care providers available in communities, overstating the need for additional physicians in shortage areas by 50 percent or more. The systems fail to count the availability of those providers historically used by the nation to improve access to care, such as National Health Service Corps physicians and U.S. trained foreign physicians, as well as nurse practitioners, physician assistants, and nurse midwives. demand for services. As a result, the systems do not accurately identify whether access problems are common for everyone living in the area, or whether only specific subpopulations, such as the uninsured poor, have difficulty accessing primary care resources that are already there but underutilized. Without additional criteria to identify the type of access barriers existing in a community, programs may not benefit the specific subpopulation with insufficient access to care. The Rural Health Clinic program, established to improve access in remote rural areas, illustrates this problem. Under the program, all providers located in rural HPSAs, MUAs, and HHS-approved state-designated shortage areas can request rural health clinic certification to receive greater Medicare and Medicaid reimbursement. However, if the underserved group is the uninsured poor, such reimbursement does little or nothing to address the access problem. Most of the 76 clinics we surveyed said the uninsured poor made up the majority of underserved people in their community, yet only 16 said they offered health services on a sliding-fee scale based on the individual’s ability to pay for care. Even if rural health clinics do not treat the group that is actually underserved, they receive the higher Medicare and Medicaid reimbursement, without maximum payment limits if operated by a hospital or other qualifying facility. These payment benefits continue indefinitely, regardless of whether the clinic is no longer in an area that is rural and underserved. Last February, we testified before this Subcommittee that improved cost controls and additional program criteria were needed for the Rural Health Clinic program. In August of this year, the Balanced Budget Act of 1997 made changes to the program that were consistent with our recommendations. Specifically, the act placed limits, beginning next January, on the amount of Medicare and Medicaid payments made to clinics owned by hospitals with more than 50 beds. The act also made changes to the program’s eligibility criteria in the following three key areas:In addition to being located in a rural HPSA, MUA, or HHS-approved state-designated shortage area, the clinic must also be in an area in which the HHS Secretary determines there is an insufficient number of health care practitioners. Clinics are allowed only in shortage areas designated within the past 3 years. Existing clinics that are no longer located in rural shortage areas can remain in the program only if they are essential for the delivery of primary care that would otherwise be unavailable in the area, according to criteria that the HHS Secretary must establish in regulations by 1999. Limiting payments will help control program costs. But until, and depending on how, the Secretary defines the types of areas needing rural health clinics, HHS will continue to rely on flawed HPSA and MUA systems that assume providing services to anyone living in a designated shortage area will improve access to care. HHS has been studying changes needed to improve the HPSA and MUA systems for most of this decade, but no formal proposals have been published. In the meantime, new legislation continues to require the use of these systems, thereby increasing the problem. For example, the newly enacted Balanced Budget Act authorizes Medicare to pay for telehealth services—consultative health services through telecommunications with a physician or qualifying provider—for beneficiaries living in rural HPSAs. However, since HPSA qualification standards do not distinguish rural communities that are located near a wide range of specialty providers and facilities from truly remote frontier areas, there is little assurance that the provision will benefit those rural residents most in need of telehealth services. To make the Rural Health Clinic program and other federal programs more accountable for improving access to primary care, HHS will have to devise a better management approach to measure need and evaluate individual program success in meeting this need. If effectively implemented, the management approach called for under the Results Act offers such an opportunity. Under the Results Act, HHS would ask some basic questions about its access programs: What are our goals and how can we achieve them? How can we measure our performance? How will we use that information to improve program management and accountability? These questions would be addressed in annual performance plans that define each year’s goals, link these goals to agency programs, and contain indicators for measuring progress in achieving these goals. Using information on how well programs are working to improve access in communities, program managers can decide whether federal intervention has been successful and can be discontinued, or if other strategies for addressing access barriers that still exist in communities would provide a more effective solution. The Results Act provides an opportunity for HHS to make sure its access programs are on track and to identify how efforts under each program will fit within the broader access goals. The Results Act requires that agencies complete multi-year strategic plans by September 30, 1997, that describe the agency’s overall mission, long-term goals, and strategies for achieving these goals. Once these strategic plans are in place, the Results Act requires that for each fiscal year, beginning fiscal year 1999, agencies prepare annual performance plans that expand on the strategic plans by establishing specific performance goals and measures for program activities set forth in the agencies’ budgets. These goals are to be stated in a way that identifies the results—or outcomes—that are expected, and agencies are to measure these outcomes in evaluating program success. Establishing performance goals and measures such as the following could go far to improve accountability in HHS’ primary access programs. The Rural Health Clinic program currently tracks the number of clinics established, while the Medicare Incentive Payment program tracks the number of physicians receiving bonuses and dollars spent. To focus on access outcomes, HHS will need to track how these programs have improved access to care for Medicare and Medicaid populations or other underserved populations. Success of the National Health Service Corps and health center programs has been based on the number of providers placed or how many people they served. To focus on access outcomes, HHS will need to gather the information necessary to report the number of people who received care from National Health Service Corps providers or at the health centers who were otherwise unable to access primary care services available in the community. survey, to measure progress toward this goal by counting the number of people across the nation who do and do not have a usual source of primary care. For those people without a usual source of primary care, the survey categorizes the reasons for this problem that individual programs may need to address, such as people’s inability to pay for services, their perception that they do not need a physician, or the lack of provider availability. Although HHS officials have started to look at how individual programs fit under these national goals, they have not yet established links between the programs and national goals and measures. Such links are important so resources can be clearly focused and directed to achieve the national goals. For example, HHS’ program description, as published in the Federal Register, states that the health center programs directly address the Healthy People 2000 objectives by improving access to preventive and primary care services for underserved populations. While HHS’ fiscal year 1998 budget documents contain some access-related goals for health center programs, it also contains other goals, such as creating 3,500 jobs in medically underserved communities. Although creating jobs may be a desirable by-product of supporting health center operations, it is unclear how this employment goal ties to national objectives to ensure access to care. Under the Results Act, HHS has an opportunity to clarify the relationships between its various program goals and define their relative importance at the program and national levels. Viewing program performance in light of program costs—such as establishing a unit cost per output or outcome achieved—can help HHS and the Congress make informed decisions on the comparative advantage of continuing current programs. For example, HHS and the Congress could better determine whether the effects gained through the program were worth their costs—financial and otherwise—and whether the current program was superior to alternative strategies for achieving the same goals. Unfortunately, in the past, information needed to answer these questions has been lacking or incomplete, making it difficult to determine how to get the “biggest bang for the buck.” cost information to allocate resources between its scholarship and loan repayment programs. While both of these programs pay education expenses for health professionals who agree to work in underserved areas, by law, at least 40 percent of amounts appropriated each year must fund the scholarship program and the rest may be allocated at the HHS Secretary’s discretion. However, our analysis found that the loan repayment program costs the federal government at least one-fourth less than the scholarship program for a year of promised service and was more successful in retaining providers in these communities. Changing the law to allow greater use of the loan repayment program would provide greater opportunity to stretch program dollars and improve provider retention. Comparisons between different types of programs may also indicate areas of greater opportunity to improve access to care. However, the per-person cost of improving access to care under each program is unknown. Collecting and reporting reliable information on the cost-effectiveness of HHS programs is critical for HHS and the Congress to decide how to best spend scarce federal resources. Although the Rural Health Clinic program and other federal programs help to provide health care services to many people, the magnitude of federal investment creates a need to hold these programs accountable for improving access to primary care. The current HPSA and MUA systems are not a valid substitute for developing the program criteria necessary to manage program performance along these lines. The management discipline provided under the Results Act offers direction in improving individual program accountability. Once it finalizes its strategic plan, HHS can develop in its annual performance plans individual program goals for the Rural Health Clinic program and other programs that are consistent with the agency’s overall access goals, as well as outcome measures that can be used to track each program’s progress in addressing access barriers. services, would have greater effect in achieving HHS’ national primary care access goals. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or members of the Subcommittee may have. Program (amount of federal funding) Rural Health Clinic ($295) Medicare Incentive Pay ($107) National Health Service Corps ($112) J-1 Visa Waiver ($0) Health Centers Grants($758) Title VII/VIII Health Education and Training Programs ($238) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the Rural Health Clinic Program in the broader context of GAO's past reviews of federal efforts to improve access to primary health care, focusing on: (1) the common problems GAO found and some recent initiatives to address them; and (2) how the type of management changes called for under the Government Performance and Results Act of 1993 can help the Rural Health Clinic and related programs improve accountability. GAO noted that: (1) GAO's work has identified many instances in which the Rural Health Clinic program and other federal programs have provided aid to communities without ensuring that this aid has been used to improve access to primary care; (2) in some cases, programs have provided more than enough assistance to eliminate the defined shortage, while needs in other communities remain unaddressed; (3) GAO's work has identified a pervasive cause for this proa reliance on flawed systems for measuring health care shortages; (4) these systems often do not work effectively to identify which programs would work best in a given setting or how well a program is working to meet the needs of the underserved once it is in place; (5) for several years, the Department of Health and Human Services has tried unsuccessfully to revise these systems to address these problems; and (6) the goal-setting and performance measurement discipline available under the Results Act, however, appears to offer a suitable framework for ensuring that programs are held accountable for improving access to primary care. |
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Our recent analyses of audit results for federal agencies showed improvement, but continued to show significant weaknesses in federal computer systems that put critical operations and assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption. The significance of these weaknesses led GAO to recently conclude that information security was a material weakness in our audit of the federal government’s fiscal year 2003 financial statements. Audits also identified instances of similar types of weaknesses in non-financial systems, which continue to receive increased audit coverage in response to FISMA requirements. Weaknesses continued to be reported in each of the six major areas of general controls—the policies, procedures, and technical controls that apply to all or a large segment of an entity’s information systems and help ensure their proper operation. These six areas are (1) security program management, a principal focus of FISMA, which provides the framework for ensuring that risks are understood and that effective controls are selected and properly implemented; (2) access controls, which ensure that only authorized individuals can read, alter, or delete data; (3) software development and change controls, which ensure that only authorized software programs are implemented; (4) segregation of duties, which reduces the risk that one individual can independently perform inappropriate actions without detection; (5) operating systems controls, which protect sensitive programs that support multiple applications from tampering and misuse; and (6) service continuity, also addressed by FISMA, which ensures that computer-dependent operations experience no significant disruptions. To fully understand the significance of the weaknesses we identified, it is necessary to link them to the risks they present to federal operations and assets. Virtually all federal operations are supported by automated systems and electronic data, and agencies would find it difficult, if not impossible, to carry out their missions and account for their resources without these information assets. Hence, the degree of risk caused by security weaknesses is extremely high. The weaknesses identified place a broad array of federal operations and assets at risk. For example, resources, such as federal payments and collections, could be lost or stolen; computer resources could be used for unauthorized purposes or to launch sensitive information, such as taxpayer data, social security records, medical records, and proprietary business information, could be inappropriately disclosed, browsed, or copied for purposes of espionage or other types of crime; critical operations, such as those supporting national defense and emergency services, could be disrupted; data could be modified or destroyed for purposes of fraud or disruption; agency missions could be undermined by embarrassing incidents that result in diminished confidence in their ability to conduct operations and fulfill their fiduciary responsibilities. Congress and the administration have established specific information security requirements in both law and policy to help protect the information and information systems that support these critical operations. On October 30, 2000, Congress passed GISRA, which was signed into law and became effective November 29, 2000, for a period of 2 years. GISRA supplemented information security requirements established in the Computer Security Act of 1987, the Paperwork Reduction Act of 1995, and the Clinger-Cohen Act of 1996 and was consistent with existing information security guidance issued by OMB and NIST, as well as audit and best practice guidance issued by GAO. Most importantly, however, GISRA consolidated these separate requirements and guidance into an overall framework for managing information security and established new annual review, independent evaluation, and reporting requirements to help ensure agency implementation and both OMB and congressional oversight. Enacted into law on December 17, 2002, as title III of the E-Government Act of 2002, FISMA permanently authorized and strengthened GISRA’s information security program, evaluation, and reporting requirements. Like GISRA, FISMA assigns specific responsibilities to agency heads, chief information officers (CIO), and IGs. It also assigns responsibilities to OMB, which include developing and overseeing the implementation of policies, principles, standards, and guidelines on information security; and reviewing at least annually, and approving or disapproving, agency information security programs. FISMA continues to delegate OMB responsibilities for national security systems to the Secretary of Defense and the Director of Central Intelligence. Overall, FISMA requires each agency, including agencies with national security systems, to develop, document, and implement an agencywide information security program to provide information 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. Specifically, this program is to include periodic assessments of the risk and magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems; 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; subordinate plans for providing adequate information security for networks, facilities, and systems or groups of information systems; security awareness training for agency personnel, including contractors and other users of information systems that support the operations and assets of the agency; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, performed with a frequency depending on risk, but no less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in the information security policies, procedures, and practices of the agency; procedures for detecting, reporting, and responding to security incidents; plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. FISMA also established a requirement that each agency develop, maintain, and annually update an inventory of major information systems (including major national security systems) operated by the agency or under its control. This inventory is to include an identification of the interfaces between each system and all other systems or networks, including those not operated by or under the control of the agency. The law also requires an agency’s CIO to designate a senior agency information security officer who, for the agency’s FISMA-prescribed information security responsibilities, shall carry out the CIO’s responsibilities; possess professional qualifications, including training and experience, required to administer the required functions; have information security duties as that official’s primary duty; and head an office with the mission and resources to assist in ensuring agency compliance. Under FISMA, each agency must continue to have an annual independent evaluation of its information security program and practices, including control testing and compliance assessment. Evaluations of non-national- security systems are to be performed by the agency IG or by an independent external auditor, while evaluations related to national security systems are to be performed only by an entity designated by the agency head. FISMA requires each agency to report annually to OMB, selected congressional committees, and the Comptroller General on the adequacy of information security policies, procedures, and practices, and compliance with FISMA’s requirements. In addition, agency heads are required to annually report the results of their independent evaluations to OMB, except that to the extent an evaluation pertains to a national security system, only a summary and assessment of that portion of the evaluation is reported to OMB. OMB is also required to submit a report to the Congress no later than March 1 of each year on agency compliance with FISMA’s requirements, including a summary of findings of agencies’ independent evaluations. FISMA also requires the Comptroller General to periodically evaluate and report to Congress on (1) the adequacy and effectiveness of agency information security policies and practices and (2) implementation of FISMA requirements. Other major FISMA provisions require NIST to develop, for systems other than national security systems, (1) standards to be used by all agencies to categorize all their information and information systems based on the objectives of providing appropriate levels of information security according to a range of risk levels; (2) guidelines recommending the types of information and information systems to be included in each category; and (3) minimum information security requirements for information and information systems in each category. NIST must also develop a definition of and guidelines concerning detection and handling of information security incidents; and guidelines, developed in conjunction with the Department of Defense and the National Security Agency, for identifying an information system as a national security system. The law also assigned other information security functions to NIST, including providing technical assistance to agencies on such elements as compliance with the standards and guidelines and the detection and handling of information security incidents; conducting research, as needed, to determine the nature and extent of information security vulnerabilities and techniques for providing cost- effective information security; developing and periodically revising performance indicators and measures for agency information security policies and practices; evaluating private-sector information security policies and practices and commercially available information technologies to assess potential application by agencies; evaluating security policies and practices developed for national security systems to assess their potential application by agencies; and periodically assessing the effectiveness of and revising, as appropriate, the NIST standards and guidelines developed under FISMA. NIST is required to prepare an annual public report on activities undertaken in the previous year, and planned for the coming year, to carry out its responsibilities under FISMA. On August 6, 2003, OMB issued its fiscal year 2003 FISMA reporting instructions and guidance on quarterly IT security reporting. These instructions, which required agencies to submit their reports to OMB by September 22, 2003, essentially continued many of the reporting requirements established for GISRA, including performance measures introduced for fiscal year 2002 reporting under that law. The instructions also highlighted the more substantive changes introduced by FISMA. For example, OMB emphasized that FISMA applies to both information and information systems used by an agency and by its contractors or other organizations and sources that possess or use federal information or that operate, use, or have access to federal information systems. OMB also underscored that FISMA requires each agency to test and evaluate the effectiveness of the information security policies, procedures, and practices for each system at least annually. OMB’s fiscal year 2003 reporting instructions also emphasized the strong focus on performance measures and formatted these instructions to emphasize a quantitative rather than a narrative response. OMB also required agencies to provide quarterly updates for a key subset of these performance measures, with the first update due December 15, 2003. Measures within this key subset are the numbers of systems that have risk assessments and assigned levels of risk, up-to-date IT security plans, security control costs integrated into their life cycles, security controls tested and evaluated in the last year, contingency plans tested. Further, OMB provided instructions for continued agency reporting on the status of remediation efforts through plans of action and milestones (POA&M). Required for all programs and systems where an IT security weakness has been found, a POA&M lists the weaknesses and shows estimated resource needs or other challenges to resolving them, key milestones and completion dates, and the status of corrective actions. POA&Ms are to be submitted twice a year. In addition, agencies are to submit quarterly updates that show the number of weaknesses for which corrective action was completed on time (including testing), is ongoing and on track to be completed as originally scheduled, or has been delayed; as well as the number new weaknesses discovered since that last update. Consistent with last year, OMB’s fiscal year 2003 guidance continued to authorize agencies to release certain information from their POA&Ms to assist the Congress in its oversight responsibilities. Agencies could release this information, as requested, excluding certain elements, such as estimated funding resources and the scheduled completion dates for resolving a weakness. Lastly, as part of IG FISMA reporting, OMB instructed the IGs to respond to essentially the same questions that the agencies were to respond to in their reports. The IG responses were to be based on the results of their independent evaluations, including agency progress in implementing and maintaining their POA&Ms, and any other work performed throughout the reporting period (such as financial statement or other audits). This year, OMB also asked the IGs to assess against specific criteria whether the agency had developed, implemented, and was managing an agencywide POA&M process. OMB noted that this assessment was critical because effective remediation of IT security weaknesses is essential to achieving a mature and sound IT security program and securing information and systems. Further, OMB identified this IG assessment as one of the criteria used in evaluating agencies under the Expanding E-Government Scorecard of the President’s Management Agenda. OMB also instructed the IGs to use the performance measures to assist in evaluating agency officials’ performance. However, it did not request them to validate agency responses to the performance measures. Instead, as part of their independent evaluations of a subset of agency systems, IGs were to assess the reliability of the data for those systems that they evaluated. In its FY 2003 Report to Congress on Federal Government Information Security Management, published this month, OMB concludes that the federal government has made significant strides in identifying and addressing long-standing problems, but that challenging weaknesses remain. Overall, the report discusses the steps taken by OMB and federal agencies to implement FISMA, details progress made in fiscal year 2003, and identifies IT security gaps and weaknesses. The report also presents a plan of action that OMB is pursuing with agencies to close these gaps and improve the security of federal information and systems. This plan is intended to resolve information and security challenges through both management and budgetary processes. OMB’s report discussed four governmentwide findings: 1. Agencies’ Progress Against Governmentwide IT Security Milestones. The President’s fiscal year 2004 budget established three governmentwide goals to be met by the end of calendar year 2003. These goals and the progress reported against them were: Goal 1 — As required by FISMA, all federal agencies are to have created a central remediation process to ensure that program and system-level IT security weaknesses, once identified, are tracked and corrected. In addition, each agency IG is to verify whether the agency has a process in place that meets criteria specified in OMB guidance. Based on IG responses to these criteria, OMB reported that each agency has an IT security remediation process, but that the maturity of these processes varies greatly. In particular, the report noted that for the 24 large agencies, only half have a remediation process verified by their IGs as meeting the necessary criteria. Goal 2 — Eighty percent of federal IT systems are to be certified and accredited. OMB reported that many agencies are not adequately prioritizing their IT investments to ensure that significant IT security weaknesses are appropriately addressed. As a result, at the end of 2003, the reported percentage of systems certified and accredited had increased to 62 percent, but was still short of the goal. Related to this goal, the report noted that most security weaknesses can be found in operational systems that either have never been certified and accredited or whose certification and accreditation are out of date. Goal 3 — Eighty percent of the federal government’s fiscal year 2004 major IT investments shall appropriately integrate security into the lifecycle of the investment. OMB reported that agencies have made improvements in integrating security into new IT investments, but that significant problems remain, particularly in ensuring security of existing systems. As an example, the report provided results for the performance measure related to this goal, which showed that at the end of 2003, the percentage of systems that had integrated security into the lifecycle of the investment increased to 78 percent. 2. Agency Progress Against Key IT Security Measures. As the report highlights, because of GISRA and the OMB-developed performance measures, the federal government is now able to measure progress in IT security; and the Congress, OMB, the agencies, and GAO are able to track and monitor agency efforts against those measures. Noting agency progress, the report provides a table comparing results of 24 large federal agencies for key performance measures for fiscal years 2001, 2002, and 2003. However, it also notes that further work is needed, and uses the area of contingency planning as an example, where only 48 percent of the systems had tested contingency plans. A comparison of reported overall results for fiscal year 2002 and 2003 is provided below in table 1. 3. IGs’ Assessment of Agency Plan of Action and Milestones Process. As mentioned in the discussion of goal 1, OMB requested that IGs assess against a set of criteria whether the agency had a robust agencywide plan of action process. OMB reported the overall results of this assessment for the 24 agencies, which showed that 8 had such a process; 4 did, but with improvements needed; 11 did not; and one did not submit a report (DOD). 4. Lack of Clear Accountability for Ensuring Security of Information and Systems. The report emphasizes that even with the strong focus of both GISRA and FISMA on the responsibilities of agency officials regarding security, there continues to be a lack of understanding, and therefore, accountability within the federal government. Issues that continue to be a concern include the following: Agency and IG reports continue to identify the same IT security weaknesses year after year, some of which are seen as repeating material weaknesses. Too many legacy systems continue to operate with serious weaknesses. As a result, there continues to be a failure to adequately prioritize IT funding decisions to ensure that remediation of significant security weaknesses are funded prior to proceeding with new development. In further discussing this finding, the report concludes that these concerns must be addressed through improved accountability, that is, holding agency program officials accountable for ensuring that the systems that support their programs and operations are secure. Further, it emphasizes that ensuring the security of an agency’s information and systems is not the responsibility of a single agency official or the agency’s IT security office, but rather a responsibility to be shared among agency officials that support their operations and assets. The report also outlines a plan of action to improve performance that identifies specific steps it will pursue to assist agencies in their IT security activities, promote implementation of law and policy, and track status and progress. These steps are: Prioritizing IT Spending to Resolve IT Security Weaknesses. OMB reports that it used information from agencies’ annual FISMA reports and quarterly POA&M updates in making funding decisions for fiscal year 2004, as well as for fiscal year 2005 to address longer term security weaknesses. For example, agencies with significant information and system security weaknesses were directed to remediate operational systems with weaknesses prior to spending fiscal year 2004 IT development or modernization funds. Further, if additional resources are needed to resolve those weaknesses, agencies are to use those fiscal year 2004 funds originally sought for new development. President’s Management Agenda Scorecard. To “get to green” under the Expanding E-Government Scorecard for IT security, agencies are required to meet the following three criteria: (1) demonstrate consistent progress in remediating IT security weaknesses; (2) attain certification and accreditations for 90 percent of their operational IT systems; and (3) have an IG-assessed and IG-verified agency POA&M process. Fiscal Year 2004 OMB FISMA Guidance. OMB plans to further emphasize performance measurement in next year’s guidance. In particular, its focus will center on three areas: (1) evolving the IT security performance measures to move beyond status reporting to also identify the quality of the work done, such as determining both the number of systems certified and accredited and the quality of certification and accreditation conducted; (2) further targeting of IG efforts to assess the development, implementation, and performance of key IT security processes, such as remediation and intrusion detection and reporting; and (3) providing additional clarity to certain definitions to eliminate interpretation differences within agencies and among agencies and IGs. Threat and Vulnerability Response Process. In response to the increasing number and potential impact of threats and vulnerabilities, OMB will continue to focus on improving the federal government’s incident prevention and management capabilities. Such improvements include an increased emphasis on reducing the impact of worms and viruses through more timely installation of patches for known vulnerabilities, and improved information sharing to rapidly identify and respond to cyber threats and critical vulnerabilities. OMB also notes the critical importance of agency business continuity plans to mitigating the impact of threats and vulnerabilities. Finally, OMB’s March 2004 report to the Congress identifies several other issues, and provides additional summary and agency-specific information. These include the following: As one of the changes or additions introduced by FISMA, a stronger emphasis is placed on configuration management. Specifically, FISMA requires each agency to develop specific system configuration requirements that meet its own needs and ensure compliance with them. According to the report, this provision encompasses traditional system configuration management, employing clearly defined system security settings, and maintaining up-to-date patches. Further, adequate ongoing monitoring and maintenance must accompany the establishment of such configuration requirements. Federal funding for IT security increased from $2.7 billion in fiscal year 2002 to $4.2 billion in fiscal year 2003. The report also continues to emphasize that, historically, a review of IT security spending and security results has demonstrated that spending is not a statistically significant factor in determining agency security performance. Rather, the key is effectively incorporating IT security in agency management actions and implementing IT security throughout the lifecycle of a system. The report appendixes provide an overview of the federal government’s IT security program, a summary of performance by 55 small and independent agencies, and individual summaries for each of the 24 large agencies. Overall, fiscal year 2003 data reported by the agencies for a subset of OMB’s performance measures show increasing numbers of systems meeting the requirements represented by these measures. For example, as shown in table 1, the reported percentage of systems authorized for processing following certification and accreditation increased from 47 percent for fiscal year 2002 to 62 percent for fiscal year 2003—an increase of 15 percentage points. In addition, the reported number of systems assessed for risk and assigned a level of risk increased by 13 percentage points from 65 percent for fiscal year 2002 to 78 percent for fiscal year 2003. Reported increases for other measures ranged from 4 to 15 percentage points. Figure 1 illustrates the reported overall status of the 24 agencies in meeting these requirements and the increases between fiscal years 2002 and 2003. This subset of performance measures highlights important information security requirements. However, agencies’ FISMA reports also address other specific statutory requirements, regarding such elements as incident response capabilities, information security training, review of agency contractor operations and facilities, and remediation processes. The agency reports, as well as the IGs independent evaluations are intended to address all the FISMA requirements, and it is these reports and evaluations that your subcommittee reviewed in assigning agency grades for your December 2003 computer security report card. The data and other information submitted for fiscal year 2003 FISMA reporting did show overall increases by many agencies for certain measures, but also that wide variances existed among the agencies. As discussed earlier, we did not validate the accuracy of the data reported by the agencies, but did analyze the IGs’ fiscal year 2003 FISMA reports to identify issues related to the accuracy of this information. Also as discussed later, we noted opportunities to improve the usefulness of agency-reported data. Further, in considering FISMA data, it is important to note that as more systems are subject to the certification and accreditation process and periodically tested, it is probable that additional significant weaknesses will be identified; and until all systems have contingency plans that are periodically tested, agencies have limited assurance that they will be able to recover from unexpected events. Summaries of results reported for specific requirements follow. As part of the agencywide information security program required for each agency, FISMA mandates that agencies assess the risk and magnitude of the harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of their information and information systems. OMB, through information security policy set forth in its Circular A-130, also requires an assessment of risk as part of a risk- based approach to determining adequate, cost-effective security for a system. As defined in NIST’s current draft revision of its Risk Management Guide for Information Technology Systems, risk management is the process of identifying risk, assessing risk, and taking steps to reduce risk to an acceptable level where risk is defined as the net negative impact of the exercise of vulnerability, considering both the probability and the impact of occurrence. Risk assessment is the first process in the risk management process, and organizations use risk assessment to determine the extent of the potential threat and the risk associated with an IT system throughout its systems development life cycle. Our best practices work has also shown that risk assessments are an essential element of risk management and overall security program management, and are an integral part of the management processes of leading organizations. Risk assessments help ensure that the greatest risks have been identified and addressed, increase the understanding of risk, and provide support for needed controls. To measure agencies’ performance in implementing this requirement, OMB mandates that agencies’ FISMA reports provide the number and percentage of systems that have been assessed for risk. Reporting for this measure continued to show overall increases. Specifically, 14 of the 24 agencies reported an increase in the percentage of systems assessed for risk for fiscal year 2003 as compared with fiscal year 2002. Further, as illustrated in figure 2, 12 agencies reported that they had assessed risk for 90 to 100 percent of their systems for fiscal year 2003, and only 4 of the remaining 13 agencies reported that less than half of their systems had been assessed for risk (compared with 8 agencies for fiscal year 2002). FISMA requires that agencywide information security programs include subordinate plans for providing adequate information security for networks, facilities, and systems or groups of information systems, as appropriate. According to NIST security plan guidance, the purpose of these plans is to (1) provide an overview of the security requirements of the system and describe the controls in place or planned for meeting those requirements, and (2) delineate the responsibilities and expected behavior of all individuals who access the system. OMB Circular A-130 requires that agencies prepare IT system security plans consistent with NIST guidance, and that these plans contain specific elements, including rules of behavior for system use, required training in security responsibilities, personnel controls, technical security techniques and controls, continuity of operations, incident response, and system interconnection. Agencies are also to update security plans as part of the cycle for reaccrediting system processing. As a performance measure for this requirement, OMB requires that agencies report number and percentage of systems with up-to-date security plans. Agency data reported for this measure showed overall increases for fiscal year 2003, with a total of 9 agencies reporting up-to- date security plans for 90 percent or more of their systems compared with 7 agencies for fiscal year 2002. Further, of the remaining 15 agencies, only 5 reported that less than 50 percent of their systems had up-to-date security plans, compared with 9 agencies in 2002. Figure 3 summarizes overall fiscal year 2003 results. As part of its responsibilities under FISMA, OMB is required to develop and oversee the implementation of policies, principles, standards, and guidelines on information security. Included in OMB’s policy for federal information security is a requirement that agency management officials formally authorize their information systems to process information and, thereby, accept the risk associated with their operation. This management authorization (accreditation) is to be supported by a formal technical evaluation (certification) of the management, operational, and technical controls established in an information system’s security plan. NIST is currently in the process of updating its guidance for the certification and accreditation of federal systems (except for national security systems). This guidance is to be used in conjunction with other standards and guidance that FISMA requires NIST to issue—documents that, when completed, are intended to provide a structured yet flexible framework for identifying, employing, and evaluating the security controls in federal information systems. Because OMB considers system certification and accreditation to be such an important information security quality control, for FISMA reporting, it requires agencies to report the number of systems authorized for processing after certification and accreditation. Data reported for this measure showed overall increases for most agencies. For example, 17 agencies reported increases in the percentage of systems authorized compared with their percentages last year. In addition, 7 agencies reported that they had authorized 90 to 100 percent of their systems compared with only 3 agencies last year. However, 11 agencies reported they had authorized less than 50 percent of their systems, but this also indicated some improvement compared with the 13 agencies that reported less than 50 percent last year (which included 3 that reported none). Figure 4 summarizes overall results for the 24 agencies for fiscal year 2003. The results of the IGs’ independent evaluations showed deficiencies in agencies’ system certifications and accreditations, including instances in which certifications and accreditations were not were not current and controls were not tested. In addition, at the request of the House Committee on Government Reform and your subcommittee, we are currently reviewing federal agencies’ certification and accreditation processes. Preliminary results of our work indicate that the majority of the 24 large agencies reported that they are using NIST or other prescribed guidance for their system certifications and accreditations. However, our reviews of the certification and accreditation of selected systems at selected agencies identified instances where documentation did not show that specific criteria were always met. For example, we noted instances in which systems were accredited even though risk assessments were outdated, contingency plans were incomplete or untested, and control testing was not performed. Further, in some cases, documentation did not clearly indicate what residual risk the accrediting official was actually accepting in making the authorization decision. Unless agencies ensure that their certifications and accreditations meet appropriate criteria, the value of this process as a management control for ensuring information system security is limited, and agency reported performance data may not accurately reflect the status of an agency’s efforts to implement this requirement. OMB requires that agencies’ budget submissions specifically identify security costs as part of life-cycle costs for their IT investments and has provided criteria to be considered in determining such costs. OMB also provided these security cost criteria in its FISMA guidance and required agencies to report their IT security spending, including those critical infrastructure protection costs that apply to the protection of government operations and assets. Among other questions related to including security costs in IT investments, OMB requires that the agencies report the number of systems that have security control costs integrated into their system life cycles. Fiscal year 2003 reporting for this measure showed that agencies are increasingly integrating security control costs into the life cycle of their systems. Specifically, 15 agencies reported increases in the number of systems integrating security costs, compared with the number reported last year. Also, as shown in figure 5, 9 agencies reported meeting this measure for 90 to 100 percent of their systems. FISMA requires that agency information security programs include periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, to be performed with a frequency that depends on risk, but no less than annually. This is to include testing of management, operational, and technical controls of every information system identified in the FISMA-required inventory of major systems. Periodically evaluating the effectiveness of security policies and controls and acting to address any identified weaknesses are fundamental activities that allow an organization to manage its information security risks cost- effectively, rather than reacting to individual problems ad hoc only after a violation has been detected or an audit finding has been reported. Further, management control testing and evaluation as part of program reviews is an additional source of information that can be considered along with control testing and evaluation in IG and our audits to help provide a more complete picture of the agencies’ security postures. As a performance measure for this requirement, OMB mandates that agencies report the number of systems for which security controls have been tested and evaluated. Fiscal year 2003 data reported for this measure showed that a total of 15 agencies reported an increase in the overall percentage of systems being tested and evaluated. However, 8 agencies still reported that they had tested the controls of less than 50 percent of their systems (compared with 10 agencies last year) and only 6 of the remaining 16 agencies reported testing and evaluating the controls for 90 percent or more of their systems (compared with 4 agencies last year). Figure 6 shows the overall results for fiscal year 2003. FISMA requires that agencies’ information security programs include plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. Contingency plans provide specific instructions for restoring critical systems, including such elements as arrangements for alternative processing facilities, in case usual facilities are significantly damaged or cannot be accessed due to unexpected events such as temporary power failure, accidental loss of files, or major disaster. It is important that these plans be clearly documented, communicated to affected staff, and updated to reflect current operations. The testing of contingency plans is essential to determine whether they will function as intended in an emergency situation, and the frequency of plan testing will vary depending on the criticality of the entity’s operations. The most useful tests involve simulating a disaster situation to test overall service continuity. Such a test would include testing whether the alternative data processing site will function as intended and whether critical computer data and programs recovered from off-site storage are accessible and current. In executing the plan, managers will be able to identify weaknesses and make changes accordingly. Moreover, tests will assess how well employees have been trained to carry out their roles and responsibilities in a disaster situation. To show the status of implementing this requirement, OMB mandates that agencies report the number of systems that have a contingency plan and the number with contingency plans that have been tested. Agencies’ reported fiscal year 2003 data for these measures showed that contingency planning remains a problem area for many agencies. Specifically, a total of 11 agencies report that less than half of their systems have contingency plans and of the remaining 13 agencies, only 6 have contingency plans for 90 to 100 percent of their systems. In addition, a total of 14 agencies reported that they had tested contingency plans for less than half of their systems, including 2 agencies that reported testing none. Figure 7 provides overall results for fiscal year 2003 contingency plan testing. FISMA requires agencies to provide security awareness training to inform personnel, including contractors and other users of information systems that support the operations and assets of the agency, of information security risks associated with their activities, and their responsibilities in complying with agency policies and procedures designed to reduce these risks. In addition, agencies are required to provide training on information security to personnel with significant security responsibilities. Our studies of best practices at leading organizations have shown that such organizations took steps to ensure that personnel involved in various aspects of their information security programs had the skills and knowledge they needed. They also recognized that staff expertise had to be frequently updated to keep abreast of ongoing changes in threats, vulnerabilities, software, security techniques, and security monitoring tools. As performance measures for FISMA training requirements, OMB has the agencies report the number of employees who received IT security training during fiscal year 2003 and the number of employees with significant security responsibilities who received specialized training. Reported fiscal year 2003 data showed that 13 agencies reported that they provided security training to 90 to 100 percent of their employees and contractors compared with 9 agencies for fiscal year 2002. Of the remaining 11 agencies, only 3 reported that such training was provided for less than half of their employees/contractors, and 1 provided insufficient data for this measure. For specialized training for employees with significant security responsibilities, reported data showed increases since fiscal year 2002. For example, a total of 7 agencies reported training for 90 to 100 percent of their employees with significant security responsibilities (compared with 5 agencies last year), and of the remaining 17 agencies, only 2 reported providing training to less than half of such employees (compared with 10 for fiscal year 2002). Figure 8 provides overall results for fiscal year 2003. Although even strong controls may not block all intrusions and misuse, organizations can reduce the risks associated with such events if they promptly take steps to detect them before significant damage can be done. Accounting for and analyzing security problems and incidents are also effective ways for an organization to gain a better understanding of threats to its information and of the cost of its security-related problems. Such analyses can also pinpoint vulnerabilities that need to be addressed to help ensure that they will not be exploited again. Problem and incident reports can, therefore, provide valuable input for risk assessments, help in prioritizing security improvement, and be used to illustrate risks and related trends in reports to senior management. FISMA requires that agencies’ information security programs include procedures for detecting, reporting, and responding to security incidents; mitigating risks associated with such incidents before substantial damage is done; and notifying and consulting with the FISMA-required federal information security incident center and other entities, as appropriate, including law enforcement agencies and relevant IGs. OMB information security policy has also required that system security plans ensure a capability to provide help to users when a security incident occurs in the system and to share information concerning common vulnerabilities and threats. In addition, NIST has provided guidance to assist organizations in establishing computer security incident-response capabilities and in handling incidents efficiently and effectively. OMB requires agencies to report several performance measures and other information for FISMA related to detecting, reporting, and responding to security incidents. These include the number of agency components with an incident handling and response capability, whether the agency and its major components share incident information with the Federal Computer Incident Response Center (FedCIRC) in a timely manner, and the numbers of incidents reported. OMB also requires that agencies report on how they confirm that patches have been tested and installed in a timely manner and whether they are a member of FedCIRC’s Patch Authentication and Distribution Capability, which provides agencies with information on trusted, authenticated patches for their specific technologies without charge. Agency-reported data showed that many agencies have established and implemented incident-response capabilities for their components. For example, 17 agencies reported that for fiscal year 2003, 90 percent or more of their components had incident handling and response capabilities (compared to 12 agencies for fiscal year 2002). Also, a total of 18 agencies reported that their components report incidents to FedCIRC either themselves or centrally through one group. A total of 22 agencies reported that they confirm patches have been tested and installed in a timely manner. In contrast, of the 23 IGs that reported, 11 responded that the agency confirmed that patches have been tested and installed in a timely manner; 5 that the agency did but not consistently; and 6 that the agency did not (1 other IG did not provide sufficient data). A total of 19 agencies also reported that they were a member of FedCIRC’s Patch Authentication and Distribution Capability. In our September 2003 testimony, we discussed the criticality of the patch management process in helping to alleviate many of the challenges involved in securing computing systems from attack. We also identified common practices for effective patch management found in security- related literature from several groups, including NIST, Microsoft, patch management software vendors, and other computer-security experts. These practices included senior executive support of the process; standardized patch management policies, procedures, and tools; dedicated resources and clearly assigned responsibilities for ensuring that the patch management process is effective; current inventory of all hardware equipment, software packages, services, and other technologies installed and used by the organization; proactive identification of relevant vulnerabilities and patches; assessment of the risk of applying the patch considering the importance of the system to operations, the criticality of the vulnerability, and the likelihood that the patch will disrupt the system; testing each individual patch against various systems configurations in a test environment before installing it enterprisewide to determine any impact on the network; effective patch distribution to all users; and regular monitoring through network and host vulnerability scanning to assess whether patches have been effectively applied. In addition to these practices, we identified several steps to be considered when addressing software vulnerabilities, including: deploying other technologies, such as antivirus software, firewalls, and other network security tools, to provide additional defenses against attacks; employing more rigorous engineering practices in designing, implementing, and testing software products to reduce the number of potential vulnerabilities; improving tools to more effectively and efficiently manage patching; researching and developing technologies to prevent, detect, and recover from attacks as well as to identify their perpetrators, such as more sophisticated firewalls to keep serious attackers out, better intrusion- detection systems that can distinguish serious attacks from nuisance probes and scans, systems that can isolate compromised areas and reconfigure while continuing to operate, and techniques to identify individuals responsible for specific incidents; and ensuring effective, tested contingency planning processes and procedures. Under FISMA, agency heads are responsible for providing information security protections for information collected or maintained by or on behalf of the agency and information systems used or operated by an agency or by a contractor. Thus, as OMB emphasized in its fiscal year 2003 FISMA reporting guidance, agency IT security programs apply to all organizations that possess or use federal information or that operate, use, or have access to federal information systems on behalf of a federal agency. Such other organizations may include contractors, grantees, state and local governments, and industry partners. This underscores longstanding OMB policy concerning sharing government information and interconnecting systems: federal security requirements continue to apply and the agency is responsible for ensuring appropriate security controls. As a performance measure for the security of contractor-provided security, OMB had the agencies report the number of contractor facilities or operations reviewed and to respond as to whether or not they used appropriate methods (such as audits or inspections and agreed-upon IT security requirements) to ensure that contractor-provided services for their programs and systems are adequately secure and meet the requirements of FISMA, OMB policy and NIST guidelines, national security policy, and agency policy. Fiscal year 2003 data reported for these measures showed that 10 of the 24 agencies reported that they had reviewed 90 to 100 percent of their contractor operations or facilities. Only 2 agencies reported having reviewed less than half of their contractor operations or facilities, and two others provided insufficient data for this measure. In addition, 22 agencies reported that they used appropriate methods to ensure that contractor- provided services are adequately secure and meet the requirements of FISMA. Of the remaining two agencies, one reported that it did not use appropriate methods and one reported partial compliance. Although these reported results indicate overall increases from fiscal year 2002, the IGs’ evaluations provided different results. For example, although the IG evaluations did not always address these measures, 9 of the 15 IGs that did report showed that less than half of contractor operations or facilities were reviewed. Further, only 12 IGs reported that the agency used appropriate methods to ensure that contractor-provided services are adequately secure and meet the requirements of FISMA, while 7 reported that their agencies did not. FISMA requires that agencies’ information security programs include 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. Developing effective corrective action plans is key to ensuring that remedial action is taken to address significant deficiencies. Further, a centralized process for monitoring and managing remedial actions enables the agency to identify trends, root causes, and entitywide solutions. As discussed previously, as part of GISRA implementation, OMB began requiring that agencies report on the status of their remediation efforts through POA&Ms and quarterly updates. In addition, for fiscal year 2003 FISMA reporting, OMB had agency IGs assess whether the agency had developed, implemented, and was managing an agencywide plan of action and milestone process according to specific criteria, such as whether agency program officials and the CIO develop, implement, and manage POA&Ms for every system that they own and operate (systems that support their programs) that has an IT security weakness; and whether the agency CIO centrally tracks and maintains all POA&M activities on at least a quarterly basis. Overall, the IGs’ responses to these criteria showed that many agencies still do not use the POA&M process to manage the correction of their information security weaknesses. For example, as part of monitoring the status corrective actions, 20 of the 23 IGs that reported responded that the agency CIO tracked POA&M data centrally on at least a quarterly basis, but only 12 reported that the CIO maintained POA&Ms for every system that has an IT weakness. Further, 14 IGs reported that their agency POA&M process did not prioritize IT security weaknesses to ensure that significant weaknesses are addressed in a timely manner and receive appropriate resources. Reported IG responses to these and other criteria are summarized in table 2. Periodic reporting of performance measures tied to FISMA requirements and related analysis can provide valuable information on the status and progress of agency efforts to implement effective security management programs, thereby assisting agency management, OMB and the Congress in their management and oversight roles. However, several opportunities exist to improve the usefulness of such information as indicators of both governmentwide and agency-specific performance in implementing information security requirements. As discussed earlier, OMB plans to further emphasize performance measurement in next year’s FISMA reporting guidance, including evolving measures to identify the quality of work performed, targeting IG efforts to assess key security processes, and clarifying certain definitions. In developing its guidance, OMB can consider how their efforts can help to address the following factors that lessen the usefulness of current performance measurement data: Limited assurance of data reliability and quality. The performance measures reported by the agencies are primarily based on self- assessments and are not independently validated. OMB did not require the IGs to validate agency responses to the performance measures, but did instruct them to assess the reliability of the data for the subset of systems they evaluate as part of their independent evaluations. Although not consistently addressed by all the IGs, some IG evaluations did identify problems with data reliability and quality that could affect agency performance data. For example, for the performance measure on the number of agency systems authorized for processing after certification and accreditation, 6 IGs indicated different results than those reported by their agencies for reasons such as out-of-date certifications and accreditations (systems are to be reaccredited at least every 3 years). Further, other IGs identified problems with the quality of the certifications and accreditations, such as security control reviews not being performed. Accuracy of agency system inventories. The total number of agency systems is a key element in OMB’s performance measures, in that agency progress is indicated by the percentage of total systems that meet specific information security requirements. Thus, inaccurate or incomplete data on the total number of agency systems affects the percentage of systems shown as meeting the requirements. Further, a complete inventory of major information systems is a key element of managing the agency’s IT resources, including the security of those resources. As mentioned, FISMA requires that each agency develop, maintain, and annually update an inventory of major information systems operated by the agency or under its control. However, according to their fiscal year 2003 FISMA reports, only 13 of the 24 agencies reported that they had completed their system inventories. Further, independent evaluations by IGs for 3 of these 13 agencies did not agree that system inventories were complete. In addition, although there was little change in the reported total number of systems shown for the 24 agencies (an increase of only 41 systems from 7,957 systems for fiscal year 2002 to 7,998 systems for fiscal year 2003, large changes in individual agencies’ total systems from year to year could make it more difficult to interpret changes in their performance measure results. For example, the total number of systems reported by the Department of Agriculture decreased by 55 percent from 605 for fiscal year 2002 to 271 for fiscal year 2003, which the department attributed, in large part, to its efforts to develop the FISMA-required inventory of major information systems. At the same time, all of the department’s key performance measures increased, with some, such as systems assessed for risk, showing a large increase (from 18 percent for fiscal year 2002 to 72 percent for fiscal year 2003). Limited Department of Defense data. In interpreting overall results for the federal government, it is important to note that reported numbers include only a small sample of the thousands of systems identified by DOD. Attributing its size and complexity and the considerable lead time necessary to allow for the collection of specific metrics and the approval process by each service and agency, DOD determined that the collection of a sample of system and network performance metrics would effectively support its emphasis on network-centric operations and complement its overall information assurance security reporting. Obtaining OMB concurrence with this approach, DOD provided performance measurement data on a sample of 378 systems in its fiscal year 2003 FISMA report. As OMB reported in its fiscal year 2003 report to the Congress, DOD reported a total of 3,557 systems for the department— almost half of the combined total systems for the other 23 agencies. OMB also reported that DOD plans to report on all systems for the fiscal year 2004 reporting cycle. As a result, including performance data on all DOD systems for fiscal year 2004 could significantly affect the overall performance measurement results both for DOD and governmentwide. Data reported in aggregate, not according to system risk. Performance measurement data are reported on the total number of agency systems and do not indicate the relative importance or risk of the systems for which FISMA requirements have been met. Reporting information by system risk would provide better information about whether agencies are prioritizing their information security efforts according to risk. For example, the performance measures for fiscal year 2003 show that 48 percent of the total number of systems have tested contingency plans, but do not indicate to what extent these 48 percent include the agencies’ most important systems. Therefore, agencies, the administration, and the Congress cannot be sure that critical federal operations can be restored if an unexpected event disrupts service. As required by FISMA, NIST recently issued its Standards for Security Categorization of Federal Information and Information Systems to provide a common framework and understanding for expressing security that promotes effective management and oversight of information security programs and consistent reporting to OMB and the Congress on the adequacy and effectiveness of information security policies, procedures, and practices. These standards, which are discussed later in greater detail, would require agencies to categorize their information systems according to three levels of potential impact on organizations or individuals—high, moderate, and low—should there be a breach of security. Refinement of performance measures to improve quality of analysis. Refinement of performance measures can provide more useful information about the quality of agency processes. For example, as discussed earlier, GAO and the IGs have noted issues concerning the quality of the certification and accreditation process. Additional information reported on key aspects of certification and accreditation would provide better information to assess whether they were performed consistently. As also discussed earlier, OMB’s fiscal year 2003 FISMA report to the Congress also identified the need to evolve performance measures to provide better quality information. Since FISMA was enacted in December 2002, NIST has taken a number of actions to develop required security-related standards and guidance. These actions include the following: In December 2003 it issued the final version of its Standards for Security Categorization of Federal Information and Information Systems (FIPS Publication 199). NIST was required to submit these categorization standards to the Secretary of Commerce for promulgation no later than 12 months after FISMA was enacted. The standards establish three levels of potential impact on organizational operations, assets, or individuals should a breach of security occur—high (severe or catastrophic), moderate (serious), and low (limited). These standards are intended to provide a common framework and understanding for expressing security that promotes effective management and oversight of information security programs, and consistent reporting to OMB and the Congress on the adequacy and effectiveness of information security policies, procedures, and practices. Also in December 2003, it issued the initial public draft of its Guide for Mapping Types of Information and Information Systems to Security Categories (Special Publication 800-60). Required to be issued 18 months after FISMA enactment, this guidance is to assist agencies in categorizing information and information systems according to impact levels for confidentiality, integrity, and availability as provided in NIST’s security categorization standards (FIPS Publication 199). In October 2003 it issued an initial public draft of Recommended Security Controls for Federal Information Systems (Special Publication 800-53) to provide guidelines for selecting and specifying security controls for information systems categorized in accordance with FIPS Publication 199. This draft includes baseline security controls for low and moderate impact information systems, with controls for high impact systems to be provided in subsequent drafts. This publication, when completed, will serve as interim guidance until 2005 (36 months after FISMA enactment), which is the statutory deadline to publish minimum standards for all non-national- security systems. In addition, testing and evaluation procedures used to verify the effectiveness of security controls are to be provided this spring in NIST’s Guide for Verifying the Effectiveness of Security Controls in Federal Information Systems (Special Publication 800-53A). In August 2003 it issued Guideline for Identifying an Information System as a National Security System (Special Publication 800-59). This document provides guidelines developed in conjunction with DOD, including the National Security Agency, to ensure that agencies receive consistent guidance on the identification of systems that should be governed by national security system requirements. Except for national security systems identified by FISMA, the Secretary of Commerce is responsible for prescribing standards and guidelines developed by NIST. DOD and the Director of Central Intelligence have authority to develop policies, guidelines, and standards for national security systems. The Director is also responsible for policies relating to systems processing intelligence information. According to a NIST official, the agency has also made progress in implementing other FISMA requirements. For example, it is continuing to provide consultative services to agencies on FISMA related information security issues and has established a federal agencies security practices Web site to identify, evaluate, and disseminate best practices for critical infrastructure protection and security. In addition, it has established a Web site for the private sector to share nonfederal information security practices. NIST has continued an ongoing dialogue with the National Security Agency and the Committee on National Security Systems to coordinate and take advantage of the security work underway within the federal government. FISMA also requires NIST to prepare an annual public report on activities undertaken in the previous year and planned for the coming year, to carry out its responsibilities. According to a NIST official, this report should be issued this month. In addition to its responsibilities under FISMA, NIST has issued or is developing other information security guidance that supports this law. Along with its guidance on incident handling, building an information security awareness program, and draft guidance on both certification and accreditation and risk management, NIST has also issued Security Metrics Guide for Information Technology Systems and Security Considerations in the Information System Development Life Cycle: Recommendations of the National Institute of Standards and Technology. Current budget constraints may, however, affect NIST’s future work. FISMA established new responsibilities for this agency and authorized an appropriation of $20 million for each fiscal year, 2003 through 2007. However, according to NIST, funding for the Computer Security Division, the organization responsible for FISMA activities, was reduced from last year, and this will affect this division’s information security and critical infrastructure protection work. In addition to the specific responsibilities to develop standards and guidance under FISMA, other information security activities undertaken by NIST include operating a computer security expert assist team (CSEAT) to assist federal agencies in identifying and resolving IT security problems; conducting security research in areas such as access control, wireless, mobile agents, smart-cards, and quantum computing; improving the security of control systems that manage key elements of the country’s critical infrastructure; and performing cyber security product certifications required for government procurements. The Cyber Security Research and Development Act also assigned information security responsibilities to NIST and authorized funding. These responsibilities include providing research grants to institutions of higher education or other research institutions to support short-term research aimed at improving the security of computer systems; growth of emerging technologies associated with the security of networked systems; strategies to improve the security of real-time computing and communications systems for use in process control; and multidisciplinary, long-term, high-risk research on ways to improve the security of computer systems. developing cyber security checklists (and establishing priorities for their development) that set forth settings and option selections that minimize the security risks associated with each computer hardware or software system that is, or is likely to become, widely used within the federal government. In summary, through the continued emphasis of information security by the Congress, the administration, agency management, and the audit community, the federal government has seen improvements in its information security. However, despite the apparent progress shown by increases in key performance measures, most agencies still have not reached the level of performance that demonstrates that they have implemented the agencywide information security program mandated by FISMA. If information security is to continue to improve, agency management must remain committed to these efforts and establish management processes that ensure that requirements are implemented for all their major systems, including new requirements to categorize their systems and incorporate mandatory minimum security controls. Performance measures will continue to be a key tool to both hold agencies accountable and provide a barometer of the overall status of federal information security. For this reason, it is increasingly important that agencies’ monitoring, review, and evaluation processes provide the Congress, the administration, and agency management with assurance that these measures accurately reflect agency progress. Opportunities to provide this assurance and improve the usefulness of agencies’ performance measurement data include IG validation of reported data, categorization of the data according to system risk levels, and refinement of the measures to provide more information about the quality of agency processes. Achieving significant and sustainable results will likely require agencies to develop programs and processes that prioritize and routinely monitor and manage their information security efforts. Further, agencies will need to ensure that systems and processes are in place to provide information and facilitate the day-to-day management of information security throughout the agency, as well as to verify the reliability of reported performance information. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or members of the subcommittee may have at this time. If you should have any questions about this testimony, please contact me at (202) 512-3317 or Ben Ritt, Assistant Director, at (202) 512-6443. We can also be reached by e-mail at [email protected] and [email protected], respectively. Other individuals making key contributions to this testimony included Larry Crosland, Mark Fostek, Danielle Hollomon, and Barbarol James. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | For many years, GAO has reported on the widespread negative impact of poor information security within federal agencies and has identified it as a governmentwide high-risk issue since 1997. Legislation designed to improve information security was enacted in October 2000. It was strengthened in December 2002 by new legislation, the Federal Information Security Management Act of 2002 (FISMA), which incorporated important new requirements. This testimony discusses (1) the Office of Management and Budget's (OMB) recent report to the Congress required by FISMA on the government's overall information security posture, (2) the reported status of efforts by 24 of the largest agencies to implement federal information security requirements, (3) opportunities for improving the usefulness of performance measurement data, and (4) progress by the National Institute of Standards and Technology (NIST) to develop related standards and guidance. OMB reports significant strides in addressing long-standing problems, but at the same time cites challenging weaknesses that remain. One governmentwide weakness OMB emphasizes is a lack of understanding--and therefore accountability--on the part of agency officials regarding their responsibilities for ensuring the security of information and systems. The report presents a plan of action to close these gaps through both management and budgetary processes. Fiscal year 2003 FISMA data showed that, overall, the 24 federal agencies reported increasing numbers of their systems met the information security requirements represented by key OMB performance measures. For example, of the total number of systems reported by these agencies, the reported number assessed for risk climbed from 65 percent to 78 percent, those having a contingency plan jumped from 55 to 68 percent, and those authorized for processing following certification and accreditation rose from 47 to 62 percent. However, reported results varied widely among individual agencies, with some reporting that less than half of their systems met certain requirements. Further, GAO noted opportunities to improve the usefulness of reported performance management data, including independent validation of these data and completion of system inventories. Reported Performance Measurement Data for Selected Information Security Requirements for 24 Large Federal Agencies NIST made progress in developing security-related standards and guidance required by FISMA. These include standards to categorize systems according to potential impact in the event of a security breach and recommended controls for such systems. However, according to NIST, current and future funding constraints could threaten its information security work. |
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FDA is responsible for helping to ensure that food products marketed in the United States meet the same statutory and regulatory requirements, whether they are produced in the United States or another country. FDA shares responsibility for the oversight of food safety with the United States Department of Agriculture’s (USDA) Food Safety and Inspection Service (FSIS). FSIS oversees the safety of domestic and imported meat, poultry, and processed egg products, while FDA is responsible for the safety of virtually all other foods, including milk, seafood, fruits, and vegetables. FDA’s responsibilities for overseeing the safety of imported products are divided among its product centers and program offices. FDA’s six centers are each responsible for the regulation of specific types of products, whether manufactured in the United States or another country. For example, the Center for Food Safety and Applied Nutrition is responsible for ensuring that the nation’s food supply is safe, sanitary, wholesome, and honestly labeled, and that cosmetic products are safe and properly labeled. FDA’s Office of International Programs (OIP) has responsibility for leading, managing, and coordinating all of the agency’s international activities, including its foreign offices. OIP, which is part of FDA’s Office of Global Regulatory Operations and Policy, collaborates with the international affairs staff in FDA’s centers and the Office of Regulatory Affairs (ORA). ORA—also part of the Office of Global Regulatory Operations and Policy—performs fieldwork to promote compliance with FDA requirements and the applicable laws, such as inspecting foreign facilities and examining products at the U.S. border. FDA’s foreign offices function within the embassy or consulate for the country or region under the auspices of the Department of State, along with other federal agencies that operate abroad, such as the USDA’s Foreign Agricultural Service, USDA’s Animal and Plant Health Inspection Service, and the Department of Commerce’s U.S. Commercial Service. FDA also works on related issues with other U.S. agencies, including USDA’s Food Safety Inspection Service to share food safety information, the Centers for Disease Control and Prevention (CDC) during foodborne outbreaks, and the Environmental Protection Agency (EPA) to enforce pesticide residue tolerances in foods that are established by EPA. FDA’s foreign offices have a director or deputy director to whom staff members report. The offices also may have food investigators that conduct inspections, as well as senior regional specialists, technical experts, and program support specialists who are responsible for engaging with foreign stakeholders and gathering information. Some offices also may have investigators responsible for inspecting other FDA- regulated products, such as drugs and medical devices, and locally employed staff, also known as Foreign Service Nationals, who are non- U.S. citizens employed at U.S. missions abroad. In 2011, FSMA expanded and modified FDA’s authorities and responsibilities, enhancing the agency’s oversight of imported food by, among other things, including provisions that might better ensure the comparable safety of imported and domestic food. For example, FSMA gave FDA express authority to hold imported foods to the same standards as domestic foods. FSMA directed the establishment of offices in foreign countries and specified that the offices (1) assist governments in those countries in ensuring the safety of food and other FDA-regulated products and (2) conduct risk-based inspections of food and other products and support such inspections by foreign governments. With respect to foreign facilities that are sources of food imported to the United States, the law directs FDA to inspect at least 600 foreign facilities within 1 year of enactment of FSMA and, in each of the 5 years following that period, to inspect at least twice the number it inspected during the previous year. In addition, FDA can refuse entry into the United States of food from a foreign facility if FDA is denied access for inspections by the foreign facility or the country in which the facility is located. FDA’s foreign offices have engaged in a variety of activities intended to help ensure the safety of imported food; building relationships with foreign counterparts has been a top-priority activity. Foreign offices have conducted inspections of foreign food facilities, but FDA is not keeping pace with FSMA’s mandate for increasing the number of these inspections. FDA reported to Congress in 2012 that the primary purpose of posting staff in other countries is to engage more proactively and consistently with various stakeholders to help prevent unsafe products from reaching U.S. borders. To accomplish that purpose, the foreign offices have engaged in various types of activities, including (1) building collaborative and cooperative working relationships with foreign regulatory authorities and U.S. federal agencies located in other countries, (2) gathering and assessing information to increase FDA’s knowledge of the regulatory landscape, such as conditions in other countries that could affect the safety of food, and (3) conducting inspections to help identify high-risk facilities and determine the risks from imported products. Table 1 explains these and other types of activities conducted by FDA’s foreign offices. These activities are carried out by FDA’s foreign offices—some of which have multiple locations—that divide up responsibilities for different parts of the world. As shown in figure 1, all offices are located in other countries except the Asia-Pacific Office, which is located at FDA headquarters in the United States. As illustrated in the figure, FDA has closed, or plans to close, some of its foreign office locations. FDA has closed these offices for a variety of reasons. For example, the location in Parma, Italy—where the European Food Safety Authority (EFSA) is headquartered—was closed, and FDA staff relocated to the United States Mission to the European Union in Brussels, Belgium, as a more efficient use of resources to ensure coverage for FDA-related activities within the European Union while maintaining the liaison with EFSA through temporary duty assignments. As part of these closures, the Asia-Pacific Office—which covers Canada, Australia, New Zealand, and countries in Asia other than China and India—has absorbed responsibilities for countries previously covered by the Middle East and North Africa Office and the Sub-Saharan Africa Office. We questioned the foreign offices to determine the extent to which they performed these activities and which three activities were a top priority in 2014. The foreign offices reported similarities and differences in the types of activities they conducted. For example, all offices similarly reported conducting activities related to (1) gathering and assessing information, (2) providing information on FDA standards, and (3) building relationships. As shown in figure 2, we found differences in top-priority activities across the foreign offices. As noted earlier, FSMA directed, among other things, the establishment of foreign offices to conduct risk-based inspections of food and other products. The foreign offices that conduct inspections of food facilities use investigators that are either assigned to a foreign office for at least a 2- year rotation (in-house) or assigned to a foreign office on temporary duty for 60, 90, or 120 days from ORA. FDA’s China Office, India Office, and Latin America Office are the only foreign offices that conducted inspections of food facilities in 2014. Our analysis showed that the number of inspections performed by the foreign offices has increased since we reported in 2010 but remains a small part of FDA’s total number of foreign food inspections. In 2010, FDA’s China Office completed 13 food inspections, and the India Office completed none. By 2013, the China Office completed 45 of FDA’s total 59 food inspections in China (about 76 percent), and the India Office completed all 20 FDA food inspections in India—about 5 percent of FDA’s total 1,415 inspections of foreign food facilities. In 2014, FDA added food investigators to its Latin America Office to conduct inspections, and the agency anticipates conducting more inspections of foreign food facilities in the future. During 2014, the foreign offices completed 140 of FDA’s total 1,323 inspections of foreign food facilities—66 in China, 67 in India, and 7 in Latin America—a 10-fold increase in the 4 years since 2010. The foreign offices also have begun providing in-country information to U.S.-based ORA investigators to help them complete their assigned foreign food inspections. Figure 3 shows the locations where FDA investigators conducted inspections of foreign food facilities in fiscal year 2014. These numbers include food inspections performed by FDA investigators, whether they were assigned to a specific foreign office, on temporary duty from ORA, or based with ORA in the United States and assigned to travel for a few weeks at a time to inspect foreign facilities. The increase in inspections completed by the foreign offices notwithstanding, FDA is not keeping pace with the targets for foreign food inspections set by Congress in FSMA. The act mandated that FDA inspect at least 600 foreign food facilities in the 1-year period following the enactment of FSMA. For each of the 5 following years, FSMA mandated that FDA inspect at least twice the number of facilities inspected during the previous year. Figure 4 shows the number of inspections FDA actually completed (or has planned to complete), along with two possible scenarios in response to FSMA. The first scenario has FDA inspecting twice the actual (or planned) number of foreign food facilities compared with the previous year, starting with the 1,002 inspections FDA completed in 2011 (see shaded bars labeled “FSMA mandate”). For example, as highlighted in the figure data, the FSMA mandate set a target of at least twice as many inspections—2,004—in 2012 as FDA actually inspected in 2011. The second scenario shows FDA inspecting 600 facilities—the FSMA minimum—in 2011, then doubling that number each of the 5 following years (see white bars labeled “Doubling each year”). The first scenario would yield a target of at least 2,646 foreign inspections in 2015 and an estimated target of at least 2,400 foreign inspections in 2016, the final year of the mandate. The second scenario, as FDA has reported to Congress, would yield a target of 19,200 foreign inspections in 2016. FDA is not currently keeping pace with the FSMA mandate for increased foreign food inspections under either scenario’s targets. As the figure shows, FDA completed 1,002 foreign food inspections in 2011, 167 percent of the FSMA mandate. In 2012, FDA completed 1,343 such inspections, a 34 percent increase from, but not twice, the previous year’s number. During 2013, FDA completed 1,403 such inspections, a 4 percent increase from the previous year but also less than twice the previous year’s number. Thus far, the agency has completed 1,323 inspections in 2014, which is more than planned but an overall decrease compared with the previous 2 years. FDA officials told us that the agency has not met—and is not planning to meet—the FSMA mandate. They questioned the usefulness of conducting the number of inspections mandated by FSMA. According to FDA officials, the cost of inspections is the main reason that the agency is not keeping pace with the FSMA mandate for foreign food facility inspections. In its most recent report to Congress on food imports and foreign offices, FDA estimated that the average cost of a foreign inspection was $23,600, compared with $15,500 for a comparable domestic one. By that estimate, FDA would have needed at least $113 million to complete the 4,800 foreign inspections that it has reported were required in fiscal year 2014 to meet the FSMA mandate. For 2014 and 2015, FDA requested funding for 1,200 foreign food inspections for each year. For fiscal year 2014, FDA received a total of about $138 million to implement all provisions of FSMA, including training, rulemaking, and foreign inspections. FDA officials told us that, given limited funding, the agency determined that additional foreign inspections were not the best use of FSMA-related funds. FDA officials said they were focusing resources instead on technical assistance to the domestic and foreign food industry to help manufacturers comply with new FSMA rules, as well as training for FDA investigators and other agency staff to modernize FDA’s food inspection program. However, FDA has not conducted an analysis to determine whether either the required number of inspections in the FSMA mandate or the lower number of inspections it is conducting is sufficient to ensure comparable safety of imported and domestic food. Without such an analysis, FDA is not in a position to know what is a sufficient number of foreign inspections and, if appropriate, request a change in the mandate regarding the number of foreign inspections to be conducted. FDA foreign office officials cited a variety of contributions to improving the safety of food imported from other countries to the United States. However, the extent of the contributions is unknown because FDA’s performance measures have not fully captured these contributions. Officials from the foreign offices cited instances when they had made significant contributions to determining the cause of outbreaks that led to illnesses and deaths in the United States. Among them: The Europe Office credited new relationships with their Italian counterparts for providing information that helped link a 2012 outbreak of listeriosis, which sickened 22 people and resulted in four deaths in the United States, to ricotta cheese imported from Italy. According to FDA officials, the office staff worked with Italian food safety authorities to investigate firms that could have caused the outbreak. The result of these efforts was a recall of some ricotta cheese, ending instances of illness and death in the United States. In 2012, the India Office’s in-country investigators were able to rapidly conduct inspections of tuna processing facilities that were identified as potential sources of an outbreak of Salmonella in tuna products, which sickened 425 people in the United States. FDA and other agencies were then able to quickly take action on the inspection findings, including FDA issuing an import alert for the tuna products. Listeriosis. The Centers for Disease Control and Prevention (CDC) estimated that approximately 1,600 illnesses and 260 deaths due to listeriosis occur annually in the United States. Listeriosis is a serious infection with symptoms that can include headache, stiff neck, confusion, loss of balance, and convulsions in addition to fever and muscle aches. Infection during pregnancy can lead to miscarriage, stillbirth, premature delivery, or life-threatening infection of the newborn. relationship with the Mexican government’s food regulatory authorities to narrow down the source of a Cyclospora outbreak in 2013 that sickened 631 people in the United States. This office coordinated investigations at the facilities that handled the leafy greens identified as the potential source of the outbreak and certified the facilities as free of Cyclospora so the shipment of the products could resume. Salmonellosis. According to the CDC, Salmonella is estimated to cause more than 1 million illnesses annually in the United States, with 19,000 hospitalizations and 380 deaths. Most persons infected with Salmonella develop diarrhea, fever, and abdominal cramps 12 to 72 hours after infection. Cyclosporiasis. Cyclosporiasis is an intestinal infection that can be caused by people ingesting food or water contaminated with feces. In the United States, outbreaks since the mid-1990s have been linked to various types of imported fresh produce such as raspberries, basil, and mesclun lettuce. The foreign office officials also provided examples of additional actions that stopped the importation of food products that were potentially harmful to humans. For example, in 2012, the Latin America Office in Mexico City helped stop the importation of a fraudulent dietary supplement into the United States because the officials discovered that the supplement did not contain the ingredients it claimed to include. Also, in 2012, this office helped test shipments of orange juice products from all foreign sources for a pesticide residue, carbendazim, and found that 31 of 166 shipments had carbendazim. EPA has not registered carbendazim for use as a fungicide on oranges or established a tolerance or an exemption from a tolerance for carbendazim in orange juice. As a result of the testing, several facilities were stopped from exporting orange juice containing carbendazim residues to the United States, and the occurrence of carbendazim in imported orange juice declined. FDA also provided an example of a foreign office’s contribution to the safety of imported animal food. Specifically, in 2012, in-country investigators in the China Office conducted inspections of five facilities that made jerky pet treats to determine if they were the cause of ongoing illnesses and deaths in pets in the United States. As of May 2014, FDA had received reports of illness involving more than 5,600 dogs and 24 cats, and the deaths of more than 1,000 dogs, which may be related to consumption of jerky pet treats. In addition, FDA received three reports of human illness after exposure to jerky pet treats. The China Office has assisted with the ongoing investigation into the illnesses; however, as of October 2014, the cause has not been found. FDA investigators were not permitted to take samples of the pet treats or their ingredients inside the facilities and have them tested in an FDA laboratory in the United States. Foreign office officials told us that FDA investigators do not typically take samples during foreign inspections, but they have taken samples in Mexico and sent them to an FDA laboratory in the United States to assist in a food outbreak investigation. FDA’s Center for Veterinary Medicine continues to work on finding the cause for illnesses and deaths linked to jerky pet treats. The extent of the foreign offices’ contributions to food safety is unknown because FDA does not fully capture the foreign offices’ contributions through performance measures that are either agency-wide or specifically developed by OIP for the foreign offices. In our 2010 report, we recommended that, as the agency completed its strategic planning process for the foreign offices, it develop performance goals and measures that can be used to demonstrate the offices’ contributions to long-term outcomes related to imported FDA-regulated products. FDA’s agency-wide performance measures for the foreign offices provide counts from each foreign office on how many inspections were conducted within each country and the number of completed country profiles— reports and papers on the food safety conditions in a given country. These measures do provide important output information, but they do not provide outcome-oriented information on how a specific action by a foreign office contributed to food safety. For example, an output measure, such as a number count of inspections, does not show how the inspections and reports contribute to broader food safety goals. OIP does have one measure that is outcome oriented—a measure of collaborative actions by each foreign office that led to improved public health outcomes. However, neither FDA’s agency-wide performance measures nor OIP’s measure fully captures the foreign offices’ activities to help improve food safety. See table 2 for a list of FDA agency-wide and OIP performance measures for the foreign offices in fiscal year 2014. In our 2010 report, we acknowledged that some measures are difficult to develop because results for some activities are not easy to quantify and that it can be difficult to attribute results to programs that involve multiple organizations within FDA. However, performance measures are important management tools for agencies. The agency has initiated a review to determine how to better reflect the value of the foreign offices in the agency-wide performance system. The initial phase of this review has been completed, and FDA could not provide a date when the full review would be completed or when new performance measures would be implemented. OIP has developed a strategic map that aligns the activities of the foreign offices with strategic outcomes. OIP is also collecting information from its foreign offices by means of annual operational plans that track each office’s progress toward completing a specific project, such as organizing a conference to help foreign regulatory counterparts and industry officials better understand FSMA. These are potentially useful performance planning and management tools; however, they are not performance measures. Leading practices indicate that results- oriented performance measures focus on expected results to show progress toward, or contributions to, intended results. We believe our previous recommendation that FDA develop performance goals and measures for the foreign offices that are outcome-oriented is still valid. Without performance measures that can be used to demonstrate the offices’ contributions to long-term outcomes related to imported FDA- regulated products, FDA has less information available to effectively measure the foreign offices’ progress toward meeting the agency’s goals. Since we last reported, FDA has continued to experience recruitment challenges in the foreign offices. FDA has taken some steps to address those challenges, but it has not completed a strategic workforce plan. In 2010, we found that FDA had experienced challenges in staffing some of the foreign offices. For example, at that time, FDA had 2 vacant staff positions in the Latin America Office out of a total of 14 positions, and 4 vacancies in the India Office out of a total of 15 positions. In subsequent years, the number of vacancies in the foreign offices has increased as these offices have expanded. There are fewer staff members in the foreign offices now than in 2010, and the percentage of vacant positions has increased because the number of approved staff positions is larger. As shown in figure 5, 44 percent of FDA’s approved foreign office positions were vacant as of October 2014, and most of these vacancies were in the China Office. These vacancies shown in the figure above include both U.S. government and locally employed staff positions. Locally employed staff account for 17 out of the 50, or 34 percent of the total staff working in FDA’s foreign offices, as of October 2014. Appendix II provides additional information about the staffing composition of the foreign offices and the contributions of locally employed staff. A number of factors have contributed to vacancies in the foreign offices, including delays in obtaining visas from the Chinese government. According to FDA officials, the last visa for a new FDA staff member to be posted in the China Office was issued in October 2012; there are nine U.S. government staff who have been hired by FDA for the China Office, but they cannot deploy because of the Chinese government’s delay in issuing new visas for FDA employees. OIP officials told us that they began discussions with Chinese government officials in February 2012 about increasing the number of investigators in the China Office. As of October 2014, FDA’s discussions with the Chinese government were ongoing. Figure 6 shows a timeline of developments, including White House involvement, related to FDA’s efforts to obtain visas for new staff in the China Office. In an effort to facilitate the granting of visas for new staff, FDA agreed to close its locations in Guangzhou and Shanghai and consolidate all China Office staff in Beijing. However, officials in the China Office expressed concern that they will lose a valuable resource because one of the two locally employed staff members in Guangzhou will not be able to relocate to Beijing. The language skills of the locally employed staff are especially important in China, where the investigators do not typically speak the local language. OIP officials told us that, in the absence of locally employed staff available to translate, investigators in China rely on translators provided by the firms that are being inspected. Consolidating all China Office staff in Beijing also poses challenges in providing enough office space within the embassy. OIP officials told us that when adding investigators to the China Office was first proposed in February 2012, they knew that they might face space constraints regardless of whether staff were placed in the China Office’s locations in Shanghai, Guangzhou, or Beijing. There is not enough space in the U.S. embassy in Beijing to house additional FDA staff, so FDA will be one of the occupants in a new annex building that the Department of State is currently constructing. FDA anticipates moving into that space in October 2015. Other factors that have affected the recruitment of staff for the foreign offices include issues that are directly affected by FDA personnel policies, such as reintegration of staff who have returned from assignments at a foreign office location. In the past, FDA handled reintegration on a case- by-case basis. Foreign office officials told us that not having a reintegration policy for staff members who have completed foreign assignments had hampered their ability to recruit staff to work in the foreign offices. Foreign office officials said U.S.-based ORA investigators have been hesitant to transfer to foreign offices because they were concerned about whether they would be able to return to their previous geographic location once they completed their posting abroad. They have also been concerned about whether FDA would value the experiences they gained while abroad. To address the uncertainty surrounding reintegration, FDA adopted a set of standard operating procedures, which were finalized in November 2014. OIP officials said they, in conjunction with the Office of Human Resources, have been engaging in outreach efforts to help managers understand the reintegration process. Foreign office officials told us that lengthy hiring processes also have affected FDA’s ability to staff its foreign offices. According to information published by the Office of Management and Budget, in 2009 it took federal agencies an average of 122 days to fill an open position. According to the most recent data available, that time dropped to an average of 93 days for fiscal year 2011 and 87 days for fiscal year 2012. For FDA, during fiscal years 2013 and 2014, it took an average of 121 days to fill staff positions in the Asia-Pacific Office, 140 days in the China Office, 172 days in the Europe Office, 200 days in the India Office, and 104 days in the Latin America Office. FDA has recently implemented an agency-wide initiative known as FDA’s Accelerated Staffing Track to reduce the time it takes to hire a candidate to 80 calendar days. OIP has undertaken initiatives to help recruit and develop staff. According to OIP officials, one successful initiative was to implement temporary duty assignments of investigators for 60, 90, or 120 days to meet immediate resource needs of the foreign offices. Officials in the foreign offices told us that the investigators assigned on temporary duty were a staffing resource that helped the offices conduct inspections. Temporary duty assignments also served as an important recruiting tool since investigators returning from a temporary overseas assignment can provide a firsthand account of their foreign office experiences to their U.S. colleagues. In addition, OIP officials told us that they were able to use information from a draft workforce gap analysis to implement some learning and development initiatives to help ensure that the foreign office staff had the necessary skills to perform their job duties. OIP identified “diplomacy” and “global awareness” as training topics for foreign office staff. OIP also sought to strengthen staff members’ foreign language skills by offering language training. However, OIP does not have a formalized staffing mechanism through which it can decide on strategic resource allocations based on a targeted analysis of the specific staffing needs of its various foreign offices. Such a staffing mechanism would be included in a strategic workforce plan. Currently, the foreign offices provide input into staffing decisions through office-level staffing proposals, but some of the needs identified in their proposals have not been met. For example, officials from one foreign office expressed a need to have a staff member located in headquarters to represent them in real time during face-to-face discussions of policy matters. That office also identified a need for additional information technology support because of the challenges created by operating in a time zone when headquarters staff are not typically working and the security requirements for accessing FDA computer systems in an embassy setting. OIP officials told us that they are developing a strategic workforce plan that requires an FDA-wide perspective and approach that recognizes the broad role of FDA’s centers and ORA in its international activities. To that end, OIP has developed a strategic workforce planning framework, and officials told us that, over the next year, they will develop the first phase of a forward-looking strategic workforce plan for the foreign offices. However, OIP has yet to define what the workforce plan will entail, and there are no time frames for completion. Strategic workforce planning is an essential tool to help agencies align their workforces with their current and emerging missions and develop long-term strategies for acquiring, developing, and retaining staff. In our 2010 report on FDA’s foreign offices, we recommended that FDA develop a strategic workforce plan for the foreign offices to help ensure that the agency is able to recruit and retain staff with the necessary experience and skills. We continue to believe that completing a strategic workforce plan for the foreign offices is critical to FDA’s ability to address staffing challenges. FDA established foreign offices to help prevent unsafe products from entering the United States. Through their activities, FDA’s foreign offices have helped the agency to increase the total number of foreign food inspections conducted annually. Nonetheless, FDA has not kept pace with FSMA’s inspection mandate since 2011. FDA is planning to conduct 1,200 foreign food inspections through the end of the mandate—well below either scenario that might satisfy the FSMA mandate to increase inspections each year through 2016. FDA officials cited limited resources as the primary reason they are not conducting more foreign food inspections. FDA officials also questioned the usefulness of conducting the number of inspections mandated by FSMA. However, FDA has not conducted an analysis to determine whether the number of inspections mandated by FSMA or the number of inspections it is now conducting is sufficient to ensure comparable safety of imported and domestic food. Without such an analysis, FDA is not in a position to know what is a sufficient number of foreign inspections and, if appropriate, request a change in the mandate regarding the number of foreign inspections to be conducted. In addition, in 2010, we recommended that FDA develop performance goals and measures that can be used to demonstrate the foreign offices’ contributions to long-term outcomes related to improving the safety of imported food products. According to FDA officials, the agency has initiated a review to determine how to better reflect the value of the foreign offices in the agency-wide performance system. However, FDA has not yet implemented new performance measures or determined when its review would be completed. We continue to believe that performance measures that demonstrate the foreign offices’ contributions to long-term outcomes for the safety of imported food are important to provide information to help the agency track progress toward meeting its goals and to provide managers with crucial information on which to base funding decisions. We also recommended that FDA develop a strategic workforce plan for the foreign offices to help ensure that the agency is able to recruit and retain staff with the necessary experience and skills. FDA has taken some steps to address recruitment challenges, but the agency has not yet completed a strategic workforce plan. We continue to believe that a strategic workforce plan for the foreign offices is critical to FDA’s ability to address staffing challenges, especially given the number of vacancies abroad. There are other challenges affecting the foreign offices, such as problems obtaining visas for the China Office staff. However, a strategic workforce plan would provide FDA some assurance that it has placed the right people in the right positions at the right time and can carry out its mission to protect public health in an increasingly complex and globalized world. To help ensure the safety of food imported into the United States, we recommend that the Commissioner of Food and Drugs complete an analysis to determine the annual number of foreign food inspections that is sufficient to ensure comparable safety of imported and domestic food. If the inspection numbers from that evaluation are different from the inspection targets mandated in FSMA, FDA should report the results to Congress and recommend appropriate legislative changes. We provided a draft of this report to FDA for comment. In its written comments, which are reprinted in appendix III, FDA concurred with the recommendation, pending the necessary resources to conduct the analysis, as part of a larger FSMA-implementation strategy to improve the safety of imported food that will, among other things, reconsider the number of inspections conducted in other countries. FDA said that foreign inspections are an important part of FSMA, providing accountability for inspected foreign firms, incentives for them to comply with U.S. import requirements, and intelligence about foreign food safety practices. FDA added that foreign inspections will not, in themselves, ensure comparable safety of imported and domestic food, and the agency is expanding its collaborations with foreign governments to assist in ensuring the safety of imported food. As noted in its comments, FDA is optimistic that additional visas will be approved to expand its presence in China, which would help reduce the number of vacant staff positions that we cite in this report. FDA also provided technical comments that were 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 Commissioner of Food and Drugs, the Secretary of Health and Human Services, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. This report responds to your request that we examine the progress of Food and Drug Administration (FDA) foreign offices since we last reported in 2010 for helping to ensure the safety of imported food. Our objectives of this report were to examine (1) the activities the FDA foreign offices have engaged in since 2010 to help ensure the safety of imported food, (2) the extent of the foreign offices’ contributions to the safety of imported food, and (3) the extent to which FDA has engaged in workforce planning for its foreign offices. For the purposes of this report, imported food refers to food for human or animal consumption, unless otherwise specified. To examine the activities of FDA’s foreign offices, we reviewed and analyzed documents including FDA reports to Congress that were mandated by the FDA Food Safety Modernization Act (FSMA) that describe the activities of all foreign offices, evaluated written answers to questions about their activities since the 2010 report, and conducted structured interviews with FDA officials in the foreign offices, and analyzed counts of foreign food facility inspections for each year of the FSMA mandate. We questioned all FDA offices that reported conducting food safety activities at the time of our review. The Sub-Saharan Africa post was vacant and, therefore, was not included in the structured interview. Based on conversations with officials from the China Office and Latin America Office, the Chile post and Shanghai post were not included in the structured interview because the posts did not focus on food. As part of our questions, we asked the officials to identify their three top priority activities. In addition, we analyzed food inspections conducted by the foreign offices compared with targets mandated in FSMA between 2011 and 2016. We cross-checked FDA’s foreign inspection numbers, as provided by the Office of Regulatory Affairs through its FACTS database, with information in FDA reports to Congress and additional information obtained during our site visits to locations in Beijing and Guangzhou, China, and Mexico City, Mexico. We selected those offices, in part, because they conducted food inspections. Through this examination of the data and interviews with FDA officials who were knowledgeable about foreign food inspections, we determined that the inspection counts provided by the agency were sufficiently reliable for use in our review. To examine how FDA foreign offices have contributed to imported food safety, we reviewed and analyzed documents and data that described the outcomes of the foreign offices’ activities, including inspection reports and import alerts. We conducted structured interviews with FDA officials from the foreign offices, including the Asia-Pacific Office, China Office, Europe Office, India Office, and Latin America Office to determine the outcomes of the foreign offices’ activities. We also discussed the outcomes of the foreign offices with FDA’s Center for Food Safety and Applied Nutrition and Center for Veterinary Medicine. We analyzed performance planning and management planning documentation to determine the extent that FDA had performance measures that were outcome oriented and captured the activities of the foreign offices, based on leading practices that we have previously identified. We interviewed FDA officials in the Office of International Programs (OIP) and the Office of Strategic Planning and Analytics to understand how FDA is measuring the performance of the foreign offices. Through interviews with FDA officials knowledgeable about performance measures for the foreign offices, we determined that the performance measure data were sufficiently reliable for use in our review. To examine the extent to which FDA has engaged in workforce planning for its foreign offices, we reviewed workforce planning documents, including descriptions of recruitment and retention and learning and development initiatives, FDA’s 80-day hiring model and draft reintegration policy, and draft analyses from a contractor hired to develop a workforce plan for the foreign offices. We also reviewed leading practices for workforce planning that we have previously identified. We also analyzed staffing data from the foreign offices, and we interviewed officials from the OIP, the Office of Operations, the Office of Planning, and the Office of Human Resources. We cross-checked the staffing counts provided by the OIP with information we obtained during our site visits to locations in Beijing and Guangzhou, China, and Mexico City, Mexico. Through this examination of the data and interviews with FDA officials knowledgeable about staffing for the foreign offices, we determined that the data were sufficiently reliable for use in our review. In addition, to address all three objectives, we conducted an in-depth review of FDA operations in Canada, China, and Mexico. We selected these locations based on an analysis of the volume of food imports, the percentage of food imports refused at the border, and the number of food facility inspections for fiscal year 2013. We also considered the number of active import alerts (i.e., warnings about particular products, manufacturers, and countries based on FDA experience or information that triggers a more intensive inspection at the U.S. border). We visited FDA’s offices in Beijing and Guangzhou, China, and Mexico City, Mexico. We interviewed all FDA staff at those locations, as well as the regional director for the Latin America Office who was present in Mexico City during our visit. We also met with officials from U.S. government agencies in those locations, including the United States Department of Agriculture’s (USDA) Foreign Agricultural Service and USDA’s Animal and Plant Health Inspection Service, the Centers for Disease Control and Prevention, the Department of Commerce’s Foreign Commercial Service and the Department of State’s Environment, Science, Technology, and Health Officers. We also accompanied FDA foreign office staff on site visits to food facilities. During our visit to Mexico City, we visited the world’s largest greenhouse, which grows and packs hydroponic tomatoes and peppers for export to the United States. During our visit to Guangzhou, we visited a large facility that produces farm-raised seafood for export to the U.S. market. Additionally, we spoke with food safety regulatory authorities in Canada, China, and Mexico, including the Canadian Food Inspection Agency; the China Food and Drug Administration; the China Center for Food Safety Risk Assessment; the General Administration of Quality Supervision, Inspection, and Quarantine of the People’s Republic of China; the Guangdong Entry-Exit Inspection and Quarantine Bureau of the People’s Republic of China; the Mexico Federal Commission for the Protection against Sanitary Risk; and the Mexico National Service of Agro Alimentary Health, Safety and Quality. We conducted this performance audit from November 2013 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. The Food and Drug Administration’s (FDA) foreign offices comprise both U.S. government staff and locally employed staff who are non-U.S. citizens employed at U.S. missions abroad. Figure 7 below shows staff numbers for each foreign office position, as of October 2014. Figure 8 shows the approved and filled staff positions by foreign office, as of October 2014. Foreign office officials told us that locally employed staff provide valuable contributions toward the activities of the foreign offices. Locally employed staff speak the local language and help foreign office staff better understand local regulations. Foreign office officials said that the locally employed staff also are knowledgeable about FDA standards and inspection protocols and are helpful to FDA investigators. Table 3 shows the number of staff in each foreign office by location and position as of October 2014. In addition to the individual named above, Mary Denigan-Macauley (Assistant Director), Darnita Akers, Cheryl Arvidson, Kevin Bray, Michele Fejfar, Jennifer Gould, and Terrance Horner Jr. made key contributions to this report. Other contributors included Adam Cowles, Marcia Crosse, Elizabeth Curda, Joyce Evans, Kimberly Gianopoulos, Armetha Liles, Cynthia Norris, Ifunanya Nwokedi, and Geri Redican-Bigott. | FDA has responsibility for ensuring the safety and proper labeling of more than 80 percent of the U.S. food supply, including an increased volume of imported food. Beginning in 2008, FDA established foreign offices to help prevent unsafe products from reaching U.S. borders. In 2010, GAO examined FDA's foreign offices and found that they engaged in a variety of activities relating to food safety but faced challenges due to an increasing workload and other factors. GAO was asked to follow up that report. This study examines (1) the activities FDA foreign offices have engaged in since 2010 to help ensure the safety of imported food, (2) the extent of the foreign offices' contributions to the safety of imported food, and (3) the extent to which FDA has engaged in workforce planning for its foreign offices. GAO reviewed documentation of foreign office activities and plans, visited offices in China and Mexico, and interviewed agency officials, foreign regulators, and other stakeholders. The Food and Drug Administration's (FDA) foreign offices have engaged in a variety of activities since 2010 to help ensure that imported food is safe. Foreign offices reported that building relationships with foreign counterparts and gathering and assessing information were among their top priorities. As directed by the FDA Food Safety Modernization Act (FSMA), foreign offices also inspected foreign food facilities. Under FSMA, FDA is to inspect at least 600 foreign food facilities in 2011 and, for each of the next 5 years, inspect at least twice the number of facilities inspected during the previous year. As shown in the figure below, FDA is not currently keeping pace with the FSMA mandate. FDA officials told GAO that they do not plan to meet the FSMA mandate because of funding, and they question the usefulness of conducting that many inspections. However, FDA has not conducted an analysis to determine whether the number of inspections in the FSMA mandate or the lower number of inspections it is conducting is sufficient to ensure comparable safety of imported and domestic food. Without such an analysis, FDA is not in a position to know what is a sufficient number of foreign inspections and, if appropriate, request a change in the mandate. FDA foreign offices cite their contributions to the safety of imported food, but the agency's performance measures do not fully capture these contributions. GAO recommended in 2010 that FDA develop performance measures that can be used to demonstrate the offices' contributions to imported food safety. This recommendation remains valid. FDA has initiated a review to determine how to better reflect the value of the foreign offices in the agency-wide performance systems. Until the offices' contributions are captured, FDA will have less information to effectively measure their progress toward meeting agency goals. FDA has taken some steps to address recruitment challenges since GAO last reported, but it still does not have a strategic workforce plan. In 2010, GAO recommended that FDA develop such a plan for the foreign offices to help ensure that it recruits and retains staff with the necessary experience and skills. GAO continues to believe that such a plan for the foreign offices is critical to FDA's ability to address staffing challenges, especially since 44 percent of foreign office positions were vacant as of October 2014. GAO recommends that FDA complete an analysis to determine the annual number of foreign food inspections that is sufficient to ensure comparable safety of imported and domestic food. FDA agreed with GAO's recommendation. |
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A few important concepts need to be explained when discussing IMF finances. Two of these are members’ “quotas” and “currency purchases.” Quotas are the membership dues that countries pay when they join IMF.Up to 25 percent of quotas normally must be paid in reserve assets, which are special drawing rights or currencies that are “freely usable” in the principal foreign exchange markets (U.S. dollars, Japanese yen, Deutsche mark, French francs, or pound sterling), and the balance may be paid either in a country’s domestic currency or with non-interest-bearing promissory notes. The portion paid in freely usable currency or special drawing rights is referred to as the member’s “reserve assets” or “initial reserve tranche position” and can be drawn on by the member as needed without prior IMF approval. If withdrawn, these amounts are replaced with the country’s own currency. Members are not obligated to replenish their reserve tranche positions. When a country needs additional funds other than from its reserve tranche position, IMF does not loan the funds to the country, per se. Rather, the country “purchases” the currency it needs from IMF with an equivalent amount of its own currency and then later “repurchases” its own currency using SDRs or other currency on terms established by IMF. Because IMF’s financial assistance is in the form of currency purchases and repurchases by member countries, the financial assistance does not reduce the combined total of IMF’s currency holdings in terms of SDR equivalents. Instead, the composition of IMF’s currency holdings changes. For example, the composition of IMF’s holdings of member currencies can change when members purchase and repurchase currency. The relationship of IMF’s holding of a member’s own currency to its quota is an important one, because it can illustrate whether the member is a creditor, debtor, or in a neutral position with IMF. In general, currencies of members who are creditors are considered usable by IMF to finance transactions, while currencies of countries in a neutral borrowing or a debtor position are considered unusable by IMF. A brief discussion about the accounting standards that IMF uses is also useful. According to the IMF External Audit Committee’s (EAC) audit opinion, IMF’s financial statements are prepared in accordance with generally accepted accounting principles. However, according to IMF, IMF is not bound by specific legal provisions or accounting principles adopted in the individual member countries. EAC and IMF officials told us that the accounting principles referred to in the EAC’s auditor’s report are neither U.S. generally accepted accounting principles nor international accounting standards, but are described in a note to the financial statements and do not differ materially from these two. You also asked us to provide information on the current amount of outstanding IMF credit, including the share of that credit that was borrowed by developing countries. This information is provided in an attachment to my statement. I would like to emphasize that GAO does not take a position on what action the Congress should take on the executive branch’s request. That is a policy decision beyond the scope of our review. I should also mention that, as you may know, we have no direct audit authority over IMF, as is the case with other international organizations. Nonetheless, working through the Treasury Department and the IMF’s U.S. Executive Director’s office, IMF has cooperated with our inquiry and provided us information not normally made publicly available. IMF has several sources available from which it can potentially obtain funds for use in its operations. The most important of these, according to IMF, are the currency holdings provided through quota subscriptions that underpin most of IMF’s operating funds. Other sources include IMF’s GAB and other bilateral borrowing arrangements with IMF members. In addition, IMF could potentially borrow from private sources or sell some of its gold holdings. Some of these resources are clearly more accessible than others. IMF’s determination of available currency holdings, its primary source of readily available funding for carrying out its operations, is based on its judgment concerning the level of usable currency and the level of reserves needed for contingencies. IMF officials have stated that reserves are necessary for two reasons: (1) to maintain sufficient working balances in various currencies to execute foreign exchange transactions and (2) to have available for use in the event that some currencies become unusable and can no longer be used to finance IMF transactions due to a deterioration in members’ balance of payments and external reserve positions. There are several steps involved in calculating the amount of resources IMF has readily available for operations. First, IMF calculates the amount of currency holdings from quotas, which was estimated to be about $195 billion as of July 20, 1998. However, only the currencies of members with sufficiently strong balance of payments and gross external reserve positions are used or usable by IMF for financing its transactions and are included in its operational budget, which is a nonpublic document. Of the $195 billion of currency holdings, IMF estimates that, before taking into consideration IMF extended credit, about $130 billion, or 67 percent, is usable. The remaining $65 billion is unusable. These currencies cannot be used to finance IMF transactions because IMF has determined that the members providing these currencies may be experiencing balance of payment problems or may have drawn on their reserve assets. (See fig. 1.) Generally, IMF presently considers 30 of its 182 members to have sufficiently strong balance of payments and external reserve positions so that their currencies can be considered usable. As indicated in figure 2, the U.S. share of usable resources is about 27.3 percent. U.K. Currencies provided from quotas are recorded in IMF’s balance sheet as an asset. The distinction between usable and unusable currency is not reported on IMF’s balance sheet, but is discussed in its annual report. As shown in table 1, IMF reduces its total usable currencies of $130 billion by about $70 billion, the amount of its members’ currency purchases outstanding, to determine its available usable resources. IMF further reduces its available and usable resources of $60 billion by the amount of the commitments it has made to countries in need of assistance in their balance of payment positions. Estimated undrawn commitments total about $17 billion. After these deductions, IMF’s usable currency holdings amounted to about $43 billion as of July 20, 1998. (See fig. 3.) However, IMF adjusts this amount to establish a level of reserves it may need for contingencies. There has been some discussion about the appropriate level of IMF reserves, the outcome of which may lead to different estimates of the amount available for IMF operations. Table 2 will assist in understanding the two approaches. The results of both approaches have been cited by IMF and Treasury officials in public discussions and have thus led to some confusion about how much currency holdings are really available. Approach 1 in table 2 is used by IMF to calculate its available resources. Using this method, IMF adjusts its available and uncommitted resources by $12 billion for the establishment of a reserve, as required by the Executive Board. According to IMF documents, this reserve has two components. One component is an adjustment for minimum working balances, which IMF officials stated are needed due to the number and types of currencies it manages to execute its foreign exchange transactions. The second component is a reserve of 10 percent of the quotas of members included in the operational budget for transfers, in case one or more of these countries may encounter balance of payments problems and can no longer provide its currencies as a source of funding for IMF transactions. After this adjustment, IMF would have $31 billion available for operations. The second approach to estimating IMF’s reserve requirements, shown in table 2, is based on the concept of a minimum IMF liquidity ratio. This approach has been used by the U.S. Treasury and endorsed by the IMF’s First Deputy Managing Director. As shown in figure 4, as of July 20, 1998, IMF’s liquidity ratio was about 44 percent, which is lower than at any time during the last 15 years. This approach considers IMF’s historical low liquidity ratio of about 30 percent to be the minimum threshold that could be achieved before it becomes imprudent to lend. In order not to drop below this 30-percent threshold, IMF would have to retain about $30 billion to $35 billion of its $43 billion in usable and uncommitted resources, which would leave only about $8 billion to $13 billion of resources that IMF could use. The $30 billion to $35 billion adjustment represents the possibility that one or more countries providing usable currencies would draw on its reserve tranche position. The amount of IMF resources that should be retained is ultimately a judgment call of IMF’s Executive Board. This decision would pinpoint the level below which the Executive Board would consider it imprudent to continue lending. July 20, 1998) In addition to its permanent, quota-based resources, IMF’s Articles of Agreement permit it to borrow funds for use in its operations and transactions. This borrowing may be from any source, public or private.Since 1962, IMF and 11 industrialized countries have maintained standing lines of credit, known as the General Arrangements to Borrow, for IMF to use in emergencies. Before the recent activation of GAB for Russia, GAB was last used by the United States in 1978 when the United States borrowed funds that IMF had borrowed from GAB participants and used them to intervene in world currency markets on behalf of the U.S. dollar. IMF has had other borrowing arrangements over the years, notably during 1979-86. The relative share of borrowed resources used in financing IMF assistance to member countries over the period 1978 through July 20, 1998, is shown in figure 5. prior to Russia loan) In January 1997, following an agreement by the Group of Ten (G-10) countries to expand the size and membership of GAB, IMF’s Executive Board voted to create the New Arrangements to Borrow. NAB would not replace GAB, which will remain in force; however, NAB would be the facility of first recourse in the event of a need to provide supplementary resources to IMF. The decision to create NAB grew out of concern following Mexico’s financial crisis of 1994-95 that substantially more resources might be needed to respond to future sovereign financial crises. Under NAB, the number of participating countries will be increased to 25, and the total amount of credit available in NAB will be up to about $45.5 billion, which is composed of the $22.7 billion available under GAB and an additional $22.7 billion for NAB. NAB could be activated when participants representing 80 percent of the credit lines’ resources determine that there is a threat to the international financial system. This could make it more difficult to use NAB than GAB, since GAB requires only a 60-percent approval for activation. As you know, NAB has not yet entered into force. In the past, IMF has borrowed funds from official sources other than through GAB. The largest such borrowing arrangements were in 1979 and 1981. In 1979 IMF concluded a series of borrowing agreements with a group of 14 industrial and oil exporting countries to finance IMF’s supplementary financing facility, which was designed to assist members whose balance of payments deficits were large in relation to their quotas. In 1981, due to the continued high demand for IMF financing, IMF concluded individual borrowing agreements with various central banks and the Bank for International Settlements. The 1979 and 1981 borrowing arrangements totaled SDR 23.1 billion (roughly $31 billion at today’s dollar/SDR exchange rate). IMF’s most recent bilateral borrowing arrangement was a SDR 3 billion arrangement with Japan in 1986. At one point, in 1985, IMF borrowings from member governments (under all borrowing arrangements) equalled almost 42 percent of outstanding IMF credit (loans). According to a U.S. Treasury official, the option to borrow funds from private sources was last seriously considered in the early 1980s. According to an IMF official, the IMF’s structure is based on cooperation with its members, and that is what it considers to be its source of financing. According to a U.S. Treasury Department official, IMF decided not to borrow from private capital markets in the early 1980s for a number of reasons. First, it was believed that the cooperative nature of the institution might be undermined were IMF to begin relying on private sources, rather than its membership, to fund its operations. Also, there was a concern about the consequences of having IMF, which seeks to stabilize international capital markets, rely on those markets for its funding. And, there was uncertainty about whether IMF could have borrowed the amount of funds it needed from private markets quickly enough to employ them as needed. IMF also has gold holdings that some have suggested it could potentially use to fund its operations. Currently it holds about 103.4 million fine ounces of gold at designated depositories in four member countries. IMF acquired most of its gold prior to 1978, when IMF’s Articles of Agreement required that in most cases 25 percent of members’ quota subscriptions be paid in gold and transactions between member countries and IMF normally be conducted in gold. IMF values its gold at SDR 35 per ounce (about $47 per ounce), the original cost at which the gold was acquired. Therefore, IMF’s gold holdings are valued on IMF’s balance sheet at SDR 3.6 billion (about $4.8 billion). However, IMF estimates and makes public as a note to its balance sheet the current market value of its gold holdings based on the market price. In April 1998 IMF estimated its gold was worth about $32 billion. Were IMF to decide to sell some of its gold, it is unclear how much money could be raised because the world price likely would be affected as a result of the sale. The regular use of gold in IMF transactions ended in 1978, when IMF’s Articles of Agreement were amended to reflect the end of the fixed currency exchange rate system that had governed the international financial system up to that time. Under its amended articles, IMF may sell gold outright on the basis of market prices and may accept gold in the discharge of a member’s obligations to IMF at an agreed price on the basis of market prices at the time of acceptance. IMF’s General Counsel told us that IMF does not have authority to engage in any other gold transactions—including loans, leases, or use of gold as collateral—because these uses are not expressly allowed under IMF articles. Although IMF may sell gold to raise funds, it does not regard gold holdings to be a liquid asset and, therefore, does not consider gold to be a liquid resource for lending purposes. According to IMF documents and IMF officials, the principal reason for not considering gold to be a liquid asset is that IMF’s Articles of Agreement require that any sale of gold be approved by IMF’s Board of Governors by an 85-percent majority of total voting power. Thus, any group of countries that holds more than 15 percent of IMF’s voting power could prevent a gold sale. For instance, the United States, which has nearly an 18-percent share of IMF’s voting power, could unilaterally block a gold sale. In 1995, IMF’s Executive Board adopted a policy on gold. The policy contained these principles: As an undervalued asset held by IMF, gold provides a fundamental strength to IMF’s balance sheet. Any mobilization of IMF’s gold should avoid weakening IMF’s overall financial position. IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies. IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market. The profits from any sales of gold should be retained and only the income deriving from the investment of those profits used for any operations that might be agreed. As I have already indicated, it is not possible in a timely manner to determine from publicly available sources what resources IMF has available for operations. Information on the availability of and actual use of IMF’s resources is regularly provided to its members, including the U.S. Treasury, in quarterly operational budgets and periodic liquidity reviews prepared by IMF staff. These documents provide considerable detail about IMF’s financial condition. For example, the operational budget specifies the amounts of usable currencies to be used in purchases, repurchases, and other IMF financial transactions expected to take place during that period. The liquidity reviews provide information on developments affecting IMF’s liquidity, 2-year projections of the use of IMF’s resources, and trends in IMF liquidity estimates. However, these documents are not publicly available. According to IMF, these documents contain information that could be market sensitive because they include judgment calls about which members’ currencies are strong or weak. IMF’s publicly available quarterly and annual financial statements do not disclose the amount of usable currencies, although this is reported in IMF’s annual report. The amount of usable currencies and the commitments IMF is likely to make can be determined using additional nonpublic documents. The publicly available financial statements do not show the adjustment factors that IMF uses to estimate its liquidity. IMF and U.S. Treasury officials told us that few people outside of IMF use or rely on IMF’s public financial statements for information about IMF’s financial condition or liquidity, and IMF and Treasury officials indicated that most potential users of financial statements do not consider them to be very useful for decisionmaking purposes. Moreover, according to private sector investment analysts we spoke with, the financial markets are more interested in information IMF has about individual country programs and information in its International Financial Statistics. IMF’s financial statements are audited annually and, according to IMF officials, have received “clean,” or unqualified audit opinions from the EAC. We have not reviewed the audit work supporting the opinions or assessed the independence of the EAC. The EAC consists of three people who are nominated by IMF members and are approved by the Executive Board to serve 1-year terms. At least one person has to be nominated by one of the six largest quota holders of IMF (United States, Germany, Japan, the United Kingdom, France, and Saudi Arabia). Of the three members, a chairman is selected at the end of the 1 year term to serve an additional year. The EAC reports to IMF’s Managing Director and to the Executive Board. To enable the EAC to express an opinion on whether IMF’s financial statements present fairly the Fund’s financial position and results of operations, the EAC relies on an audit by a certified public accounting (CPA) firm—which is selected by the Managing Director. The CPA firm issues an advisory letter to the EAC that contains the CPA firm’s opinion on the financial statements. The EAC discusses the audit with the CPA firm and reviews its work papers, and then the EAC issues an audit opinion on IMF’s financial statements. If the EAC has any audit issues or recommendations for improvements, it issues its views and suggestions to the Managing Director and the Executive Board. Again, we have not tested the work of the EAC and cannot comment on the reasonableness of its audit opinion. The IMF has commissioned a study of its internal audit and evaluation function and how it obtains its external audit, and expects to have a report on these matters in September 1998. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other Members may have. You asked us to provide information on IMF’s current lending. Figure I shows members’ currency purchases outstanding from IMF’s general resources account (GRA) as of May 31, 1998. As the figure shows, IMF had about $70 billion in outstanding loans at that time. About $48.4 billion, or 70 percent, of these loans went to developing countries, and the other $20.3 billion, or 30 percent, had been borrowed by countries in transition.No industrial countries had outstanding borrowings from IMF at that time.Figure I does not include about $8.4 billion of outstanding loans from non-GRA IMF lending facilities. The amount of funds that a member country may borrow from IMF is typically limited to a certain percentage of that member’s quota. This is true both for individual financing programs and for the total amount of funds that a member can borrow from IMF. Current rules governing use of IMF’s general resources account permit an IMF member to borrow an amount equal to 100 percent of its quota per year, with a cumulative limit of 300 percent, unless exceptional circumstances permit. These limits exclude drawings under “special facilities,” such as the concessional (below market interest rate) Enhanced Structural Adjustment Facility. These limits were last changed in 1994, when the yearly limit on borrowing was increased from 68 percent of quota to 100 percent. In the past 3 years, IMF has provided financing to a number of large developing countries that have experienced financial crises. IMF’s financial assistance to Mexico in 1995 and its 1997-98 financing programs for Thailand, Indonesia, and Korea all were well in excess of the normal limit on cumulative borrowing. Mexico’s 1995 assistance program from IMF amounted to 688 percent of its quota. Thailand’s July 1997 financing arrangement with IMF was about $3.9 billion, or about 500 percent of its quota. Indonesia’s November 1997 IMF financing arrangement for about $10.1 billion, which was augmented by an additional $1.3 billion on July 15, 1998, now totals about 557 percent of its quota. Korea’s December 1997 program of about $21 billion was equivalent to about 1,940 percent of its quota. A member borrowing funds from IMF pays various charges to cover IMF’s operational expenses, including compensation paid to the member whose currency it is borrowing. Presently, a borrower typically pays in service charges and commitment fees about one-half of 1 percent of the amount borrowed and in interest charges about 4.6 percent. This 4.6 percent is the SDR interest rate (about 4.3 percent, as of July 20, 1998) plus an amount that is designed to allow IMF to meet its annual administrative expenses, cover any overdue finance charges that members have not yet paid, and compensate members whose currencies have been purchased by other IMF members. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the International Monetary Fund's (IMF) financial operations and financial reporting, focusing on: (1) what resources IMF currently has available to carry out its operations; and (2) whether IMF's financial condition can be determined from publicly available information. GAO did not take a position on what action the Congress should take on the executive branch's request for about $17.5 million for IMF. GAO noted that: (1) IMF has a total of about $195 billion in currency holdings in its general resources account that has been provided through quota subscriptions by its 182 members; (2) however, as of July 20, 1998, IMF estimates that only about $130 billion of these funds represent resources that could be used; that is, are from members that are sufficiently strong economically to permit their currencies to be used for IMF operations; (3) of this amount, about $70 billion has already been used to finance credit to IMF members and about $17 billion has been committed for their use; (4) therefore, according to IMF's estimate, only about $43 billion of its $195 billion in currency holdings remain for operations, including lending; (5) further, IMF and Department of the Treasury officials have indicated in public statements that only about $10 billion to $15 billion of the available $43 billion could be used for additional credit to IMF members without leaving IMF seriously short of funds due to IMF's need to maintain certain reserves; (6) these IMF estimates do not take into account the $11.4 billion IMF financing arrangement for Russia that was approved by IMF's Executive Board on July 20, 1998; (7) about $2.9 billion of this $11.4 billion will come from IMF's remaining general currency holdings, and IMF will borrow the other $8.5 billion from 11 member governments that participate in the General Arrangements to Borrow; (8) IMF's available funds are reported in its annual report; however, the report is released six months after IMF's fiscal year ends and, according to IMF and Treasury officials, is of limited use for decisionmaking purposes; and (9) instead, decisionmaking requires the use of IMF's quarterly operational budgets, which are nonpublic. |
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Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business and is especially important for government agencies, where maintaining the public’s trust is essential. While the dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet have enabled agencies such as SEC to better accomplish their missions and provide information to the public, the changes also expose federal networks and systems to various threats. For example, the Federal Bureau of Investigation has identified multiple sources of cyber threats, including foreign nation states engaged in information warfare, domestic criminals, hackers and virus writers, and disgruntled employees working within an organization. Concerns about these threats are well founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, and steady advances in the sophistication and effectiveness of attack technology. For example, the number of incidents reported by federal agencies to the United States Computer Emergency Readiness Team (US- CERT), has increased dramatically over the past 3 years, increasing from 3,634 incidents reported in fiscal year 2005 to 13,029 incidents in fiscal year 2007 (a 259 percent increase). Without proper safeguards, systems are vulnerable to individuals and groups with malicious intent who can intrude and use their access to obtain or manipulate sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Our previous reports and reports by federal inspectors general describe persistent information security weaknesses that place federal agencies at risk of disruption, fraud, or inappropriate disclosure of sensitive information. Accordingly, we have designated information security as a governmentwide high-risk area since 1997, a designation that remains in force today. Recognizing the importance of securing federal agencies’ information systems, Congress enacted the Federal Information Security Management Act (FISMA) in December 2002 to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk- based approach to information security management. Following the stock market crash of 1929, Congress passed the Securities Exchange Act of 1934, establishing SEC to enforce securities laws, regulate the securities markets, and protect investors. To carry out its responsibilities and help ensure that securities markets are fair and honest, SEC issues rules and regulations that promote adequate and effective disclosure of information to the investing public. The commission also oversees the registration of other key participants in the securities industry, including stock exchanges, broker-dealers, clearing agencies, depositories, transfer agents, investment companies, and public utility holding companies. SEC is an independent, quasi-judicial agency that operates at the direction of five commissioners appointed by the President and confirmed by the Senate. In fiscal year 2008, SEC received a budget authority of $906 million and had a staff of 3,511 employees. In addition, the commission collected $569,000 in filing fees and about $434 million in penalties and disgorgements. To support its financial operations and store the sensitive information it collects, SEC relies extensively on computerized systems interconnected by local and wide-area networks. For example, to process and track financial transactions, such as filing fees paid by corporations, disgorgements and penalties from enforcement activities, and procurement activities, SEC relies on several enterprise database applications—Momentum; Phoenix; Electronic Data Gathering, Analysis, and Retrieval (EDGAR); and Fee Momentum—and a general support system network that allows users to communicate with the database applications. The database applications provide SEC with the following capabilities: Momentum is used to record the commission’s accounting transactions, to maintain its general ledger, and to maintain some of the information SEC uses to produce financial reports. Phoenix contains and processes sensitive data relating to penalties, disgorgements, and restitution on proven and alleged violations of securities and futures laws. EDGAR performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others that are required to file certain information with SEC. Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. The general support system is an integrated client-server system composed of local- and wide-area networks and is organized into distinct subsystems based along SEC’s organizational and functional lines. The general support system provides services to internal and external customers who use them for their business applications. It also provides the necessary security services to support these applications. Under FISMA, the Chairman of SEC has responsibility for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency’s information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency chief information officer (CIO) the authority to ensure compliance with the requirements imposed on the agency. FISMA requires the CIO to designate a senior agency information security officer who shall carry out the CIO’s information security responsibilities. SEC has corrected or mitigated 18 of the 34 security control weaknesses that we had reported as unresolved at the time of our prior audit report in 2008. For example, it has adequately validated electronic certificates from connections to its physically secured the perimeter of the operations center, monitored unusual and suspicious activities at its operations center, and removed network system accounts and data center access rights from separating employees. In addition, SEC has made progress in improving its information security program. For example, the commission has developed, documented, and implemented a policy on remedial action plans to help ensure that deficiencies are mitigated in an effective and timely manner, and provided individuals with training for incident handling. These efforts constitute an important step toward strengthening the agencywide information security program mandated by FISMA. While SEC has made important progress in strengthening its information security controls, it has not completed actions to correct or mitigate 16 of the previously reported weaknesses. For example, SEC has not adequately documented access privileges for the EDGAR application, always implemented patches on vulnerable workstations and enterprise database servers, or always sufficiently protected passwords. Failure to resolve these issues could leave sensitive data vulnerable to unauthorized disclosure, modification, or destruction. In addition to the 16 previously reported weakness that remain uncorrected, we identified 23 new weaknesses in controls intended to restrict access to data and systems, as well as weaknesses in other information security controls, that continue to jeopardize the confidentiality, integrity, and availability of SEC’s financial and sensitive information and information systems. Previously reported and newly identified weaknesses hinder the commission’s ability to perform vital functions and increase the risk of unauthorized disclosure, modification, or destruction of financial information. A key reason for these weaknesses was that SEC did not fully implement key activities of its information security program. A basic management objective for any organization is to protect the resources that support its critical operations and assets from unauthorized access. Organizations accomplish this by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computer resources (e.g., data, programs, equipment, and facilities), thereby protecting them from unauthorized disclosure, modification, and loss. Specific access controls include identification and authentication, authorization, cryptography, audit and monitoring, and physical security. Without adequate access controls, unauthorized individuals, including outside intruders and former employees, can surreptitiously read and copy sensitive data and make undetected changes or deletions for malicious purposes or personal gain. In addition, authorized users can intentionally or unintentionally modify or delete data or execute changes that are outside of their span of authority. A computer system must be able to identify and authenticate the identities of users so that activities on the system can be linked to specific individuals. When an organization assigns unique user accounts to specific users, the system is able to distinguish one user from another—a process called identification. The system must also establish the validity of a user’s claimed identity by requesting some kind of information, such as a password, that is known only by the user—a process known as authentication. Furthermore, SEC policy requires the implementation of automated identification and authentication mechanisms that enable the unique identification of individual users and systems. SEC did not consistently enforce identification and authentication controls for its users and systems. For example, it did not always securely configure the snmp community string (similar to a password) used to monitor and manage network devices; remove the default vendor account for a remote network service, which could allow access to the network service without the need to provide a password; restrict multiple database administrators from sharing the same log-on application ID to a powerful database account; and uniquely identify individual accounts on network switches for https login. As a result, increased risk exists that users will not be uniquely identified before they access the SEC network, and SEC will not be able to hold them accountable in the event of a security incident. Authorization is the process of granting or denying access rights and privileges to a protected resource, such as a network, system, application, function, or file. A key component of granting or denying access rights is the concept of “least privilege.” Least privilege is a basic principle for securing computer resources and data that means that users are granted only those access rights and permissions that they need to perform their official duties. To restrict legitimate users’ access to only those programs and files that they need in order to do their work, organizations establish access rights and permissions. “User rights” are allowable actions that can be assigned to users or to groups of users. File and directory permissions are rules that are associated with a particular file or directory, regulating which users can access it—and the extent of that access. To avoid unintentionally giving users unnecessary access to sensitive files and directories, an organization must give careful consideration to its assignment of rights and permissions. In addition, SEC policy requires that each user or process be assigned only those privileges or functions needed to perform authorized tasks and that approval of such privileges be documented. Furthermore, SEC policy states that only services that are absolutely necessary are allowed to have a remote connection. SEC did not always sufficiently restrict system access and privileges to only those users that needed access to perform their assigned duties. For example, SEC did not always remove excessive user privileges on its financial systems, properly document or maintain approval of user access privileges to the restrict unnecessary remote access to database servers, and limit users’ privileges so that users do not monopolize database system resources during critical times of the day. As a result, increased risk exists that users could gain inappropriate access to computer resources, circumvent security controls, and deliberately or inadvertently read, modify, or delete critical financial information. In addition, SEC’s financial information may not be available when it is needed. Cryptography underlies many of the mechanisms used to enforce the confidentiality and integrity of critical and sensitive information. A basic element of cryptography is encryption. Encryption can be used to provide basic data confidentiality and integrity by transforming plaintext into ciphertext using a special value known as a key and a mathematical process known as an algorithm. The National Security Agency recommends encrypting network services. If encryption is not used, user ID and password combinations are susceptible to electronic eavesdropping by devices on the network when they are transmitted. Although SEC has implemented a network topology that employs extensive switching and limits eavesdropping to only the network segment accessible by the potential eavesdropper, it did not always ensure that information transmitted over the network was adequately encrypted. While the eavesdropping risk on the SEC network is reduced by its topology, nonetheless, increased risk exists that individuals could capture user IDs and passwords and use them to gain unauthorized access to network devices. To establish individual accountability, monitor compliance with security policies, and investigate security violations, it is crucial to determine what, when, and by whom specific actions have been taken on a system. Organizations accomplish this by implementing system or security software that provides an audit trail for determining the source of a transaction or attempted transaction and monitoring users’ activities. To be effective, organizations should (1) configure the software to collect and maintain a sufficient audit trail for security-relevant events; (2) generate reports that selectively identify unauthorized, unusual, and sensitive access activity; and (3) regularly monitor and take action on these reports. SEC also requires the enforcement of auditing and accountability by configuring information systems to produce, store, and retain audit records of system, application, network, and user activity. SEC did not adequately configure several database systems to enable auditing and monitoring of security-relevant events. For example, it did not configure one database to record successful log-ons or security violations for unauthorized modification of data, and three databases to safeguard log data against loss. As a result, there is increased likelihood that unauthorized activities or policy violations would not be detected. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls involve restricting physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed, and periodically reviewing access rights granted to ensure that access continues to be appropriate based on criteria established for granting it. At SEC, physical access control measures (such as guards, badges, and locks, used either alone or in combination) are vital to protecting its computing resources and the sensitive data it processes from external and internal threats. Although SEC has strengthened its physical security controls, certain weaknesses reduced its effectiveness in protecting and controlling physical access to sensitive work areas. For example, on multiple occasions SEC employees entered electronically secured interior spaces by following another employee through an open door instead of using their badges to obtain access. In addition, physical security standards have been drafted but have not been approved by management. As a result, increased risk exists that unauthorized individuals could gain access to sensitive computing resources and data and inadvertently or deliberately misuse or destroy them. In addition to having access controls, an organization should have policies, procedures, and control techniques in place to appropriately segregate computer-related duties. Segregation of duties refers to the policies, procedures, and organizational structure that help ensure that one individual cannot independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often segregation of incompatible duties is achieved by dividing responsibilities among two or more organizational groups. Dividing duties among two or more individuals or groups diminishes the likelihood that errors and wrongful acts will go undetected because the activities of one individual or group will serve as a check on the activities of another. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. In addition, SEC policy requires that each user or process be assigned only those privileges or functions needed to perform authorized tasks. SEC did not adequately segregate incompatible computer-related duties and functions. For example, a financial services branch chief could perform multiple incompatible duties such as creating, modifying, and deleting security organizations, roles, and security categories. At the same time, he could perform financial operations such as creating, approving, and changing invoices. These conditions existed, in part, because SEC lacked implementation guidelines for assigning incompatible duties among personnel administering its computer applications environment. In addition, although SEC has logically separated many of its networked devices, it did not always adequately separate network management traffic from general network traffic. As a result, general users could gain inappropriate access and intentionally or inadvertently disrupt network operations. As a consequence, increased risk exists that users could perform unauthorized system activities without detection. Configuration management is another important control that involves the identification and management of security features for all hardware and software components of an information system at a given point and systematically controls changes to that configuration during the system’s life cycle. An effective configuration management process includes procedures for (1) identifying, documenting, and assigning unique identifiers (for example, serial number and name) to a system’s hardware and software parts and subparts, generally referred to as configuration items; (2) evaluating and deciding whether to approve changes to a system’s baseline configuration; (3) documenting and reporting on the status of configuration items as a system evolves; (4) determining alignment between the actual system and the documentation describing it; and (5) developing and implementing a configuration management plan for each system. In addition, establishing controls over the modification of information system components and related documentation helps to prevent unauthorized changes and ensure that only authorized systems and related program modifications are implemented. This is accomplished by instituting policies, procedures, and techniques that help make sure all hardware, software, and firmware programs and program modifications are properly authorized, tested, and approved. SEC has implemented several elements of a configuration management process. Specifically, it has documented policies and procedures for assigning unique identifiers and naming configuration items so that they can be distinguished from one another and for requesting changes to configuration items. SEC has also developed a change request process and an enterprise-level change control board to review changes. However, SEC has not adequately implemented key configuration management controls over the information system components associated with the upgrade to Momentum. Specifically, it did not always document, evaluate, or approve changes to a system’s baseline. For example, it did not consistently document test plans; adequately document or approve changes to the requirements, design, and scripts; establish or maintain configuration baselines; or apply up-to-date patches on its database servers that support processing of financial data. In addition, SEC did not document and report on the status of configuration items as Momentum evolved, nor did it conduct configuration audits to determine the alignment between the actual system and the documentation describing it. Furthermore, SEC did not (1) develop a configuration management plan for Momentum, (2) assign a manager or team to conduct these activities, and (3) use adequate tools to implement the process. As a result, increased risk exists that authorized changes will not be made and unauthorized changes will be made to the Momentum system. SEC has made important progress in implementing its information security program. For example, SEC has provided individuals with training for incident handling and developed, documented, and implemented a policy on remedial action plans to ensure that deficiencies are mitigated in an effective and timely manner. However, a key reason for the information security weaknesses is that it has not effectively or fully implemented key program activities. Until all key elements of its information security program are fully and consistently implemented, SEC will not have sufficient assurance that new weaknesses will not emerge and that financial information and financial assets are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. FISMA requires the CIO to designate a senior agency information security officer who shall have information security duties as that official’s primary duty and head an office with the mission and resources to assist in ensuring agency compliance with the provisions of the act. This officer will be responsible for carrying out the CIO’s information security responsibilities, including developing and maintaining a departmentwide information security program, developing and maintaining information security policies and procedures, and providing training and oversight to security personnel. However, although SEC appointed an acting senior agency information security officer from April to July 2008, the position has been vacant for the past 8 months. According to an SEC official, a vacancy announcement has not yet been posted for this position. Without a senior security officer to provide direction for an agencywide security focus, SEC is at increased risk that its security program will not be adequate to ensure the security of its highly interconnected computer environment. FISMA and its implementing policies require agencies to develop, document, and implement periodic assessments of the risk and magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems. The National Institute of Standards and Technology (NIST) also states that a risk assessment report should be presented as a systematic and analytical approach to assessing risk so that senior management will understand the risks and allocate resources to reduce and correct potential losses. SEC policy states that security risk assessment involves the identification and evaluation of IT security risks. This process identifies IT security-related risks to information and information systems, considers the probability of occurrence, and measures their potential impact. The SEC Office of IT Security Group is responsible for periodically reviewing the risk assessments to ensure that all aspects of risk and applicable IT security requirements have been adequately addressed. SEC did not provide full information for management oversight of risks associated with the Momentum application. For example, the SEC security testing and evaluation for Momentum identified numerous configuration management vulnerabilities that affect other areas such as access controls, separation of duties, and inappropriate administrative roles assigned to individuals. Several of these vulnerabilities in the security testing and evaluation were not reported in the risk assessment summary for the Momentum application for management attention. As a result, SEC management may not be fully aware of all risks or the magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems that support their operations and assets. FISMA and its implementing policies require periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices performed with a frequency depending on risk, but no less than annually; this should include testing of management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems. This type of oversight is a fundamental element of a security program because it demonstrates management’s commitment to the program, reminds employees of their roles and responsibilities, and identifies areas of noncompliance and ineffectiveness. Analyzing the results of security reviews provides security specialists and business managers with a means of identifying new problem areas, reassessing the appropriateness of existing controls, and identifying the need for new controls. FISMA requires that the frequency of tests and evaluations be based on risks and occur no less than annually. However, SEC did not sufficiently conduct periodic testing and evaluation of controls. For example, SEC did not test and evaluate the effectiveness of security controls for the general support system supporting Momentum and EDGAR in fiscal year 2008. In addition, the scope and depth of security testing and evaluation that were performed were not comprehensive and often did not identify control weaknesses. To illustrate, SEC did not test or assess the effectiveness of a key subsystem used to develop financial statements, and an independent contractor tested only 4 of 65 security roles in Momentum, severely limiting the scope of the testing. In addition, control tests conducted by SEC on Momentum did not identify vulnerabilities in the following controls: (1) configuration management, (2) separation of duties, (3) audit and monitoring, and (4) access controls; in contrast our tests identified vulnerabilities in these controls. As a result, there is heightened risk that SEC cannot be assured that Momentum and EDGAR meet requirements and perform as intended. According to NIST, security certification and accreditation of information systems and subsystems are important activities that support a risk management process and are an integral part of an agency’s information security program. Security certification consists of conducting a security control assessment and developing the security documents. Security accreditation is the official management decision given by a senior agency official to authorize the operation of an information system and to explicitly accept the risk it may present to agency operations, agency assets, or individuals based on the implementation of an agreed-upon set of security controls. Required by Office of Management and Budget (OMB) Circular A-130, appendix III, security accreditation provides a form of quality control and challenges managers and technical staffs at all levels to implement the most effective security controls possible on an information system, given mission requirements and technical, operational, and cost/schedule constraints. After certification, a security accreditation package with security documents is provided to the authorizing official with the essential information for the official to make a credible, risk- based decision on whether to authorize operation of the information system. The security accreditation package includes the security plan, risk assessment, contingency plan, security assessment report, and plan of action and milestones. SEC did not certify and accredit a key intermediary subsystem that supports the production of its financial statements. In preparing its financial statements, SEC regularly used this intermediary subsystem to process transactions before loading the financial data into the Momentum application. The subsystem encompassed (1) an application tool to handle transactions of disgorgement data between the Phoenix and Momentum applications; (2) spreadsheets to record, calculate, maintain, and report financial transactions from various accounts; and (3) a third-party tool used for manipulating, sorting, and merging financial data. SEC did not certify or accredit the subsystem or include it as part of the security certification and accreditation process for Phoenix and Momentum. For example, the subsystem was not described in a security plan, risk assessment, contingency plan, security assessment report, or plan of action and milestone. Without certification and accreditation of the intermediate subsystem, possible security weaknesses may go undetected and management may not be alerted to potential vulnerabilities. SEC has made progress in correcting or mitigating previously reported weaknesses. However, information security weaknesses—both old and new—continue to impair the agency’s ability to ensure the confidentiality, integrity, and availability of financial and sensitive information. These weaknesses represent a significant deficiency in internal controls over the information systems and data used for financial reporting. A key reason for these weaknesses is that the agency has not yet fully implemented critical elements of its agencywide information security program. Until SEC (1) mitigates known information security weaknesses in access controls and other information system controls and (2) fully implements a comprehensive agencywide information security program that includes filling the security officer position, adequately reporting risks, conducting effective system security tests, and certifying and accrediting an intermediary subsystem, its financial information will remain at increased risk of unauthorized disclosure, modification, or destruction, and its management decisions may be based on unreliable or inaccurate information. To assist the commission in improving the implementation of its agencywide information security program, we recommend that the SEC Chairman direct the CIO to take the following four actions: designate a senior agency information security officer who will be responsible for managing SEC’s information security program, provide full information for management oversight of information security conduct comprehensive periodic testing and evaluation of the effectiveness of security controls for the general support system and key financial applications, and certify and accredit subsystems that support the production of SEC’s financial statements. In a separate report with limited distribution, we are also making 32 recommendations to enhance SEC’s access controls and configuration management practices. In providing written comments on a draft of this report, the SEC Chairman agreed with our recommendations and reported that the agency is on track to address our new findings and to complete remediation of prior year findings. She stated that strong internal controls are one of SEC’s highest priorities and that it is committed to proper stewardship of the information entrusted to it by the public. The Chairman’s written comments are reprinted in appendix II. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Banking, Housing, and Urban Affairs; the Senate Committee on Homeland Security and Governmental Affairs; the House Committee on Financial Services; and the House Committee on Oversight and Government Reform. We are also sending copies to the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available at no charge on our Web site at http://www.gao.gov. If you have any questions about this report, please contact Gregory C. Wilshusen at (202) 512-6244 or Dr. Nabajyoti Barkakati at (202) 512-4499. We can also be reached by e-mail at [email protected] or [email protected]. Contacts for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals who made key contributions to this report are listed in appendix III. The objectives of our review were (1) to determine the status of the Securities and Exchange Commission’s (SEC) actions to correct or mitigate previously reported information security weaknesses and (2) to determine whether controls over key financial systems were effective in ensuring the confidentiality, integrity, and availability of financial and sensitive information. This review was performed for the purpose of supporting the opinion developed during our audit of SEC’s internal controls over the preparation of its 2008 financial statements. To determine the status of SEC’s actions to correct or mitigate previously reported information security weaknesses, we identified and reviewed its information security policies, procedures, practices, and guidance. We reviewed prior GAO reports to identify previously reported weaknesses and examined the commission’s corrective action plans to determine which weaknesses it had reported were corrected. For those instances where SEC reported that it had completed corrective actions, we assessed the effectiveness of those actions by reviewing the appropriate documents and interviewing the appropriate officials. To determine whether controls over key financial systems were effective, we tested the effectiveness of selected information security controls. We concentrated our evaluation primarily on the controls for financial applications, enterprise database applications, and network infrastructure—Momentum; Phoenix; Electronic Data Gathering, Analysis, and Retrieval (EDGAR); Fee Momentum; and the general support system—that directly or indirectly support the processing of material transactions reflected in the agency’s financial statements. Our evaluation was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information. Using National Institute of Standards and Technology (NIST) standards and guidance and SEC’s policies, procedures, practices, and standards, we evaluated controls by testing the complexity and expiration of password settings on selected servers to determine if strong password management was enforced; analyzing users’ system authorizations to determine whether users had more permissions than necessary to perform their assigned functions; observing methods for providing secure data transmissions across the network to determine whether sensitive data were being encrypted; observing whether system security software was logging successful testing and observing physical access controls to determine if computer facilities and resources were being protected from espionage, sabotage, damage, and theft; inspecting key servers and workstations to determine whether critical patches had been installed or were up to date; examining access privileges to determine whether incompatible functions were segregated among different individuals; and observing end user activity pertaining to the process of preparing SEC financial statements. Using the requirements identified by the Federal Information Security Management Act (FISMA), the Office of Management and Budget (OMB), and NIST, we evaluated SEC’s implementation of its security program by reviewing SEC’s risk assessment process and risk assessments for three key systems that support the preparation of financial statements to determine whether risks and threats were documented consistent with federal guidance; analyzing SEC’s policies, procedures, practices, and standards to determine their effectiveness in providing guidance to personnel responsible for securing information and information systems; analyzing security plans to determine if management, operational, and technical controls were in place or planned and that security plans were updated; examining training records for personnel with significant security responsibilities to determine if they received training commensurate with those responsibilities; analyzing security testing and evaluation results for three key systems to determine whether management, operational, and technical controls were tested at least annually and based on risk; examining remedial action plans to determine whether they addressed vulnerabilities identified in security testing and evaluations; and examining contingency plans for three key systems to determine whether those plans had been tested or updated. We also discussed, with key security representatives and management officials, whether information security controls were in place, adequately designed, and operating effectively. We conducted this audit from July 2008 to March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contacts named above, David B. Hayes and William F. Wadsworth (Assistant Directors), Angela M. Bell, Mark J. Canter, Kirk J. Daubenspeck, Patrick R. Dugan, Mickie E. Gray, Sharon S. Kitrell, Lee A. McCracken, Stephanie Santoso, Duc M. Ngo, Tammi L. Nguyen, Henry I. Sutanto, Edward R. Tekeley and Jayne L. Wilson made key contributions to this report. | In carrying out its mission to ensure that securities markets are fair, orderly, and efficiently maintained, the Securities and Exchange Commission (SEC) relies extensively on computerized systems. Effective information security controls are essential to ensure that SEC's financial and sensitive information is protected from inadvertent or deliberate misuse, disclosure, or destruction. As part of its audit of SEC's financial statements, GAO assessed (1) the status of SEC's actions to correct previously reported information security weaknesses and (2) the effectiveness of SEC's controls for ensuring the confidentiality, integrity, and availability of its information systems and information. To do this, GAO examined security policies and artifacts, interviewed pertinent officials, and conducted tests and observations of controls in operation. SEC has made important progress toward correcting previously reported information security control weaknesses. Specifically, it has corrected or mitigated 18 of 34 weaknesses previously reported as unresolved at the time of our prior audit. For example, SEC has adequately validated electronic certificates from connections to its network, physically secured the perimeter of its operations center and put in place a process to monitor unusual and suspicious activities, and removed network system accounts and data center access rights from separating employees. In addition, the commission has made progress in improving its information security program. To illustrate, it has developed, documented, and implemented a policy on remedial action plans to ensure that deficiencies are mitigated in an effective and timely manner, and provided individuals with training for incident handling. Nevertheless, SEC has not completed actions to correct 16 previously reported weaknesses. For example, it did not adequately document access privileges granted to users of a key financial application, and did not always implement patches on vulnerable workstations and enterprise database servers. In addition to the 16 previously reported weakness that remain uncorrected, GAO identified 23 new weaknesses in controls intended to restrict access to data and systems, as well as weaknesses in other information security controls, that continue to jeopardize the confidentiality, integrity, and availability of SEC's financial and sensitive information and information systems. The commission has not fully implemented effective controls to prevent, limit, or detect unauthorized access to computing resources. For example, it did not always (1) consistently enforce strong controls for identifying and authenticating users, (2) sufficiently restrict user access to systems (3) encrypt network services, (4) audit and monitor security-relevant events for its databases, and (5) physically protect its computer resources. SEC also did not consistently ensure appropriate segregation of incompatible duties or adequately manage the configuration of its financial information systems. A key reason for these weaknesses is that the commission has not yet fully implemented its information security program to ensure that controls are appropriately designed and operating as intended. Specifically, SEC has not effectively or fully implemented key program activities. For example, it has not (1) filled the vacancy for a senior agency information security officer, (2) fully reported or assessed risks, (3) sufficiently tested and evaluated the effectiveness of its information system controls, and (4) certified and accredited a key intermediary subsystem. Although progress has been made, significant and preventable information security control deficiencies create continuing risks of the misuse of federal assets, unauthorized modification or destruction of financial information, inappropriate disclosure of other sensitive information, and disruption of critical operations. |
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A component of DOJ, BOP has obligations to confine offenders in a controlled, safe, and humane prison environment, while providing a safe workplace where officers can perform their duties without fear of injury or assault. In fiscal year 2010, $6.2 billion was appropriated for BOP to carry out its mission. For all 116 of its institutions, BOP has dedicated an average of almost $17 million annually from fiscal year 2000 through 2010 to expenditures that include protective equipment for its officers. In fiscal year 2010, BOP oversaw more than 209,000 inmates, housing more than 170,000 of these inmates in its 116 institutions. In addition, BOP utilizes privately managed secure facilities; residential re-entry centers— also known as halfway houses; bed space secured through agreements with state and local entities; and home confinement to house inmates. In fiscal year 2010, more than 22,000 inmates—or about 11 percent of the 209,000 inmates overseen by BOP—were housed in privately managed facilities, while more than 14,000—or about 7 percent—were housed in residential re-entry centers, bed space secured through agreements with state or local entities, or home confinement. BOP’s 116 institutions generally have one of four security level designations: minimum, low, medium, and high. The designations depend on the level of security and staff supervision the institution is able to provide, such as the presence of security towers; perimeter barriers; the type of inmate housing, including dormitory, cubicle, or cell-type housing; and the staff-to-inmate ratio. Further, BOP designates some of its institutions as administrative institutions, which specifically serve inmates awaiting trial, or those with intensive medical or mental health conditions, regardless of the level of supervision these inmates require. To determine the institution in which an inmate is confined, BOP considers the level of security and supervision the inmate requires and that the institution is able to provide; the inmate’s rehabilitation needs; the level of overcrowding at the institution; and any recommendations from the court at the inmate’s sentencing. Table 1 depicts the percentage of inmates incarcerated in BOP institutions, by security level of the institution in fiscal year 2010. Since fiscal year 2000, BOP’s inmate population has grown by 45 percent, as shown in figure 1. See appendix II for information on the characteristics of BOP’s inmate population. BOP tracks information related to inmate assaults on staff in two data systems: SENTRY and TRUINTEL. First created in 1974, BOP’s SENTRY system maintains most of BOP’s operational and management information, such as inmate data and property management data, among others. According to the Acting Director of BOP’s Office of Research and Evaluation (ORE), SENTRY was updated in 1997 to capture reports of inmate incidents, including assaults on staff. Assaults on staff can include a variety of violent acts. For instance, BOP officials with whom we spoke provided examples of assaults, such as stabbing a staff member with a homemade weapon, punching or kicking staff, or throwing bodily fluids on a staff member. Assaults are classified as serious or less serious based upon the injury sustained or intended as a result of the assault. For instance, officials at one BOP institution reported that they would classify an assault in which an inmate threw food at an officer as a less serious assault, but an assault in which the officer was stabbed as a serious assault. To report an inmate assault on a BOP staff member in SENTRY, BOP instructs its personnel to follow the procedures for incident reporting and investigations described in BOP’s Program Statement on Inmate Discipline and Special Housing Units. Figure 2 depicts this process. In addition to the information captured in SENTRY, BOP’s TRUINTEL system—created in October 2009—provides BOP with a number of capabilities, including an intelligence gathering function that provides real- time information on assaults on staff. Unlike SENTRY, Correctional Services Branch officials reported that TRUINTEL captures only data from the initial incident report, and is not updated based on the subsequent investigation or hearings related to the assault. According to these officials, TRUINTEL allows managers at BOP institutions to see trends in incidents, including assaults, across BOP institutions. The Correctional Services Branch officials stated that if an assault on an officer occurs, an individual at the institution—generally the lieutenant on duty—completes a Form 583 Report of Incident (Form 583) in the TRUINTEL system, indicating that the incident was an assault on staff. The lieutenant also records information on the incident’s cause, such as alcohol or a disrespect issue; the inmate(s) involved in the assault; whether restraints were applied to the inmate; and whether any lethal or less-than-lethal weapons were used to resolve the incident. The officer involved in the assault may also submit a description of the incident, which is entered into the Form 583. After the lieutenant completes the Form 583, the institution’s captain generally reviews the report before it is reviewed and finalized by the institution’s warden. Once the warden finalizes the Form 583, managers across BOP institutions can view the information in the TRUINTEL system. Further, following any incident involving an officer’s use of force against an inmate, such as the use of a less-than-lethal weapon, BOP requires that a Form 586 After Action Review Report be completed in TRUINTEL. To complete this report, an after action review committee first meets to review the incident. The facility’s warden, the associate warden responsible for correctional services, the health services administrator, and the captain comprise this review committee and their purpose is to assess the rationale for why the staff involved took the actions or used the equipment they did. The committee also determines if these actions, including the use of any equipment, were appropriate given BOP policy. Since BOP’s inmate population changes each year, BOP calculates the rate of inmate assaults—both of a serious and less serious nature—per 5,000 inmates incarcerated based on the information submitted in its SENTRY system. For example, in fiscal year 2010, the total number of assaults on staff was almost 1,700, for a rate of about 49 serious and less serious assaults per 5,000 inmates. Figure 3 displays the serious and less serious assaults on BOP staff, as recorded in SENTRY from fiscal year 2000 through 2010. As the trends illustrate, less serious assaults have followed a generally upward trend, while serious assaults have experienced fewer fluctuations over time. According to BOP officials from the Correctional Services Branch, upward trends in assault data may be influenced by a number of factors, including the number of inmates affiliated with gangs, the staff-to-inmate ratio in the institutions experiencing assaults, or the opening of additional BOP institutions because inmates incarcerated in these new institutions are not familiar with each other, which can lead to initial tension between the inmates. Correspondingly, the officials explained that the decrease in assaults may be a result of the inmate population at a new institution stabilizing and becoming less tense. In addition, the officials reported that the downward trend in assaults from 2009 to 2010 may be related to BOP creating Special Management Units (SMU) to house inmates who present unique security and management concerns, such as those who participated or had a leadership role in gang activity, by removing them from other BOP facilities. While these data systems track inmate assaults on staff while staff are on duty, officers may also encounter former inmates or inmates’ families or associates while in the community, including while commuting to and from work. In part due to these potential threats to officers’ safety in their communities, the Law Enforcement Officers Safety Act of 2004 (LEOSA) was passed. LEOSA exempts qualified law enforcement officers and qualified retired law enforcement officers from state and local laws that prohibit carrying concealed firearms. BOP staff who have primary and secondary law enforcement status are “qualified law enforcement officers” as defined by statute and qualify to carry concealed firearms. However, with limited exceptions, BOP prohibits anyone, including officers, from storing personal firearms carried while commuting to and from work on institution property. In addition to BOP, other federal government and nongovernmental organizations also engage in activities that relate to officer safety. The National Institute of Justice (NIJ) is DOJ’s research, development, and evaluation component. In addition to awarding grants and cooperative agreements to research, develop, and evaluate criminal justice programs, NIJ coordinates various technical working groups comprised of subject matter experts who work in the field of criminal justice to address a variety of law enforcement issues. Three of NIJ’s technical working groups relevant to officer safety in correctional settings are: Institutional Corrections, Personal Protective Equipment, and Less Lethal Technologies. Further, NIJ funds the National Law Enforcement and Corrections Technology Center (NLECTC), which assists state, local, tribal, and federal correctional agencies, as well as law enforcement and criminal justice agencies, in addressing technology needs and challenges, which can help address officer safety. In addition, BOP’s National Institute of Corrections (NIC) provides training, technical assistance, information services, and policy and program development assistance to federal, state, and local correctional agencies. The NIC also maintains an extensive library of research and evaluations related to corrections, including those related to officer safety. Further, the Office of Law Enforcement Standards within the National Institute of Standards and Technology (NIST), an agency of the Department of Commerce, helps criminal justice, public safety, emergency responder, and homeland security agencies make decisions, primarily by developing performance standards, measurement tools, operating procedures and equipment guidelines. For instance, NIST has conducted research on the long-term durability of body armor, which is worn by correctional officers to ensure their safety. The American Correctional Association’s (ACA) Commission on Accreditation provides all accreditations for BOP institutions. The ACA’s standards provide guidance to all correctional organizations on correctional issues such as programming, officer staffing, and officer safety. In order for a correctional institution to be accredited by the ACA, the institution must show compliance in key areas, including officer safety. Additionally, the Council of Prison Locals (CPL) is the union that represents employees within BOP’s bargaining unit, which includes correctional officers. The CPL is a part of the Association of Federal Government Employees (AFGE), a union that represents federal government employees. There are 105 local CPL branches nationwide that represent employees from BOP’s 116 facilities, and advocate for the interests of their constituents, including officer safety issues. In addition to BOP’s role in ensuring the safety of federal correctional officers, state departments of corrections work to ensure the safety of correctional officers working in state institutions. All 50 states have agencies that are responsible for housing the state’s inmate populations. See appendix III for the inmate populations and characteristics in these states as of December 31, 2009. BOP and the selected states with whom we spoke provide their officers with a variety of equipment to protect them. BOP generally requires officers working within the secure perimeter of its institutions to carry a radio, body alarm, and keys while on duty. BOP also provides officers with the option to carry flashlights and wear stab-resistant vests. This policy regarding the equipment worn or carried by officers is largely consistent across BOP facilities. Further, with limited exceptions, BOP prohibits anyone, including officers, from storing personal firearms the officers carried while commuting to and from work on facility property. States have discretion over the equipment they make available to their officers, and officials in the 14 states with whom we spoke provided examples of three types of equipment they allow their officers to carry while on duty that BOP generally does not, including pepper spray and batons. In addition, officials from 9 of the 14 states reported that they allow their officers to store personal firearms that they have carried when commuting to and from work on facility property, which BOP generally does not. However, BOP and states provide similar equipment and weapons—such as less-than-lethal launchers, shotguns, or rubber bullets—to protect their officers in an emergency situation, which can include responding to an inmate riot or attack, removing a noncompliant inmate from a cell, or capturing an escaping inmate. Most BOP officers and union officials with whom we spoke reported that carrying additional equipment while on duty and while commuting to and from work would better protect officers, while BOP management largely reported that officers did not need to carry additional equipment in order to better ensure their safety. BOP officers working within the secure perimeter of a BOP institution are generally required to carry a radio, body alarm, and keys while on duty. In addition, officers have the option to carry a flashlight, handcuffs, latex or leather gloves, or a stab-resistant vest. These policies are largely consistent across BOP institutions, although officers in certain posts carry additional equipment beyond what the typical officer carries. For instance, officers in armed posts carry a lethal weapon and have the option to wear a ballistic vest while on duty. Further, institutions can request waivers to permit their officers to carry or wear additional equipment. According to BOP officials in the Correctional Services Branch, such waivers are granted when the institution demonstrates that it has a unique need to deviate from BOP’s national policy. For example, BOP approved a waiver for officers working at BOP’s Administrative Maximum (ADX) institution in Florence, Colorado, which houses inmates requiring the tightest controls in BOP, to carry batons while on duty. Similarly, officers working with inmates in SMUs, which house inmates that present unique security and management concerns, such as those who participated or had a leadership role in gang activity, were also granted a waiver to carry batons while on duty. According to BOP, it has granted 5 institutions waivers related to officers carrying additional equipment. These waivers include permitting officers in the ADX and SMUs to carry batons inside the institutions. In addition, BOP granted waivers allowing officers patrolling the perimeter of 3 institutions located in downtown areas to carry smaller canisters of pepper spray than those in BOP’s inventory because the larger size was too cumbersome. Further, BOP reported that it has granted waivers to 25 institutions permitting them to store less-than-lethal munitions closer to, or in some cases inside, Special Housing Units (SHU) in order to provide officers more rapid access to the equipment. State DOCs determine the type of equipment their officers carry, and officials in the 14 states with whom we spoke provided examples of three types of equipment that they made available to their officers working within the secure perimeter of the institution to carry or wear while on duty that BOP generally does not. For example, officials from 10 states reported that their officers were permitted to carry pepper spray. In the case of pepper spray and other equipment, state officials told us that it may be carried or worn by all officers in the state; optional for officers; or dependent on the security level of the institution in which the officer works, the officer’s post, or the warden’s discretion. Table 2 displays the equipment that BOP routinely provides to the majority of its officers to carry or wear while on duty, and the number of officials from the 14 states reporting that their officers carry or wear this equipment. According to BOP officials with whom we spoke, officers carry limited equipment while on duty because BOP stresses the importance of officers communicating with inmates to ensure officer safety. For instance, management officials at one BOP institution explained that, regardless of the amount of equipment officers carry, inmates will always outnumber officers. Therefore, the officers’ ability to manage the inmates through effective communication, rather than the use of equipment, is essential to ensuring officer safety. BOP officials reported that carrying additional equipment would impede this communication. For example, according to officials from the Correctional Services Branch, if officers carried equipment in addition to what BOP currently provides, the officers may rely more on this equipment than on their communication with inmates to resolve a situation. Further, officials in 9 of the 14 states with whom we spoke reported that they allow their officers to store personal firearms that they have carried while commuting to and from work on facility property, while BOP, with limited exceptions, does not allow its officers to store such personal weapons. Specifically, BOP policy prohibits anyone, including officers, from bringing personal firearms into or onto the grounds of any BOP institution without the knowledge or consent of the warden, or storing personal firearms in any vehicle parked on BOP property. According to an official from the Correctional Services Branch, BOP does not permit officers to store personal weapons on BOP property because visitors or inmates working on the institution grounds may be able to gain access to the weapon, which would threaten the security of all individuals at the institution. See table 3 for the state department of corrections’ policies pertaining to personal firearms storage on facility property. BOP’s policy prohibiting officers from storing personal firearms on BOP property is largely consistent across its institutions; however, there are limited exceptions to this policy. For instance, BOP policy permits wardens to allow officers to bring personal firearms onto BOP grounds. As such, in 1995, the warden at BOP’s Metropolitan Detention Center (MDC) in Guaynabo, Puerto Rico issued a local policy permitting officers to store personal firearms in a personal weapons locker outside the facility’s secure perimeter while on duty. According to the policy, to store a personal firearm in the MDC’s gun locker, officers must first submit a request to the MDC’s security officer through the MDC’s captain. The request must contain the brand, caliber, and serial number of each weapon to be stored, as well as the number and expiration date of the officer’s permit to carry a firearm. Once the request is approved, the officer receives a key to a locked box within the personal weapons locker. To access the personal weapons locker, the officer must first be identified by staff in the MDC’s control room on a camera located outside the personal weapons locker. Once identified, the officer is granted access to the personal weapons locker and must log his or her entry in and out of the locker in a log book located inside the locker. Figure 4 depicts the MDC’s personal weapons locker and an open locker. According to officials at the Guaynabo MDC, the policy was enacted when the MDC was constructing an armory and requested approval to build the personal weapons locker attached to the armory; the policy is reviewed annually. The officials reported that officers at the MDC at the time were concerned for their safety due to criminal activity surrounding the institution. For instance, the officials reported that an associate warden at the institution was the victim of an attempted car jacking when leaving work. In addition, officers residing in housing located on BOP property—known as reservation housing—are prohibited from storing personal firearms in their housing, and are instead required to place personal firearms in the institution’s armory for safekeeping. According to BOP, as of January 2011, 32 of its 116 institutions have reservation housing available, and officers at 14 of these 32 institutions store personal firearms in the institution’s armory. The number of firearms stored in the armories at these 14 institutions ranges from 1 to 32, with an average of about 10. Moreover, BOP has leased parking space for its officers on non-BOP property at 5 of BOP’s institutions, on which BOP’s policy prohibiting the storage of personal weapons does not apply. Depending on the laws of the state in which the officers work, they may legally be able to store their personal firearms in their cars while on duty. In contrast to what officers carry on a routine basis, in cases of emergency, such as an inmate riot or attack, BOP provides officers with access to a variety of equipment that is largely consistent with what our selected state departments of corrections provide. This equipment includes less-than-lethal weapons, protective gear, and lethal weapons. The equipment is located in specific locations throughout the institutions, such as in secure control rooms, watchtowers in the institutions’ yards, or in the institutions’ armories outside the secure perimeter. Table 4 shows the type of equipment that BOP makes available to its officers in an emergency and the number of officials in the 14 states with whom we spoke who also reported making it available. The 68 officers, officials from six unions, and management officials from BOP’s Correctional Services Branch and the eight BOP institutions with whom we spoke had different opinions about whether additional equipment would better protect officers. As shown in figure 5, most officers and all the union officials with whom we spoke reported that additional equipment would enhance officer safety, while most management officials reported that additional equipment would not enhance officer safety. These officers and officials who said that carrying additional equipment would better ensure safety reported that officer safety would be enhanced if officers carried pepper spray (41 of 45 officers, all union officials, and management officials from one BOP institution); batons (15 of 45 officers); TASERs (4 of 45 officers); or a portable phone (1 officer). Moreover, the officers and officials cited a number of safety benefits to this additional equipment. For instance, 9 officers, officials from four unions, and management at one BOP facility reported that carrying additional equipment would allow officers to defend themselves in case of an attack by an inmate. Four officers reported that carrying additional equipment would help officers deter inmates from engaging in disruptive behavior. For example, 1 officer stated that if an inmate saw an officer carrying a baton, the inmate would be less likely to do something wrong. Further, 4 officers reported that carrying additional equipment could help officers to prevent injuries to inmates, as they could break up fights between inmates more quickly with the additional equipment on hand. However, 7 officers and officials from two unions expressed the need for officers to be trained on the additional equipment in order to enhance their safety. Five officers also reported that the need to carry additional equipment would depend on the situation. Specifically, 4 of the 5 noted that it could particularly aid officers whose posts included open recreational yards where inmates congregate and the potential for fighting or misconduct was greater. Eighteen officers and eight BOP management officials that reported that carrying additional equipment would not enhance officer safety cited concerns with the additional equipment. Specifically, officers most frequently cited concerns that the equipment could be taken from the officer and used against him or her by an inmate. BOP management officials most frequently reported that carrying additional equipment might hinder officers’ communication with inmates either because the officer would be more likely to utilize the equipment to prevent an inmate from engaging in misconduct than talk with the inmate, or the inmate would perceive officers carrying additional equipment as more threatening and be less willing to engage in communication with officers. Similarly, the 68 officers, officials from six unions, and management officials from BOP’s Correctional Services Branch and the eight BOP institutions with whom we spoke had different opinions about whether safety is a concern for officers while they are commuting to and from work. As displayed in figure 6, all of the union officials with whom we spoke reported that safety is a concern for officers when commuting to and from work, most BOP management officials reported that it was not, and the officers with whom we spoke were evenly split regarding safety concerns while commuting to and from work. The officers and officials reporting safety concerns most frequently cited the presence of former inmates, inmates’ families, or associates of inmates in the communities in which officers work who may wish to harm the officers. For instance, one officer explained that he has confiscated contraband from inmates during visiting hours, then later saw the visitors in the community and felt concerned that the visitors might retaliate. In addition, 2 officers and officials from two unions reported that officers’ safety may be at risk when they are wearing their uniforms, either because they are recognized as a BOP officer or other law enforcement personnel. Further, 4 officers, officials from one union and BOP management officials from one institution cited crime in the community or the lack of security in the employee parking lot as a safety concern for officers while commuting to and from work. The 33 officers who reported that safety while commuting to and from work was not a concern cited a number of reasons, including living in close proximity to the institution in which they work; working in an institution that is in a quiet, non-urban setting; the local community’s positive perception of officers; and officers’ good relationship with inmates. Management officials also reported that officers often change out of their uniforms when commuting to and from work, which mitigates safety concerns during the commute. Given the varying opinions regarding officer safety concerns while commuting to and from work, the officers, union officials, and BOP management officials with whom we spoke also reported different opinions about whether allowing officers to carry personal firearms to and from work and store them on BOP property would enhance officer safety. As shown in figure 7, most officers and all union officials reported that being permitted to store personal firearms on BOP property would enhance officer safety, while most BOP management officials reported that doing so would not enhance officer safety. Of the 50 officers reporting that allowing officers to store personal firearms on BOP property would enhance their safety, 7 told us that they would not take advantage of this policy if it were instituted, though they did not elaborate, and another 2 expressed the need for additional training on the firearms before the policy is implemented. The 7 officers who indicated to us that allowing officers to store personal firearms on BOP property would enhance officer safety at another institution reported that having the ability to carry a personal firearm to work and store it on BOP property was not necessary to ensure their safety at the current institution at which they work. However, these 7 officers stated that such a policy would better ensure the safety of other officers, such as those working at institutions in large cities. The 7 officers and six BOP management officials who told us that allowing officers to store personal firearms on BOP property would not enhance officer safety explained their reasons. These reasons included officers not needing to carry firearms during their commute because danger is minimal if non existent, officers having the potential to misuse firearms if not properly trained, and inmates potentially obtaining the firearms if stored in officers’ cars or carried into the facility. Further, 2 officers at one BOP institution and 2 officers and union officials at a second BOP institution cited additional safety measures that would enhance officer safety while officers are commuting to and from work that did not involve authorization to carry weapons while commuting. Three of these officers and the union officials reported that increased monitoring of the parking lot and checks on visitors’ cars would improve officer safety. One of these three officers and the union officials also stated that posting a guard at the entrance to an institution would enhance officer safety. Finally, one officer told us that staggering officers’ shifts with visiting hours would help improve safety because it would help ensure that visitors would not be able to identify the officers’ cars and then follow them while the officers are off duty. BOP and states provide a variety of equipment to their officers to ensure their safety; however, none of the BOP officials, state correctional officials, and correctional experts with whom we spoke reported that they were aware of or had conducted evaluations of the effectiveness of equipment in ensuring officer safety. If BOP were to acquire new equipment, correctional equipment experts from the National Law Enforcement and Corrections Technology Center (NLECTC), the National Institute of Standards and Technology (NIST), and the National Institute of Justice (NIJ) reported to us that BOP would need to consider factors such as training, replacement, and maintenance costs; potential liability issues; whether the equipment met technical performance standards; and the benefits and risks of using the equipment. BOP officials from the Correctional Services Branch and BOP’s Office of Security Technology—which is responsible for identifying and evaluating new security-related equipment—reported that their offices had not assessed whether the equipment BOP provides to its officers has improved the officers’ safety. Similarly, officials from NIJ, DOJ’s research, development, and evaluation agency, told us that NIJ has not conducted any evaluations of the effectiveness of the set of equipment that BOP uses in ensuring the safety of its officers. Moreover, BOP’s NIC, which provides technical assistance, training, and information to BOP and state and local correctional agencies, found no record of studies related to officer safety. In addition, officials from BOP’s Office of Research and Evaluation (ORE), which conducts research and evaluations on behalf of BOP, reported that ORE had not conducted such studies. According to BOP’s mission statement, BOP protects society by confining offenders in prisons that are, among other things, safe, cost-efficient, and appropriately secure. Further, BOP states in its vision statement that it will know that it has realized these goals when, among other things, the workplace is safe and staff perform their duties without fear of injury or assault and BOP is a model of cost-efficient correctional operations. In addition, DOJ stresses the importance of evidence based knowledge in achieving its mission. For instance, when soliciting federally funded research in crime and justice, DOJ’s Office of Justice Programs (OJP) states that it supports DOJ’s mission by sponsoring research to provide objective, independent, evidence based knowledge to meet the challenges of crime and justice. According to OJP, practices are evidence based when their effectiveness has been demonstrated by causal evidence, generally obtained through outcome evaluations, which documents a relationship between an intervention—including technology—and its intended outcome, while ruling out, to the extent possible, alternative explanations for the outcome. Standards for Internal Control in the Federal Government state that managers need to compare actual performance to planned or expected results throughout the organization and analyze significant differences, as well as that program managers need both operational and financial data to determine whether they are meeting their agencies’ strategic and annual performance plans and meeting their goals for accountability for effective and efficient use of resources. Given that BOP’s SENTRY and TRUINTEL systems maintain data on inmates and related incidents, including assaults on officers and the equipment officers utilize in instances where they use force against an inmate, ORE officials reported that such data would allow them to assess the effectiveness of equipment in ensuring officer safety, even though they told us that this assessment may be time intensive. Further, BOP officials from the Office of Security Technology reported that, while they do not assess the impact of equipment on officer safety, they obtain information about the equipments’ performance by obtaining feedback on equipment from those using it at their facilities, such as during a pilot test, and testing whether the equipment performs in accordance with the manufacturer’s intent. While information obtained from these methods helps inform the officials about staff perspectives on the usefulness of the equipment and the equipment’s performance, these methods do not provide information about the equipment’s impact on officer safety. Given BOP’s rising inmate population and the increasing number of inmates per BOP staff member, assessing the effectiveness of officer equipment in a range of scenarios and settings could help BOP better understand which of the equipment it currently provides—or could provide to officers—improves officer safety. For instance, such an assessment might indicate whether the use of a certain piece of equipment appears to prevent injuries, or whether one type of equipment appears to have a greater impact on reducing assaults on officers than another. Conducting such an assessment also could better position BOP to achieve its goal of operating in a cost-efficient manner by effectively targeting limited resources to those equipment investments that clearly demonstrate protective benefit. Officials from the NLECTC, NIST, and NIJ reported that BOP would need to consider factors such as training, replacement, and maintenance costs; potential liability issues; and whether the equipment met technical performance standards if it acquired new equipment, as well as the price of new equipment. Additionally, these organizations suggested that any decision must first be based on a close examination of the benefits and risks of using certain types of equipment. Officials from the NLECTC emphasized the need to examine other costs related to equipment acquisition, such as new officer training related to the equipment, and costs related to the frequency of replacing equipment, such as canisters of pepper spray that must be replaced once used or other munitions with contents that must be refilled to maintain their potency. The NLECTC also explained that there are liability issues a facility or a state can incur if officers misuse equipment, are subsequently sued by inmates for their actions, and compelled to pay for associated legal expenses. Officials from NIST stated that it is important to ensure that any new equipment considered meets the technical performance standards, if any, associated with certain types of equipment. For example, officials noted that adherence to standards when purchasing bulletproof vests is critical to ensuring that the materials used in vests have been proven to stop bullets. In addition, experts from NIJ’s Institutional Corrections Technology Working Group suggested assessing where in the field of corrections less-than-lethal weapons have been used and whether the benefits of using certain less-than-lethal weapons outweigh the risks. Table 5 provides examples of what officials from BOP and the 14 state DOCs included in this review cited as benefits and risks associated with the use of specific types of less-than-lethal weapons. BOP officials from the Correctional Services Branch stated that they first establish whether new or additional equipment is needed through a variety of means. For example, officials said they obtain information from BOP’s Office of Security Technology about the performance of the equipment, such as through a pilot test; identify trends related to incidents in institutions’ data; and also review feedback from officers and other BOP staff on how well the current inventory of equipment is meeting their needs. Officials stated that the next steps involve reviewing factors such as equipment benefits, risks, and costs related to training and maintenance. Officials also noted that before they acquire new equipment it must undergo a legal review by BOP’s Office of General Counsel. Equipment available to officers is one important part of officer safety; however, there are other factors—such as those related to the movement of inmates throughout the facility and the skills and training of prison personnel—that impact both officers’ safety and the overall safety of the institution. BOP has conducted evaluations to measure the impact of several efforts it has undertaken to address such institutional factors on officer safety, among other outcomes, and officials report using these evaluations to inform BOP operations. Throughout our audit work, we asked BOP and state correctional officials with whom we spoke to identify institutional factors that impact officer safety, as well as efforts they have made to mitigate these factors’ consequences. We then analyzed their responses and found 14 common institutional factors the BOP and state officials identified. In order to determine which of the 14 factors have the greatest impact on officer safety, we surveyed 30 correctional accrediting experts at the ACA and asked them to rank which of the factors—if they existed in an institution— would pose the greatest threat to officer safety. We received responses from 21 experts who also provided examples of efforts to address these factors that they believe to be cost effective—that is, efforts that strike a balance between their effectiveness in addressing the factor and their implementation costs. See appendix IV for a copy of our survey and appendix V for a full description of each of the 14 factors identified by BOP and state correctional officials. These experts most frequently reported that the existence of ineffective inmate management, insufficient officer training, inmate gangs, correctional officer understaffing, and inmate overcrowding in an institution would most affect officers’ safety. At one BOP fcility we viited, line re pinted on the floor on oth ide of corridor to ditingh the re where inmtelk from the re deignted for ff. Ineffective Inmate Management: Inmate management refers to the various strategies employed to control and manage the inmate population within a facility. For example, if inmates are not managed effectively, there could be instances where groups of inmates are allowed to congregate, which could lead to increased tension and violence. In one BOP facility a race riot between the Aryan Brotherhood and African-American inmates broke out in the recreation yard on Adolf Hitler’s birthday in April 2008, resulting in injuries and two inmate deaths. After putting up fences that separated the recreation yard into sections, the warden reported that assaults decreased. Fifteen of 21 correctional experts reported that ineffective inmate management is one of the most important factors that could jeopardize officer safety. Further, these experts identified examples of potential cost- effective efforts to manage inmates effectively. One expert reported that managers should assess the risk of housing certain inmates together. Once it assesses its population, management can control inmates’ movement accordingly. Another suggested that institutions utilize video cameras and a “pass” system, which allows only those authorized to enter or exit (i.e., pass through) a certain area, to improve monitoring of inmates’ movement. Further, 1 expert stated that institutions should control inmate movement times, and only allow inmates to move when authorized, such as at the top of the hour, while restricting all other movement unless an inmate is accompanied by an escort or otherwise authorized in advance. BOP and state officials reported making efforts to address inmate management. For instance, BOP employs a direct supervision strategy where officers interact and communicate frequently with inmates, and officials from 3 of the 14 states with whom we spoke reported that they also employ direct supervision over inmates. Officials from another 2 of the 14 states reported that they employ an indirect supervision strategy that minimizes the interaction between officers and inmates by having the supervision take place in a centralized control center within the housing unit. A lieutenant at a facility in one of these states explained that because the facility houses a large number of violent inmates, the state has chosen to apply a less direct supervisory approach to minimize inmate and officer contact. See appendix III for characteristics of state inmates, including types of offenses. Insufficient Correctional Training: Insufficient correctional training refers to a level of training that does not adequately prepare officers to fulfill their duties at their assigned post or other collateral duties they may be asked to perform. For example, one officer we spoke with stated that he felt that officers did not receive enough self defense training, which he indicated would have prevented some of the assaults on staff in his facility since officers would not have to depend on equipment or the backup from other staff to protect themselves. BOP’s Specil Opertion Repone Te (SORT) ttend Cri Mgement Trining, which i n intenive fll-time, weeklong progrm tht trin officer in certin pecilized kill, such ascorting high rik inmte, condcting hoge negotition, nd reching prion door nd fence, mong other kill. Seven of 21 correctional experts reported that inadequate officer training—if it exists within an institution—is one of the most important factors jeopardizing officer safety because it could result in officers not having the knowledge and skills to perform their duties safely and effectively. These experts identified some examples of potential cost- effective efforts to address insufficient correctional officer training when it exists in an institution. Two experts emphasized the need to leverage training provided by local law enforcement agencies, or training provided at no cost to the facility, such as curricula offered through NIC. Another expert recommended that institutions call upon the local law enforcement community for assistance or sharing of training needs. Both this expert and 2 others recommended the use of computer-based training to expand staff access to resources, make training available “anytime,” and combat officer complacency. Officials from BOP and the 14 state DOCs all agreed on the importance of training. However, none of the officials identified their officer training programs as being insufficient. In addition, 8 of the 68 officers we spoke with expressed criticisms over the training they receive. To ensure that their officers receive adequate training, BOP and the 14 state DOCs included in our review require that officers must complete some form of training prior to working with inmates in a facility. Such training is usually conducted through an academy that can last from 2 to 16 weeks, depending on the prison system. BOP’s training courses at the academy include self defense, “use of force” policies, and gang control in addition to any required firearms certification, and officers also receive training at the facility in which they will be working. In addition, in BOP and 9 of the 14 states with whom we spoke, officers benefit from on-the-job training programs, usually conducted through a shadowing program with a more experienced officer or supervisor. Officials from 2 states with whom we spoke reported that they have such a program and that it has helped them address staffing issues because officers in training provide additional support on a given shift. BOP officers are also required to complete some form of refresher training annually. Further, officers that are members of their institution’s Disturbance Control Team (DCT) or Special Operations Response Teams (SORT) receive additional training on a more frequent basis. Both BOP and state institutions have such teams of officers that are responsible for various duties. Inmate Gangs: Inmate gangs are the organized factions of inmates inside a prison which can be based on an inmate’s race, religion, or geographic origin, commonly referred to in corrections as security threat groups (STG). Many STGs parallel existing street gangs, such as the Bloods and the Crips. These STGs exist primarily to offer protection to their members from other STGs and to transport and distribute drugs. For example, the warden at one BOP facility told us that gang participation often encourages inmates to be violent and defiant towards staff and other inmates in order to gain respect from other gang members. Seven of the 21 correctional experts reported that the presence of inmate gangs in prisons is one of the most important factors impacting officer safety, and identified some examples of potential cost-effective efforts to address inmate gangs. According to one expert, institutions should employ the use of phone systems that allow inmates to call a hotline to talk about gangs; track and manage gang activity and provide this information to hotline staff; and provide training to staff receiving this information or observing suspicious activities. Further, another expert suggested the use of computer assisted tracking of whom the gang leaders are calling and whom they are writing. According to the expert, this electronic mapping of community linkages (prison to the streets) can assist prison staff and law enforcement in monitoring illegal activity and possibly disrupting it. Another expert stated that proper supervision and staff training are critical to controlling gangs, and that gangs cannot be tolerated. In addition, one expert reported that institutions must not allow any type of gang displays, and should transfer gang members to different institutions frequently in order to disrupt gang organization. Officials at two of the eight BOP institutions and 3 of the 14 states with whom we spoke described specific efforts to identify and manage STGs that are important in order to enhance officer safety and prevent prison violence. For instance, both BOP and the California state prison system reported that they identify STG members when they enter the system through clothing insignia, tattoos, or peer associations, and note if the inmate is identified as a member. One California official reported that the state strives to segregate inmate STG members from other members of their own STGs or rival STGs, to the extent possible. Further, an official from 1 state reported that some of that state’s institutions have a housing unit program dedicated solely for STG members, where they offer assistance aimed to rehabilitate the inmates and draw them away from STGs. Officials in another state prison system with whom we spoke reported that they manage their STG population by segregating the gang members. Correctional Officer Understaffing: Correctional officer understaffing is the level of staffing of officers that is perceived to be inadequate to prevent violence and maintain a safe facility, usually measured by the inmate-to-staff ratio. Specifically, BOP’s ORE conducted a study in 2005 entitled “The Effects of Changing Crowding and Staffing Levels in Federal Prisons on Inmate Violence Rates,” which found that lower inmate-to-staff ratios are correlated with increases in the level of inmate violence in BOP institutions. However, not all officers and officials we spoke with agreed that understaffing impacted officer safety at BOP institutions. For instance, the officers we spoke with most frequently reported understaffing as a factor impacting their safety (39 of 68 officers), with many citing concerns about staffing levels during the evening and night shifts when there is no other support staff present in the unit, while management at two of the eight BOP institutions we visited reported that the current staffing levels at their institutions are adequate to maintain a safe facility. Texasas evuated the ff level nd dty po t ech fcility cross it tem, llowing it to look t how mny ff ech fcility has, where theff re locted, nd ask whether the ff re poted where they re needed, given inmte movementring dily opertion. A result, Texasas able to identify ome po tht it no longer needed nd to dd po it needed but did not hve. Despite the potential variation in perceptions, 8 of 21 correctional experts reported that officer understaffing is one of the most important factors jeopardizing officer safety and identified some examples of potential cost- effective efforts to address correctional officer understaffing. One expert commented that prisons need to embrace technologies like cameras on walls, and utilize better designs to eliminate blind spots. Another expert stated that in many facilities, correctional officers perform support functions, such as paperwork, that may be effectively done by other staff earning lower salaries. However, the expert commented that hiring too many support staff to perform these functions could affect the ability of a correctional organization to hire more officers. In addition, another expert stated that having officers work 12 hour shifts would increase the staff on each shift. Another expert opined that the most effective strategy is a careful analysis of the institutional officer posts that involves key stakeholders, such as management and officers, and establishes mandatory minimum post numbers, adding more posts only as staffing levels permit. Officials at two of the eight BOP institutions and 4 of the 14 states with whom we spoke reported employing efforts to address officer understaffing. For example, according to BOP management officials at one institution that has multiple facilities in one location, called a complex, management has implemented a staffing plan referred to as consolidation, which allows them to fill in staffing shortages in one facility with officers from another facility within a complex. BOP management at this institution cited consolidation as an economical strategy to fill critical need posts because they do not have to pay officers overtime. However, BOP union officials at two complexes we visited and 4 out of 68 officers we spoke with expressed unease specifically over the consolidation policy, voicing concerns that at times, they feel less safe if sent to work in facilities where they were not as familiar with the inmates. For example, at one complex we visited, an officer reported that he was transferred from a medium security facility to cover shifts at the high security facility. This officer shared concerns that because he does not work with high security inmates on a regular basis, he lacks the opportunity to become familiar with various inmates who pose a greater security threat. Inmate Overcrowding: Inmate overcrowding exists when the number of inmates housed in a facility exceeds the rated capacity of a particular facility. BOP defines rated capacity as the number of prisoners that the institution is built to house safely and securely and with adequate access to services providing necessities for daily living and programs designed to support prisoners’ crime-free return to the community. In testimony before the House of Representatives Subcommittee on Commerce, Justice, Science, and Related Agencies in 2009, the BOP Director stated that correctional administrators agree that overcrowding contributes to greater tension, frustration, and anger among the inmate population, which leads to conflict and violence as the inmates’ ability to access basic services are hindered. Further, as BOP described in its 2005 study, where overcrowded conditions exist, more inmates share cells and other living units, and are thus brought together for longer periods with more high risk, violent inmates, creating more potential victims. According to this report, BOP found that an increase in the inmate population as a percentage of a facility’s rated capacity directly correlates with an increase in inmate violence. Seven of the 21 correctional experts reported that overcrowding is one of the most important factors jeopardizing officer safety. These experts identified some examples of potential cost-effective efforts to address inmate overcrowding. For instance, one expert recommended that inmate programs be carried out in shifts, from the early morning to the late evening, in order to split the amount of inmates between idle time and program time. To address overcrowding, officials from one of the BOP institutions and 3 of the 14 states with whom we spoke reported converting community space, such as television rooms, into inmate cells to accommodate a larger inmate population. This has resulted in trade-offs—to make room in existing housing units to accommodate growing inmate populations, the number of televisions inmates have available to watch has been reduced, which can increase tensions and threaten safety. Further, officials from three of the eight BOP institutions and 3 of the 14 states with whom we spoke stated that they have resorted to double or even triple bunking cells to accommodate the increasing inmate population. This occurs not only within units that house inmates from the general population, but also in the special housing units where inmates are sent for administrative detention or disciplinary segregation. According to BOP, the tradeoff for accommodating a growing population by double and triple bunking cells is the increased level of stress and conflict among inmates that results from living in such close quarters with others. However, not all prison systems are experiencing overcrowding; in fact some states, such as Michigan, are experiencing a reduction in their inmate populations. States have employed a variety of mechanisms to reduce their inmate populations in order to alleviate overcrowding, such as reviewing inmates that may be eligible for parole or considering sentence reductions. An official in Michigan with whom we spoke attributed the decline in inmate population in his state to the success of the state’s re-entry programs for inmates, which has reduced recidivism and violations of parole or probation that often bring former inmates back to jail. BOP’s ORE has conducted evaluations to measure the impact of several efforts on officer safety, among other outcomes, and officials report using these evaluations to inform BOP operations. For instance, in 2001, ORE conducted a study empirically evaluating BOP’s substance abuse treatment program’s effectiveness in reducing prisoner misconduct, which is closely related to officer safety. The study found that treatment program graduates were 74 percent less likely to engage in misconduct between program graduation and release from prison than a comparison group. In addition, in a 2008 study of BOP’s pilot faith-based residential program called Life Connections, BOP’s ORE found that Life Connections participants were less likely to engage in serious misconduct while in the program. Further, ORE has recently begun collecting data for a study to measure the impact of its SMUs—separate housing for inmates presenting unique security and management concerns, such as those who participated or had a leadership role in gang activity—on misconduct rates at both the institutions from which the inmates were removed as well as the SMUs into which they were placed. According to the Deputy Assistant Director of BOP’s Information, Policy, and Public Affairs Division, ORE provides interim data and its final evaluations to the BOP Director and executive staff members, as well as NIC—whose director is a member of BOP’s executive staff—and other DOJ components, such as OJP. Further, ORE requires its staff to publish their work to make it available publicly to the larger correctional community. This official reported that BOP’s Director and executive staff use information from ORE for a variety of purposes, including operational decision-making and budget formulation. For example, this official reported that ORE provides the BOP Director and the executive staff with interim information related to its ongoing SMU evaluation, which provides BOP management with real-time information to guide its decisions related to the SMUs. In addition, in its 2011 Budget Justification, BOP cited its findings from ORE’s study on the Life Connections Program, which demonstrated reductions in serious inmate misconduct, when providing its rationale for funding for inmate programs. Further, the official reported that, when faced with budget constraints, BOP decided to eliminate its intensive confinement centers—or “boot camps”—after an ORE study found that BOP’s boot camps were not effective at reducing re-arrest. With an increasing inmate population in BOP institutions, officer safety is continuously at risk. To protect officers from a range of threats, BOP has taken steps, such as providing additional equipment to officers to access in an emergency and routinely conducting officer training to enhance on-the- job responsiveness. Further, in limited cases, BOP has obtained information about the performance of equipment through pilot tests, officer surveys, and comparisons to manufacturer specifications. In addition, BOP has conducted studies looking at whether its efforts to address institutional factors have impacted inmate violence. However, it is difficult for BOP to determine the impact on officer safety of the equipment it provides because it has not used the data it already collects for this evaluative purpose. By conducting evidence-based evaluative research in what equipment effectively protects officers, BOP could be better positioned to dedicate resources to equipment that has the greatest impact on safety. To capitalize on the data BOP already collects and to further DOJ’s evaluation efforts, we recommend that the Attorney General direct the Director of BOP to leverage existing BOP data systems, such as TRUINTEL and SENTRY, as well as the institutional expertise available through NIJ and NIC, as appropriate, to assess the impact of the equipment BOP has provided or could provide to its officers to better protect them in a range of scenarios and settings. We received written comments on a draft of this report from BOP, which are reproduced in full in appendix VI. BOP concurred with our recommendation and stated that, with the assistance of NIJ and/or NIC, it will conduct a study to evaluate the impact of protective equipment on officer safety. BOP and NIJ also provided technical comments on the report, which we incorporated as appropriate. We are sending copies of this report to the Attorney General and interested congressional committees. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff have any questions concerning this report, please contact David Maurer at (202) 512-9627 or by email at [email protected]. Contact points from 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. In this report, we describe the equipment available to protect officers as well as other institutional factors, such as inmate overcrowding and staffing shortages, that affect officer safety. Specifically, this report addresses the following questions: What equipment do the Bureau of Prisons (BOP) and selected states provide to protect officers and what are the opinions of BOP officers and other correctional practitioners regarding this equipment? To what extent has BOP evaluated the effectiveness of its equipment in ensuring officer safety, and what do correctional equipment experts report as important factors when considering the purchase of new equipment? What institutional factors do correctional accrediting experts report as most impacting officer safety, and to what extent has BOP evaluated the effectiveness of the steps it has taken to address these factors? To address all of our objectives, we reviewed existing BOP policies and procedures, such as BOP Program Statements and institution-specific policies, to catalogue the equipment BOP provides to officers and the measures it has implemented to address institutional factors affecting officer safety system-wide. We also interviewed BOP central management, such as officials from the Correctional Services Branch, who help ensure that national policies and procedures are in place that provide a safe, secure institutional environment for inmates and staff, and the Office of Security Technology, who identify and evaluate new security-related equipment. In addition, we interviewed officials from the Office of Research and Evaluation, who produce reports and also research corrections-related topics. During these interviews, we discussed BOP’s existing officer safety practices; the institutional factors they report as affecting officer safety; their views on the effectiveness of the equipment BOP provides, and the measures it has implemented to address these institutional factors; and their mechanisms for evaluating the effectiveness. We compared BOP’s mechanisms for evaluating the effectiveness of its practices in ensuring officer safety to BOP’s and DOJ’s mission statements and Standards for Internal Control in the Federal Government. Further, we visited a total of eight BOP institutions in each of BOP’s six regions. During these visits, we interviewed BOP institutional management officials and observed officer safety practices so that we could accurately reflect BOP management views on officer safety. To obtain the views of officers regarding their safety, we also conducted semistructured interviews with 68 officers who were on duty at the time of our visit. The officers were chosen at random, but were generally posted to the institutions’ housing units or yard. In selecting the institutions to visit, we considered factors such as their location, staff-to-inmate ratio, level of overcrowding, number of assaults on staff, and the security level of the institution. These institutions included Atwater U.S. Penitentiary (USP) and Victorville Federal Correctional Complex (FCC) in California; Florence FCC in Colorado; Allenwood FCC in Pennsylvania; Guaynabo Metropolitan Detention Center (MDC) in Puerto Rico; Beaumont FCC and Houston Federal Detention Center (FDC) in Texas; and Lee USP in Virginia. Because we used a nonprobability sample, our results are not generalizable to all BOP institutions; however, our interviews provided us with insights into the perspectives of management officials and officers at BOP institutions regarding officer safety. In addition, we contacted the 15 state DOCs with the largest inmate populations and conducted semi-structured interviews with 14 of these 15 DOCs. These states included Alabama, Arizona, California, Florida, Georgia, Illinois, Louisiana, Michigan, Missouri, New York, North Carolina, Ohio, Pennsylvania, Texas, and Virginia. During these interviews, state DOC officials identified equipment their officers use and their perceptions of the equipment’s effectiveness in protecting their officers. In connection with our BOP site visits, we also visited state institutions in 5 of these states: Corcoran State Prison in California, Central Florida Reception Center in Florida, Graterford State Correctional Institution in Pennsylvania, Darrington Unit in Texas, and Coffeewood Correctional Center in Virginia. Due to the overall number of correctional organizations in the United States, we conducted nonprobability sampling, which limits the ability to extrapolate the findings in this report to all correctional organizations. However, this information provided useful insight into state correctional practices. We also interviewed union officials from the Council of Prison Locals, representing BOP officers, including officials at the national union as well as local union officials at five of the eight BOP institutions we visited, in order to obtain their perspectives about the institutional factors they report as affecting officer safety, the measures in place to address these factors, and the equipment BOP uses to protect officers. In addition, we interviewed officials from correctional organizations to determine the institutional factors they report as affecting officer safety, and their perspectives on the equipment used to protect officers and the effectiveness of this equipment and BOP and state officer safety practices. These organizations included the American Correctional Association (ACA), BOP’s National Institute of Corrections (NIC), and the Association of State Correctional Administrators (ASCA). We selected these organizations based on recommendations from the correctional officials with whom we spoke, including BOP and state officials. As we selected a nonprobability sample of the officials at correctional organizations, these opinions are not generalizable. However, they provided important insights into BOP and state correctional practices. In addition, we conducted a literature search to identify and obtain evaluations of the effectiveness of BOP or state officer safety practices, such as those conducted by the states’ or DOJ’s inspectors general. In addition, to further address our second objective, we interviewed correctional equipment experts from the DOJ’s National Institute of Justice (NIJ), NIJ’s National Law Enforcement and Corrections Training Center (NLECTC), and the Department of Commerce’s National Institute of Standards and Technology (NIST). Officials from these organizations were chosen because of their expertise in correctional equipment. During these interviews, we obtained the officials’ perspectives on the factors BOP would need to consider if it acquired additional personal protective equipment for its officers. As we selected a nonprobabilty sample of correctional equipment experts, these perspectives are not generalizable. However, they provided valuable insights into equipment considerations. In order to further develop our third objective, we identified 14 institutional factors that BOP, state DOCs, and correctional experts reported as most affecting officer safety. We then surveyed a panel of 30 correctional accrediting experts who serve as audit chairs for the ACA’s Commission on Accreditation concerning the list of 14 institutional factors that BOP and state DOC officials perceived as affecting officer safety. The ACA audit chairs ranked which of these factors most affect officer safety when the factors exist in a correctional institution. The ACA audit chairs also provided a list of cost effective strategies that could be used to address these strategies. The ACA audit chairs were selected based upon their expertise in advising the ACA Accrediting Commission as to which correctional institutions in the United States should be accredited, including BOP institutions. The e-mail-based survey was launched on December 10, 2010, and by the close of the survey on December 22, 2010, we had received 21 responses from the 30 experts, for a response rate of 70 percent. We sent one follow up e-mail to the experts on December 16, 2010. Because our survey was not a sample survey, there are no sampling errors; however, the practical difficulties of conducting any survey may introduce nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. In addition, we collaborated with a social science survey specialist to design the survey instrumentation, and the survey was pretested with a subject matter expert at ACA with over 30 years of experience in corrections. From this pretest, we made revisions as necessary. See appendix IV for a copy of our survey. We conducted this work from June 2010 to April 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. The figures below depict trends in the characteristics of the Bureau of Prisons’ (BOP) total inmate population, including inmates housed in privately managed or contracted facilities, in each fiscal year, from fiscal year 2000 through 2010. As figure 8 illustrates, the average inmate age increased by more than 2 years from fiscal year 2000 through 2010. As shown in figures 9 and 10, the percentage of inmates by race, ethnicity, and gender has remained relatively constant throughout this period. As depicted in figure 11, the types of offenses for which BOP inmates are incarcerated have also remained relatively constant, with drug offenses comprising more than half the offenses each fiscal year from 2000 through 2010. As figure 12 illustrates, the length of the sentence imposed on BOP inmates has been generally stable, with a slight increase in longer sentences from fiscal year 2000 through 2010. As shown in figure 13, the percentage of inmates associated with a Security Threat Group has fluctuated from fiscal year 2000 through 2010. Specifically, it was generally constant from fiscal year 2000 through 2002, declined slightly in fiscal year 2003, and then steadily increased until fiscal year 2008 when it began to decline in fiscal year 2009 and then again in fiscal year 2010. State departments of corrections are responsible for housing the states’ inmate populations. The table and figures that follow depict the characteristics of state inmates. Inmate populations in the 50 states vary in size from each other. Table 6 displays the inmate populations in each state. Figure 14 presents DOJ Bureau of Justice Statistics estimates of sentenced prisoners under state jurisdiction by race and Hispanic origin. As figure 14 shows, the percentage of Hispanic inmates and inmates of “other” races— including American Indians, Alaska Natives, Native Hawaiians, other Pacific Islanders, and persons identifying as two or more races—under state jurisdiction has been increasing from calendar year 2000 to 2009, while the percentage of black and white inmates has decreased or stayed about the same. Figure 15 presents DOJ Bureau of Justice Statistics estimates of sentenced prisoners under state jurisdiction by gender from December 31, 2000 through December 31, 2009. As depicted in figure 15, the gender breakdown has remained largely stable over this time period. Figure 16 shows the DOJ Bureau of Justice Statistics estimates of the sentenced inmate population under state jurisdiction by the type of offense for which they were convicted, as of the end of 2008, the most currently available data. Based on responses from Bureau of Prisons (BOP) and state correctional officials with whom we spoke, we identified 14 common institutional factors that impact officer safety. In order to determine which of the 14 factors have the greatest impact on officer safety, we sent the survey below to 30 correctional accrediting experts at the American Correctional Association (ACA) and asked them to rank which of the factors—if they exist in an institution—would pose the greatest threat to officer safety. These experts are the audit chairs for the ACA’s Commission on Accreditation, who advise the commission as to which federal, state, and local correctional institutions should be accredited and were therefore selected based on this knowledge. We received responses from 21 experts, who also provided examples of efforts to address these factors that they believed to be cost effective. 1. Which of the following corrections-related positions do you hold? Please check one answer. 2. In general, how much, if at all, does each of the following affect the safety of correctional officers or of other staff performing corrections duties? Please check one answer for each row. a. Ineffective inmate management (e.g., lack of controlled inmate movement, b. Insufficient information sharing among managers and staff within institutions e. Insufficient inmate programming (e.g., prison industries, drug rehabilitation, h. Insufficient discipline of inmates following a violation i. Intoxicated inmates as a result of inmate-manufactured alcohol j. Disruptive inmate behavior due to the sale and use of illegal drugs k. Inmate possession and use of unauthorized communication devices, m. Inmates dissatisfied with food service n. Population of inmates with characteristics that may lead to increased violent behavior (e.g., younger age, longer sentences, lack of parole opportunities) 3.If you would like to elaborate on any of the factors above, please do so in the box below. The box will expand as you type. 4. Which three of the following factors do you believe most affect corrections officer safety? Please check three and no more than three factors in the list below. a. Ineffective inmate management (e.g. lack of controlled inmate movement, insufficient supervision of inmates) b. Insufficient information sharing among managers and staff within institutions e. Insufficient inmate programming (e.g., prison industries, drug rehabilitation, education, recreation) h. Insufficient discipline of inmates following a violation i. Intoxicated inmates as a result of inmate-manufactured alcohol j. Disruptive inmate behavior due to the sale and use of illegal drugs k. Inmate possession and use of unauthorized communication devices, including m. Inmates dissatisfied with food service n. Population of inmates with characteristics that may lead to increased violent behavior (e.g. younger age, longer sentences, lack of parole opportunities) 5. Besides the factors listed above, if there are any other significant factors affecting corrections officer safety please describe them in the box below. The box will expand as you type. 6. The next questions ask you to provide examples(s) of strategies to address each factor that you believe to be cost-effective. Please answer as many as you can. a. What are example(s) of cost effective strategies to address Ineffective inmate management (e.g., lack of controlled inmate movement, insufficient supervision of inmates)? The box will expand as you type. b. What are example(s) of cost effective strategies to address Insufficient information sharing among managers and staff within institutions? The box will expand as you type. c. What are example(s) of cost effective strategies to address Inmate overcrowding? The box will expand as you type. d. What are example(s) of cost effective strategies to address Corrections officer under-staffing? The box will expand as you type. e. What are example(s) of cost effective strategies to address Insufficient inmate programming (e.g., prison industries, drug rehabilitation, education, recreation)? The box will expand as you type. f. What are example(s) of cost effective strategies to address Corrections officer complacency? The box will expand as you type. g. What are example(s) of cost effective strategies to address Insufficient corrections training? The box will expand as you type. h. What are example(s) of cost effective strategies to address Insufficient discipline of inmates following a violation? The box will expand as you type. i. What are example(s) of cost effective strategies to address Intoxicated inmates as a result of inmate-manufactured alcohol? The box will expand as you type. j. What are example(s) of cost effective strategies to address Disruptive inmate behavior due to the sale and use of illegal drugs? The box will expand as you type. k. What are example(s) of cost effective strategies to address Inmate possession and use of unauthorized communication devices, including cell phones? The box will expand as you type. l. What are example(s) of cost effective strategies to address Inmate gangs? The box will expand as you type. m. What are example(s) of cost effective strategies to address Inmates dissatisfied with food service? The box will expand as you type. n. What are example(s) of cost effective strategies to address Population of inmates with characteristics that may lead to increased violent behavior (e.g., younger age, longer sentences, lack of parole opportunities)? The box will expand as you type. 7. If you have any additional comments concerning correctional officer safety, please type them in the box below. The box will expand as you type. Table 7 lists the institutional factors that the officers and officials with whom we spoke reported impacted officer safety. It also provides examples of strategies to mitigate these factors that BOP or state officials reported using or that correctional accrediting experts we surveyed suggested. In addition to the contact named above, key contributors to this report were Joy Gambino, Assistant Director; Jill Evancho, Analyst-In-Charge; Christian Montz, Julia Becker Vieweg, and Miriam Rosenau. Michele Fejfar assisted with design and methodology; Willie Commons III provided legal support; Pedro Almoguera provided economic expertise; and Katherine Davis provided assistance in report preparation. | The Department of Justice's (DOJ) Federal Bureau of Prisons (BOP) manages more than 209,000 inmates, up 45 percent between fiscal years 2000 and 2010. As the prison population grows, so do concerns about correctional officer safety. As requested, GAO examined the (1) equipment that BOP and selected state departments of corrections (DOC) provide to protect officers, and the officers' and other correctional practitioners' opinions of this equipment; (2) extent to which BOP has evaluated the effectiveness of this equipment, and factors correctional equipment experts consider important to the acquisition of new equipment; and (3) institutional factors correctional accrediting experts reported as impacting officer safety, and the extent to which BOP has evaluated the effectiveness of the steps it has taken in response. GAO reviewed BOP policies and procedures; interviewed BOP officials and officers within BOP's six regions, selected based on such factors as the level of facility overcrowding; interviewed officials at 14 of the 15 largest state DOCs; and surveyed 21 individuals selected for their expertise in corrections. The results of the interviews cannot be generalized, but provide insight into issues affecting officer safety. BOP and 14 state DOCs included in GAO's review provide a variety of protective equipment to officers, but BOP officers and management have different views on equipment. BOP generally provides officers with radios, body alarms, keys, flashlights, handcuffs, gloves, and stab-resistant vests while on duty, but prohibits them from storing personal firearms on BOP property, with limited exceptions. DOC officials in 14 states GAO interviewed provided examples of equipment they allow officers to carry while on duty that BOP does not--such as pepper spray--and officials in 9 of the 14 states reported allowing officers to store personal firearms on state DOC property. BOP and states provide similar equipment to protect officers in an emergency, such as an inmate riot or attack. Most BOP officers with whom GAO spoke reported that carrying additional equipment while on duty and commuting would better protect officers, while BOP management largely reported that officers did not need to carry additional equipment to better protect them. BOP has not evaluated the effectiveness of equipment it provides in ensuring officer safety, and correctional equipment experts report that BOP needs to consider a variety of factors in acquisition decisions. Neither the officials nor the experts with whom GAO spoke reported that they were aware of or had conducted evaluations of the effectiveness of equipment in ensuring officer safety, although BOP tracks information necessary to do so in its data systems. By using information in these existing systems, BOP could analyze the effectiveness of the equipment it distributes in ensuring officer safety, thus helping it determine additional actions, if any, to further officer safety and better target limited resources. All of the correctional equipment experts GAO spoke with reported that BOP would need to consider factors such as training, replacement, maintenance, and liability, as well as whether the equipment met performance standards, if it acquired new equipment. These experts suggested that any decision must first be based upon a close examination of the benefits and risk of using certain types of equipment. For example, while state officials reported that pepper spray is inexpensive and effective, a majority of the BOP management officials we spoke with stated that it could be taken by inmates and used against officers. Correctional accrediting experts most frequently cited control over the inmate population, officer training, inmate gangs, correctional staffing and inmate overcrowding as the institutional factors--beyond equipment--most impacting officer safety. These experts suggested various strategies to address these factors, and BOP reported taking steps to do so, such as conducting annual training on BOP policies, identifying and separating gang members, and converting community space into inmate cells. BOP has assessed the effectiveness of steps it has taken in improving officer safety. For instance, a 2001 BOP study found that inmates who participated in BOP's substance abuse treatment program were less likely than a comparison group to engage in misconduct for the remainder of their sentence following program completion. BOP utilizes such studies to inform its decisions, such as eliminating programs found to be ineffective. GAO recommends that BOP's Director assess whether the equipment intended to improve officer safety has been effective. BOP concurred with this recommendation. |
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Congress created the EIC to offset the impact of Social Security taxes and to encourage low-income workers to seek employment rather than welfare. Taxpayers earning income below a certain level may claim the credit. The amount of the EIC increases with increasing income, plateaus at a certain level of earnings, and then decreases until it reaches zero when earned income exceeds the maximum earning level allowed for the credit. Taxpayers with children can claim the EIC if they (1) have at least one EIC qualifying child, (2) meet income tests, (3) file with any filing status except “married filing separately,” and (4) were not a nonresident alien for any part of the year. To claim the EIC without a qualifying child, taxpayers must meet requirements 2, 3, and 4; be at least 25 years old but less than 65 at the end of the year; have lived in the United States for more than half the year; and not be claimed as a dependent on another return. Although the EIC has been credited with reducing welfare participation and lifting millions of low-income earners out of poverty, it has also been susceptible to error and abuse. In a February 28, 2002, report on its study of tax year 1999 EIC claims, IRS said that of the estimated $31.3 billion in EIC claims for that tax year, between $9.7 billion and $11.1 billion (30.9 to 35.5 percent) was overclaimed. Of the overclaims, the largest amount (about $2.3 billion) was caused by taxpayers claiming children who did not meet the qualifying child criteria. Most often, according to IRS, these errors were due to taxpayers claiming children who did not meet the residency requirements. EIC eligibility, particularly related to qualifying children, is difficult for IRS to verify through its traditional enforcement procedures, such as matching return data to third-party information reports. Correctly determining whether a child claimed by the taxpayer for EIC purposes meets the qualifying tests requires IRS to have detailed knowledge of the taxpayer’s household composition and living arrangements. However, IRS does not have the necessary resources to visit taxpayers’ homes and conduct the kind of interviews that would help it obtain that kind of detailed knowledge, and there is no certainty that the cost of such an effort would be worth the results. Thus, IRS must rely on its ability to clearly communicate to taxpayers what information is needed to certify them for the EIC and on taxpayers’ ability to produce documentation to substantiate their qualification for the EIC. IRS began implementing the recertification process in 1998, when, through audits, it disallowed in whole or in part, the EIC claims on about 312,000 tax year 1997 returns and placed recertification indicators on its computerized accounts for those taxpayers. The indicators, which, in effect, tell IRS’s computers not to allow payment of any EIC claim to the taxpayers, are to remain until the taxpayers successfully recertify. To begin the recertification process, taxpayers are to attach a Form 8862 (Information To Claim Earned Income Credit After Disallowance) to the next tax return they file that includes an EIC claim. If a taxpayer claims the EIC without attaching Form 8862, IRS is authorized to disallow the credit, process the return without considering the EIC claim, and inform the taxpayer why it denied the claim. Upon receipt of Form 8862, IRS procedures call for freezing the entire refund claimed on the return (not just the portion related to the EIC) and determining whether the return should be selected for audit. IRS examiners are to select the return for audit unless the taxpayer is no longer claiming the EIC child(ren) previously disallowed and is not claiming a new EIC child. Once the return has been selected for audit, the recertification process, with some minor differences, essentially follows IRS’s normal procedures for correspondence audits. These procedures generally involve examiners (1) asking taxpayers to provide support, (2) reviewing any support provided, and (3) advising taxpayers of the audit results. Since the EIC recertification program’s implementation, IRS has, among other things, expanded the information on recertification available to taxpayers, revised some of the correspondence it sends to taxpayers, and improved examiner training. Many of these changes were in response to recommendations resulting from prior reviews by us and the Treasury Inspector General for Tax Administration (TIGTA). (See app. I for a detailed discussion of the changes in the EIC Recertification Program since 1999, and see app. II for information on prior recommendations by us and TIGTA and IRS’s corrective actions.) There have also been some significant program developments since 1998. Most relevant to this report, (1) the definitions of qualifying child and eligible foster child for EIC purposes have changed and (2) starting with tax returns filed in 2001, IRS, as authorized by TRA97, began imposing a 2-year ban on credits to taxpayers who it determines negligently claimed the EIC through reckless or intentional disregard of the regulations. These developments are discussed in more detail later in the report. To determine whether IRS’s communications with taxpayers about recertification meet the needs of IRS and taxpayers, we analyzed IRS’s forms and correspondence related to recertification, interviewed a representative sample of IRS examiners (as described in the next paragraph) about certain forms, and reviewed the results of related work done by TIGTA. To determine whether information taxpayers are told to provide to prove their entitlement to the EIC is reasonably easy to obtain and consistent with what examiners accept, we did the following: We surveyed, via telephone, a random sample of 90 tax examiners from a list of 323 tax examiners, which, according to IRS, represented the population of examiners in its 10 processing centers who were working on recertification cases as of April 2001. The purpose of our survey was to determine how examiners evaluated evidential support from taxpayers and to help identify aspects of the EIC eligibility criteria that taxpayers had the most difficulty documenting. More details on our survey methods, as well as the confidence intervals of the estimates for all examiners that we made from our sample are provided in appendix III. We talked with representatives from 10 LITCs about any problems taxpayers have in understanding IRS correspondence related to recertification and in complying with IRS’s documentation requirements. We obtained a list from IRS’s Taxpayer Advocate’s Office of the 102 LITCs that were operating in 2001. From that list, we randomly selected 20 LITCs. After eliminating those LITCs that either chose not to participate or said that they did no EIC recertification work, we talked with representatives of 10 LITCs. Given our relatively small sample size and the relatively small proportion of the sample from which we were able to get useful information, we have no assurance that the results from this sample can be reliably generalized to all 102 LITCs. However, our sample does provide the views of about one-tenth of the listed 102 LITCs. To determine whether IRS’s treatment of similarly situated taxpayers is consistent, we analyzed IRS guidance and criteria related to the EIC and recertification; developed five scenarios involving various kinds of documentation that taxpayers might provide IRS in an attempt to prove their eligibility for the EIC; and held structured interviews with 21 examiners to determine, among other things, how they interpreted IRS’s recertification guidance and how they assessed the documentation in our five scenarios. We obtained the documents for our scenarios from EIC recertification cases that we had reviewed, and we deleted taxpayer- identifiable information, such as Social Security numbers, from the documents before giving them to the examiners. We subjectively selected the 21 examiners, on the basis of their availability to meet with us, from the 187 EIC recertification examiners at 4 of IRS’s 10 processing centers (Atlanta, Brookhaven, Kansas City, and Memphis). As such, the results of this analysis cannot be generalized beyond the 21 examiners. We also reviewed IRS’s plans for developing and implementing a decision support tool to be used by examiners working EIC cases, including those involving recertification. We performed our work between February 2000 and January 2002 in accordance with generally accepted government auditing standards. Although IRS has revised some of the correspondence it sends taxpayers as part of the recertification process, two standard forms that are an integral part of the process can lead to unnecessary taxpayer burden because they (1) are of questionable value to the recertification process and/or (2) provide the taxpayer with inadequate or confusing information. The forms are Form 8862 and Form 886-R (Supporting Documents). Copies of the two forms are in appendix IV. Taxpayer confusion can have even more critical implications now that IRS has begun imposing a 2-year EIC ban on credits to taxpayers who it determines have negligently claimed the EIC through reckless or intentional disregard of the regulations. Accurately determining whether a taxpayer’s erroneous claim is due to a simple mistake versus reckless or intentional disregard of the regulations can be complicated when the requirements for claiming the EIC are confusing. Taxpayers begin the recertification process by filing Form 8862 with their tax return. In a 1999 report, we raised concerns about the usefulness of Form 8862 and its potential for misleading or confusing taxpayers. We recommended that IRS stop using the form if it is not needed for recertification purposes. IRS did not eliminate the form because it said it relies on the form to “identify the type of action to be taken for taxpayers required to recertify.” In that regard, IRS does use Form 8862 to decide whether or not to initiate the recertification process. If a taxpayer files a return claiming the EIC and does not attach a Form 8862, IRS is authorized to disallow the credit without going through the recertification process and inform the taxpayer that the disallowance is due to the failure to attach Form 8862. If a taxpayer submits Form 8862, according to IRS’s recertification guidelines, the taxpayer’s return is to be forwarded for audit if the taxpayer is still claiming the previously disallowed EIC child or is claiming a new EIC child. However, Form 8862 does not assist in this determination, because the names and Social Security numbers of the taxpayer’s children that IRS needs to match against the prior year’s tax return do not appear on the form. On the basis of our telephone survey of IRS examiners, we estimate that 86 percent of all examiners working in the recertification program do not find Form 8862 useful. A few examiners pointed out that Form 8862 is generally not part of the case file they receive when they begin recertification. Even when Form 8862 is in the case file, some examiners said that they do not use it because there are no supporting documents submitted with the form. Although the great majority of examiners do not find Form 8862 useful, IRS estimates that taxpayers need an average of 2 hours and 44 minutes to complete and file the form. In that regard, of the 10 LITC representatives we talked with, 7 said that Form 8862 is not easy for most of their clients to understand. Thirteen of the examiners we surveyed did say that Form 8862 had some value. Some pointed out that the form gave them some initial information about the taxpayer before seeking additional information. Others said that the form would alert taxpayers to the kind of documentation they should expect to provide during the recertification process. However, taxpayers would have to deduce the type of information needed because neither Form 8862 nor its instructions specifically tell taxpayers what, if any, documentation they may be asked to send IRS. On the basis of our telephone survey, we determined that an estimated 16 percent of examiners believe that Form 8862 misleads taxpayers into thinking that IRS’s final decision on their eligibility will be based on information in the form. Such a misconception seems understandable given the amount of information taxpayers are asked to provide on the Form 8862. Form 8862 is a 2-page form that requires taxpayers who are claiming the EIC with qualifying children to answer numerous questions and report information on such things as (1) the name of the school the child attended or the day care provider, (2) addresses where the child lived during the year, (3) the name and social security number of any other person the child may have lived with for more than half a year, and (4) the child’s health care provider or social worker if the child was disabled and older than 18. Form 886-R is the vehicle IRS examiners use to tell taxpayers what information they need to provide to prove their eligibility for the EIC as well as to gather information on two other tax issues—whether the taxpayer can also claim dependents and whether the taxpayer qualifies as a head of household. That form is confusing and incomplete. Of the 10 LITC representatives we interviewed, 8 did not believe that IRS adequately explained to taxpayers how EIC recertification is achieved and what documentation is needed to achieve recertification. We believe that Form 886-R contributes to that confusion. The format of Form 886-R could easily confuse taxpayers. For example, in addition to listing documents and information needed to prove eligibility for the EIC, the form lists documents and information needed to prove eligibility for dependent exemptions and the head of household filing status. Requesting documentary evidence to support a dependency claim and head of household filing status could confuse or mislead taxpayers about the requirements they need to meet for EIC recertification. To claim a person as a dependent, for example, a taxpayer must generally prove, among other things, that he or she provided more than one-half of the person’s total support during the calendar year. Therefore, the evidence IRS asks taxpayers to submit to prove that a child is their dependent includes documentation relating to financial support. However, the law does not require that taxpayers meet a financial support test to claim the EIC, and, thus, taxpayers can qualify for the EIC even if they cannot meet the financial support requirement for the dependency exemption. Form 886-R does not make clear that persons can still qualify for the EIC even if they cannot prove that their child qualified as a dependent, and there are no instructions sent to taxpayers along with the Form 886-R that provide that clarification. Thus, persons might incorrectly assume that because they cannot substantiate a child as a dependent, they do not qualify for the EIC. Taxpayers might also be confused by the references in Form 886-R to school records. The form tells taxpayers that one acceptable form of proof that a child lived with them is a school record or transcript containing, among other things, “dates of attendance for the entire tax year.” Since a tax year generally runs from January to December of the same year and a school year typically runs from September of one year to May or June of the next, some taxpayers may not easily discern that they need to obtain school records for 2 school years in order to provide adequate documentation for 1 tax year. In that regard, an IRS taxpayer advocate and an IRS lead examiner in one field office both told us that school year versus tax year is a difficult concept for taxpayers to understand, and examiners we interviewed said that school records submitted by taxpayers often relate to a school year rather than a tax year. The lack of more specific guidance on Form 886-R about the need for 2 years of school data increases the risk that a taxpayer will submit incorrect information, which, at a minimum, could (1) cause extra work for the examiner, (2) cause the taxpayer to contact the school again, and (3) delay a final decision on the taxpayer’s eligibility for the EIC. With a trend toward more nontraditional family units and recent changes in the definitions of qualifying child and foster child for EIC purposes, taxpayers must clearly understand what evidence IRS requires to substantiate the EIC relationship requirement. Form 886-R does not satisfy that need. In listing the documentation needed to prove eligibility for the EIC, Form 886-R includes (1) the child’s birth certificate and (2) the name, address, and Social Security number of the child’s mother and father (if other than the taxpayer and the taxpayer’s spouse). That documentation would be insufficient, however, to prove, for example, that a person is the taxpayer’s adopted child, grandchild, stepchild, or foster child—all of whom meet the definition of an EIC qualifying child. For example, as described by one examiner, a grandmother raising a grandchild with a different last name would have to prove her relationship to the child’s parents. Some examiners we interviewed said that they would accept various official documents that established the relationship requirement between a nonparental taxpayer and the EIC-qualifying child. The official documents they mentioned included birth certificates of the various parties, an adoption paper, some social program’s paperwork that states the relationship between child and taxpayer, or some insurance or medical record that states the relationship. None of these documents is mentioned on the Form 886-R. Although an examiner may eventually obtain the necessary documentation through follow-up correspondence with the taxpayer, the need for additional correspondence leads to extra work for examiners and taxpayers and can lengthen the time needed to close the audit and pay the EIC, if the taxpayer is found eligible. Census Bureau statistics provide an indication of the prevalence of nontraditional family units. According to 1997 Census Bureau statistics, there were 3.9 million children living in homes maintained by their grandparents. Of this number, 1.27 million lived with their grandparents without the presence of either parent, 1.77 million had only a mother present, 0.57 million had both parents present, and 0.28 million had only a father present. According to Census Bureau statistics, the greatest growth between 1992 and 1997 occurred among grandchildren living with grandparents with no parent present. The Census Bureau attributed the increase in grandchildren in these “skipped generation” living arrangements to the growth in drug use among parents, teen pregnancy, divorce, the rapid rise of single-parent households, mental and physical illness, AIDS, crime, child abuse and neglect, and the incarceration of parents. In addition to children living with grandparents without the presence of either parent, the Census Bureau found, as of Fall 1996, that 688,000 children without parents were living with other relatives and 622,000 children without parents were living with nonrelatives. Recent changes in the definitions of qualifying child and foster child for EIC purposes further highlight the need for IRS to make clear what evidence it requires to substantiate the EIC relationship requirement. To qualify as a taxpayer’s qualifying child in tax year 1999, a person had to be the taxpayer’s son, daughter, adopted child, grandchild, stepchild, or foster child, with a foster child defined as any child that (1) the taxpayer cared for as if it were the taxpayer’s own child and (2) lived with the taxpayer for the whole year, except for temporary absences. Those definitions were revised first by the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170) and then by the Economic Growth and Tax Relief Act of 2001 (P.L. 107-16). As a net result of those two laws, the current definition of a qualifying child is (1) a son, daughter, stepson, or stepdaughter, or a descendant of any such individual; (2) a brother, sister, stepbrother, or stepsister, or a descendant of any such individual, who the taxpayer cares for as the taxpayer’s own child; or (3) an eligible foster child of the taxpayer. An eligible foster child is now defined as an individual who is placed with the taxpayer by an authorized placement agency and cared for as the taxpayer’s own child. Also, a child who is legally adopted or is placed with the taxpayer by an authorized placement agency for adoption is considered the taxpayer’s child by blood for purposes of the EIC relationship test. With these definitional changes, for example, a taxpayer claiming a nephew as an EIC-qualifying child would have to provide documentation to prove that the child is a descendant of the taxpayer’s sibling. Before the definitional changes, the taxpayer would not have had to prove a blood relationship to the child but only that the taxpayer cared for the child as if it were the taxpayer’s own child. TRA97 authorizes IRS to ban a taxpayer from receiving the EIC for 2 years if it determines that the taxpayer negligently claimed the EIC through reckless or intentional disregard of the regulations. In addition to being banned for 2 years from receiving the EIC, taxpayers may be penalized an amount equal to 20 percent of their tax liability underpayment. IRS began imposing the 2-year ban starting with tax year 1999 returns (i.e., returns filed in 2000). During calendar year 2000, IRS imposed the ban on 7,608 taxpayers. IRS imposed another 14,432 bans during calendar year 2001. “The taxpayer’s EIC in a prior year was disallowed by audit because the taxpayer could not demonstrate the child was the taxpayer’s qualifying child. The taxpayer files a subsequent return claiming EIC and again cannot demonstrate that the child was the taxpayer’s qualifying child. You can consider that the taxpayer intentionally disregarded the EIC rules and regulations and impose the two-year ban.” No doubt some taxpayers seeking recertification are intentionally disregarding the EIC rules and regulations. However, accurately differentiating between negligence and simple error can be hampered when taxpayers are faced with evidentiary requirements that are difficult to understand and/or comply with. Providing documentation to show that a child lived with the taxpayer has consistently been identified as the toughest EIC eligibility requirement to substantiate. This is true for EIC claimants in general, not just those who have to recertify. With respect to the Recertification Program, 80 percent of examiners said that when a taxpayer failed to be recertified, most or all of the time the taxpayer’s inability to substantiate that a child lived with the taxpayer led to the failure. As noted in the following excerpt from Form 886-R, IRS provides taxpayers with several examples of acceptable documents to establish a child’s living arrangement. The quoted excerpt clearly indicates that taxpayers only need to submit one of the three types of documentation listed (school, child care, or medical). “School records or transcripts or an administrative statement from a school official on school letterhead containing the child’s name, address, and dates of attendance for the entire tax year, and the name and address of the child’s parent or guardian, or A statement on company letterhead or a notarized statement from a child care provider containing the child’s name, address, and dates of care for the entire tax year, the name and address of the child’s parent or guardian, and the name and taxpayer identification number of the child care provider, or Medical records or an administrative statement from a health care provider containing the child’s name, address, and dates of medical care during the tax year, and the name and address of the child’s parent or guardian.” Our interviews with LITC representatives and IRS examiners indicated that each of these three types of documentation could pose problems for EIC claimants. In discussing EIC recertification with LITC representatives, we heard of various circumstances facing low-income taxpayers that complicate the ability of these taxpayers to obtain documents that might not seem so difficult for other taxpayers. Our interviews with IRS examiners also indicated that the evidentiary requirements related to child care are not consistent with what most examiners consider acceptable. In order for school records to be accepted, they must include an address for the child and an address for the taxpayer and, as discussed earlier, must be for 2 school years in order to cover the tax year in question. According to some IRS examiners we interviewed, the school records submitted by taxpayers often do not have both the child’s and the taxpayer’s addresses and often relate to a school year rather than a tax year. Earlier in this report, we discussed the problems taxpayers might encounter in distinguishing between a school year and a tax year. Another potential problem related to school records was raised by IRS’s National Taxpayer Advocate in a December 31, 2001, report to the Congress. In the report, the Advocate noted that examiners sometimes disallow the EIC because school records submitted by taxpayers reflect the addresses of the taxpayers’ relatives or friends. As explained by the Advocate, parents may provide school authorities with a relative’s or friend’s address, instead of their own, “in order for their child to attend a particular school for purposes of busing and facilitating before-school or after-school care.” Medical records can also cause problems for EIC claimants. According to some examiners we interviewed, many taxpayers submit their child’s immunization records as the medical record to prove residency. Of the 21 examiners we interviewed, 18 did not accept immunization records as proof of residency. Some examiners explained that immunization records do not include the addresses of either the child or the taxpayer and, as such, cannot be accepted as proof of residency. Some of the 18 examiners said that they would accept a letter from a physician or an official record from a medical center showing the child’s address as well as the taxpayer’s address as proof that the taxpayer and child have the same address. However, according to the LITC representatives we interviewed, many low-income taxpayers have no ongoing medical care. In that regard, we reported in 1997 that 10.6 million children, living generally in lower- income working families, were uninsured in 1996. We further reported that, according to various national studies, a high proportion of these children’s parents worked for small employers that most likely did not offer health insurance; even when employers offered medical coverage, the amount that employees had to pay toward it to cover their families could have made health insurance unaffordable; these uninsured children were less likely to (1) have a usual source of care, (2) see a specific physician, (3) receive care from a single site, (4) have had a visit to a physician in the past year, and (5) ever have had routine care; and medical care for uninsured children was more likely to be sporadic and fragmented. Considering the medical coverage of low-income taxpayers, obtaining medical records that provide enough information to demonstrate that the taxpayer’s and child’s addresses were the same for at least one-half a year may not be easy. LITC representatives said that getting documentation, such as medical records or school records, to prove residency or living arrangements is not easy. For example, migrant workers would have a tough time getting school records from the schools their children attended throughout the year. As we reported in October 1999, during 1993-94, 78 percent of migrant crop worker families lived in two or more locations. Of the 10 LITC representatives we interviewed, 5 said that IRS should develop a standard form on which it could indicate the specific period of time for which IRS needed support. A taxpayer could then take the form to a school or a medical office, which could just write in the child’s and taxpayer’s address for the specific tax year IRS wanted. A few of the examiners we surveyed also said that they would benefit from such a standard form because it would give them the exact information they are looking for to recertify taxpayers. In 1998, examiners in one processing center started using a locally devised form that essentially served the purpose of the standard form suggested by the LITC representatives. Use of the form by examiners at the center was optional. Although no study was done of its effectiveness, anecdotal information indicates that examiners found it effective. One examiner who used the form estimated that one-half of the taxpayers to whom she sent the form were able to secure verification compared with the very few taxpayers who were able to secure verification without the form. Form 886-R states that a notarized statement from a child-care provider with certain detailed information about the child and the child-care provider would be considered acceptable evidence for residency. In our telephone survey, we asked examiners if they would accept a notarized statement from babysitters. We estimate that 62 percent of recertification examiners would not accept a notarized statement from a babysitter as evidence. The nonacceptance rate went up to 79 percent if the notarized letter was from a relative, such as a grandparent, who claimed to be the child’s babysitter. Several examiners said that they would not accept the notarized letter because the notary public verifies the signature but not the content of the letter. These examiners are correct in their understanding of the purpose of the notary public. However, a notarized letter from a child-care provider is a document listed on Form 886-R as acceptable proof of residency. We do not know how many taxpayers failed to recertify for the EIC because examiners would not accept a notarized letter from their babysitter. However, telling taxpayers that a notarized letter is acceptable and then refusing to accept it can frustrate taxpayers and subject them to unnecessary burden. Not only would those taxpayers have spent unnecessary time and effort writing the letters and locating a notary public, but they would have had to pay for the notary public’s service. Perhaps the more problematic issue related to evidence of child care is the general unwillingness of examiners to accept statements from relatives. Some examiners told us, for example, that they would accept child-care provider statements if they were from child-care centers, but expressed the belief that relatives would lie to help a taxpayer get the EIC. While we understand the hesitancy to accept a relative’s statement, refusing to accept child-care statements from relatives can pose a hardship for low- income taxpayers who use relatives for child care. The problem is compounded by the clear implication on Form 886-R that a “notarized statement from a child care provider” containing certain information, such as the child’s name, address, and dates of care for the entire tax year, is acceptable documentation to verify that a child lived with the taxpayer. Form 886-R says nothing to alert taxpayers that additional documentation may be needed if the child-care provider is a relative. Grandparents and other relatives play an especially large part in the care of poor preschoolers. In a March 1996 report entitled, Who’s Minding Our Preschoolers?, and an update issued in November 1997, the Census Bureau found that, in 1993 and 1994, relatives provided care for 62 percent of preschoolers in poor families while their mothers were working. This reliance on relatives, and especially grandparents, for child care was noted again in Census’ October 2000 report entitled Who’s Minding the Kids? Child Care Arrangements. Among other things, the report concluded, using Fall 1995 data, that “Fifty percent of preschoolers were cared for by a relative, with grandparents being the single most frequently mentioned care provider (30 percent).” In reports issued in May 1997 and November 1999, we discussed three major barriers that confront low-income persons in trying to find child care: availability; accessibility; and cost, especially for infants and toddlers. As discussed in these reports, many parents of low-income families are likely to obtain work at low-skill jobs, such as janitor or cashier, that operate on nonstandard schedules at workplaces that often do not offer child care during hours outside the traditional “9 to 5” work schedule; according to a 1999 Urban Institute paper, more than a quarter of low- income mothers work night hours; accessibility, such as transportation to get to providers, was especially problematic in rural or remote areas; and child care consumes a high percentage of poor families’ income. Regarding the cost of child care, the Census Bureau, in its October 2000 report, said that poor families, in 1995, who paid for child care “spent 35 percent of their income on child care, compared with 7 percent spent by nonpoor families.” Asking relatives to serve as child-care providers may be one way for poor families to limit the cost of child care. In that regard, the Census Bureau noted in its March 1996 report that preschoolers in poor families were 50 percent more likely to be cared for by their grandparents or other relatives than were preschoolers in nonpoor families. As noted in several places throughout the preceding discussion, low- income taxpayers face many problems that complicate their ability to satisfy the evidentiary requirements associated with the EIC recertification program. For example, many low-income taxpayers move from location to location for job reasons, have children who receive their medical care at hospital emergency rooms and have no medical insurance, and rely on relatives for free child-care service instead of taking their child to a child-care center. “Low-income taxpayers usually cannot afford to take time off from work to gather the documentation required. They often do not maintain financial records. Many have moved several times, making it even more difficult to provide what is asked of them. Obtaining such documentation may therefore involve long-distance calls, which are beyond the financial means of these taxpayers.” In general, the 10 LITC representatives who we talked with said that the recertification process was confusing to their clients and difficult to comply with. Some representatives noted that these problems had caused clients to give up on EIC recertification. One LITC representative said that for migrant workers, getting documentation might include writing to Mexico for birth certificates and other information. According to the representative, (1) some agencies or companies may charge a fee for documents; (2) requesting information through the mail would be difficult since many low-income taxpayers are illiterate; and (3) it takes time to gather support, and many taxpayers get discouraged and give up. Another LITC representative said his client gave up on the EIC because he had moved to another city for a new job and getting the records IRS wanted would require him to take time off from work and travel back to his old home town, neither of which he could afford to do. Some LITC representatives told us that some examiners were more lenient than others in assessing supporting documents and that third-party statements were not always treated the same. Four of the 10 LITC representatives we interviewed said that they have seen some of their client’s EIC claims denied because they could not substantiate that the child was a dependent. However, an EIC child does not have to be a dependent of the taxpayer to qualify that taxpayer for the EIC. As such, financial support, which is a factor in determining if a child qualifies as a taxpayer’s dependent, should not be a factor in determining if the child is a qualifying child for EIC purposes. “Since you have not verified that you are entitled to the exemption(s) claimed on your return, we have disallowed the deduction. Since the exemption for your child (or children) has been disallowed, you are not entitled to the earned income credit and/or child tax credit; therefore we have disallowed it/them.” Contrary to those statements, denial of a dependency exemption does not automatically mean that a taxpayer is not entitled to the EIC. In an effort to see how consistently IRS examiners assess evidence submitted by taxpayers, we presented 21 examiners at the four processing centers we visited with five scenarios involving differing sets of supporting documents. We obtained these documents from EIC recertification cases that we had reviewed. We deleted taxpayer-identifiable information, such as names, Social Security numbers, and addresses, from the documents before giving them to the examiners. The five scenarios were as follows: Case A—a single mother sending in copies of Social Security cards, the child’s birth certificate, and a school record listing the child’s address. Case B—a married couple, filing jointly, sending in copies of Social Security cards, the child’s birth certificate, and a locally devised IRS form signed by a school official verifying the child’s address. Case C—a single father sending in copies of Social Security cards, the child’s birth certificate, an immunization certificate showing the taxpayer as the parent and that the child received shots throughout the tax year, and a formal lease listing the taxpayer as the leasee but with no reference to the child. This case also included a notarized letter from the taxpayer’s grandmother stating that she provided child care for the taxpayer’s daughter while the taxpayer worked. The grandmother gave her own address and Social Security number. Case D—a single father sending copies of Social Security cards, the child’s birth certificate, an immunization record that did not have either the child’s or the taxpayer’s name, various monthly rental receipts not showing the full dates, and a letter from someone (without a title) written on apartment letterhead. Case E—a single father sending in copies of Social Security cards, the child’s birth certificate, a lease agreement not listing the child’s name, and a non-notarized letter from a babysitter stating that she cared for the taxpayer’s child throughout the year while the taxpayer was at work. The babysitter mentioned the salary she received from the taxpayer, but did not give her address, telephone number, or Social Security number. As seen in table 1, in no case did all examiners agree and, in some cases, their decisions varied significantly. Cases B, C, and E showed the most consistent decisions. Of the 19 examiners who accepted the Case B documentation, 7 said that they did so because the taxpayer was married and filed jointly and because the child lived with both parents and 1 said that he was swayed by the school verification (the other 11 did not explain their reasoning). Case C was almost unanimously rejected because examiners would not accept a notarized letter from the taxpayer’s grandmother who claimed to be the child-care provider. Although the grandmother’s letter had met all the specifications listed on Form 886-R, examiners still did not accept it as adequate proof of living arrangement. This is consistent with the results of our examiner interviews, which, as discussed earlier, showed that 79 percent of examiners would not accept such a letter. In Case E, we included a nonrelative babysitter’s letter as evidence of residence. Although the babysitter’s letter was not notarized and did not have the babysitter’s Social Security number or address, more examiners were willing to accept this letter than the notarized letter in Case C from a grandmother who gave her Social Security number as required by IRS. Examiners’ decisions varied significantly in Cases A and D. For Case A, three examiners pointed out that they would not accept the school record submitted because it pertained to a school year and not the tax year. A taxpayer would have to submit school records for 2 school years to cover the tax year in question. Some examiners who decided that the documents in Case D did not support recertification thought that the apartment letterhead on the letter saying that the taxpayer lived there looked too simplistic or fake to be trusted. They pointed out that almost anyone with a computer could easily come up with such a letterhead. IRS is aware of the need for more consistency in the evaluation and determination of EIC cases. According to the Director of Reporting Compliance in IRS’s Wage and Investment Division, IRS is in the process of developing a decision support tool to be used by examiners working EIC cases. Because all EIC audits involve the same basic issue—proving that the EIC claim satisfies all eligibility tests—the decision tool is to be used for all EIC cases, including those involving recertification. The goals of this project are to (1) automate the decision process examiners go through when performing audits, (2) reduce inconsistency in how EIC audits are conducted nationwide and subsequently improve the quality of examinations, and (3) decrease the time spent on EIC audits since the logic will be built into the tool to determine the appropriate questions for the individual case. IRS is planning to implement the first phase of this project and deliver training to examiners by May 2002. As described to us by the Director of Reporting Compliance, the first phase basically involves automating the current process. As such, it does not include a reconsideration of the documentation requirements discussed in this report. In that regard, for example, we noted, in reviewing preliminary information on the tool, that it included information to suggest that documentation of financial support was necessary to determine EIC eligibility. We advised the Director of our concerns in that regard, and he agreed to look into the matter. According to the Director, the project team is expected to take on the issue of what documentation taxpayers need to submit to prove their eligibility for the EIC during phase 2 of the project. In a related move, an IRS/Treasury task force was formed in February 2002 to comprehensively review the EIC program in general. The task force’s objective is to develop recommendations for achieving the objectives of the EIC program “while reducing taxpayer confusion and increasing the accuracy of the administration of benefits.” The task force was to complete its work within 4 months. Administering the EIC is not an easy task for IRS. IRS has to balance its efforts to help ensure that all qualified persons claim the credit with its efforts to protect the integrity of the tax system by guarding against fraud and other forms of noncompliance associated with the EIC. Furthermore, as with other provisions of the tax code, IRS must minimize the burden imposed on taxpayers yet ensure that it has a reasonable basis for judging whether taxpayers have properly claimed the credit. Although the recertification program provides a vehicle for combating EIC noncompliance, we believe that the program unnecessarily burdens taxpayers and provides inadequate assurance that IRS has a reasonable evidentiary basis for determining whether recertification applicants should be granted the EIC. As a consequence, taxpayers may be discouraged from claiming credits to which they are entitled or IRS may make poorly supported decisions in allowing or disallowing the credit. We identified several opportunities to make the recertification program less confusing to taxpayers and the decisions reached more accurate and consistent, without adversely affecting IRS’s ability to protect against EIC noncompliance. Two important forms used in the recertification process are problematic. Form 8862 is required of all taxpayers seeking recertification, yet 86 percent of IRS examiners who audit recertification cases say they do not use it. Since IRS is basically using Form 8862 only as a trigger for initiating the recertification process, we believe that a simpler version of Form 8862 could serve that same purpose. Form 886-R, which tells taxpayers what documentation they need to submit to prove their eligibility for the EIC, says nothing about documentation that taxpayers in nontraditional childrearing arrangements—which are likely common among the EIC recipient population—need to provide to demonstrate that they meet the EIC relationship test. At the same time, Form 886-R lists documentation that substantial majorities of examiners said they would not accept. The form states that a notarized statement from a child-care provider is acceptable evidence that a child lived with the claimant. However, 62 percent of examiners said that they would not accept such statements generally and 79 percent said that they would not accept such statements from relatives who provide child care. Other documentation listed on Form 886-R, while useful in gauging a taxpayer’s eligibility for the EIC, can lead to unnecessary taxpayer burden. IRS could minimize that burden and increase the probability of obtaining useful information by clarifying Form 886-R itself or providing simple supplemental forms that serve the same purpose. For instance, taxpayers would be less likely to submit school year attendance information rather than tax year attendance information if IRS were to develop a simple form that specified the period (e.g., January through December 2000) for which taxpayers must provide information. A taxpayer could then take the form to the school(s) for completion. When IRS has gathered information to judge whether a taxpayer should be recertified, examiners reviewing the information are likely to reach differing conclusions. The 21 examiners who reviewed five case scenarios we developed based on actual case files did not all agree on any scenario and, in some cases, reached widely varying judgments about whether the evidence was sufficient to support an EIC claim. Furthermore, 53 percent of the examiners we interviewed said that they have sometimes denied recertification because taxpayers did not provide documentation of financial support for the EIC-qualifying child—reflecting a fundamental misunderstanding of the law since financial support is not a criterion for the EIC. The results of our review suggest that IRS needs to reassess the evidentiary requirements for recertification and take steps to better ensure that examiners understand and more consistently apply the criteria for recertification. The inability to prove that qualifying children have lived with taxpayers for the requisite period of time—the residency requirement—has historically been a major reason why taxpayers are judged not eligible for the EIC. IRS examiners will continue to exercise discretion in determining whether documentation is sufficient even when using IRS’s proposed new decision support tool. Furthermore, each of the three types of acceptable documentation cited on Form 886-R for establishing residency can prove problematic for an EIC claimant. Therefore, the chances of a claimant being able to prove to an examiner’s satisfaction that a child’s living arrangement meets EIC requirements might be enhanced if taxpayers were encouraged to send IRS various types of documentation. Form 886-R, as currently worded, encourages taxpayers to send in just one type of documentation—be it school records, medical records, or statements from a child care provider—which can leave an examiner with less than conclusive evidence. If taxpayers provided more than one document, an examiner could disregard a document that seemed questionable but possibly find one or more of the other documents persuasive. Also, a pattern of evidence across several corroborating documents may provide a more meaningful basis for examiners to judge residency. Although our review was directed at the EIC Recertification Program, many of our findings would also apply to other IRS audits of EIC claims because IRS’s requirements for proving eligibility for the EIC apply to all EIC claimants, not just those who have to recertify. In that regard, while we understand that it is not possible, and probably not desirable, to eliminate all subjectivity from examiners’ decisions about EIC eligibility, there is room to bring more consistency to that process—not only consistency among examiners but also consistency between the requirements of the tax law (e.g., no financial support test to claim the EIC) and examiners’ practices. IRS recognizes the need for more consistency and is working to develop a decision support tool for EIC audits. More broadly, an IRS/Treasury task force has been charged with developing recommendations for making the overall EIC program less confusing to taxpayers and easier for IRS to administer. The results of our work should be useful to IRS in developing the decision support tool and to the task force in deliberating on possible changes to the EIC program. We recommend that the commissioner of Internal Revenue reassess the evidentiary requirements for recertification. As part of that reassessment, we recommend that the commissioner do the following: Revise Form 8862 to make it a simple request for recertification that IRS can use to trigger the recertification process and eliminate all of the information that taxpayers are now asked to provide on the form. Revise Form 886-R (and similar forms used for other EIC audits) to clarify that taxpayers who are seeking EIC recertification do not have to demonstrate that their EIC-qualifying child is a dependent to qualify for the EIC; help taxpayers understand what documentation they must provide (such as birth certificates, adoption papers, etc.) to establish their relationship with the EIC-qualifying child, especially when the child is not their natural born son or daughter; eliminate the need to have the statement from a child-care provider notarized, since a notary public does not verify the content of the statement and most examiners placed no validity on the notary stamp; and encourage taxpayers to submit more than one type of document to demonstrate that the EIC-qualifying children lived with them. If IRS is not willing to accept a relative’s child-care statement as evidence that a child lives with the taxpayer, make that clear on Form 886-R, on similar forms used for other EIC audits, and in the EIC decision support tool and suggest additional evidence that a taxpayer might provide. Whatever IRS’s official position on statements from relatives, ensure that examiners are aware of that position and apply it consistently. Develop a standard form that taxpayers can give to a school or health-care provider that specifies the information needed and on which examiners can indicate the period of time for which that information is needed. If IRS decides not to develop a standard form, revise Form 886-R to clearly remind taxpayers that records for parts of 2 school years are needed to document a living arrangement for the tax year. Take appropriate steps to ensure that the new EIC decision support tool does not continue the inappropriate linkage of financial support to decisions on EIC eligibility. In conjunction with the establishment of the EIC decision support tool, which is intended to improve consistency among EIC examinations, provide examiners with the training needed to better ensure consistent and accurate decisions. As part of the training, emphasize to examiners the difference between the eligibility requirements for an EIC-qualifying child and a dependent. We requested comments on a draft of this report from IRS. We obtained written comments in an April 10, 2002, letter from the commissioner of Internal Revenue (see app. V). The commissioner cited several steps being taken with respect to the EIC, including the development of the decision support tool and convening of the IRS/Treasury task force, referred to earlier, and the redesign of EIC taxpayer notices. The commissioner said that the IRS/Treasury task force would consider the findings discussed in this report in evaluating “legislative and administrative solutions to recertification problems.” With respect to our recommendation that IRS revise Form 8862, the commissioner said that the Wage and Investment Division will study the use of Form 8862 in EIC recertifications and the examination of related issues. Based on the results of that study and our findings, IRS “will evaluate possible revisions to the form that will make communications clearer, reduce taxpayer burden, and aid the recertification and examination processes.” IRS anticipates completion of this study by June 2003. Such a study, with the objectives cited by the commissioner, would be responsive to our recommendation. Regarding our recommendation that IRS revise Form 886-R and similar forms, the commissioner said that IRS plans to have revised forms that incorporate feedback from taxpayers and tax practitioners by the 2003 filing season. We agree wholeheartedly with the plan to obtain feedback from taxpayers and practitioners and look forward to seeing the results of these efforts. However, the commissioner’s response did not clearly indicate that the intended revisions to the forms would reflect the specific changes we recommended. We encourage the commissioner to ensure that the recommended changes are made. In response to our two recommendations relating to child care provided by a taxpayer’s relative, the commissioner said the following: “A child-care provider’s statement by itself may not be sufficient to verify eligibility. In that instance, the taxpayer will need to provide additional collaborating evidence to support his or her claim. We will show examples of this evidence on Form 886-R.” IRS will enhance examiner awareness of IRS’s official position on this issue and the consistency of its application through the decision support tool, in examiner training and the Internal Revenue Manual, and during quality reviews. The actions referred to by the commissioner would be responsive to our recommendations. With respect to our two recommendations about helping ensure that taxpayers obtain documentation for the proper time period, the commissioner said that IRS was revising Form 886-R to clearly remind taxpayers that records for parts of 2 school years are needed to document a living arrangement for the tax year. That would be responsive to our recommendation. Finally, the commissioner said that the new EIC decision support tool has been revised to incorporate our recommendation that IRS take appropriate steps to ensure that the new tool does not continue the inappropriate linkage of financial support to decisions on EIC eligibility. The new tool is to be rolled out nationwide in May 2002. 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 Chairmen and Ranking Minority Members of the Senate Committee on Finance and the House Committee on Ways and Means; the Ranking Minority Member of this Subcommittee; the secretary of the Treasury; the commissioner of Internal Revenue; the director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. This report was prepared under the direction of David J. Attianese, Assistant Director. Other major contributors to this report are acknowledged in appendix VI. If you have any questions, contact Mr. Attianese or me on (202) 512-9110. The Congress established the earned income credit (EIC) in 1975 to offset the impact of Social Security taxes paid by low-income workers and to encourage low-income persons to choose work over welfare. A significant number of taxpayers are affected by EIC. In 2001, 18.7 million taxpayers claimed a total of $31 billion in EIC. Since 1995, we have identified EIC noncompliance as one of the high-risk areas within IRS. EIC noncompliance has resulted in billions of dollars in EIC claims that IRS paid, but should not have. In its most recent EIC compliance study, IRS determined that of an estimated $31.3 billion in EIC claims for tax year 1999, between $9.7 billion and $11.1 billion was overclaimed. After deducting the estimated amount of those overclaims that it recovered during the processing of returns and through enforcement programs, IRS determined that between $8.5 billion and $9.9 billion in tax year 1999 EIC claims was paid out that should not have been. The Taxpayer Relief Act of 1997 reflects the Congress’ concern about the level of EIC noncompliance. Among other things, the 1997 act amended the Internal Revenue Code to provide that taxpayers who are denied EIC during an IRS audit are ineligible to receive the EIC in subsequent years unless they provide documentation to demonstrate their eligibility. IRS developed a recertification program designed to deal with this new requirement. Taxpayers were first required to recertify, based on a 1997 audit, when submitting their 1998 tax returns. Tax year 1998 returns filed in 1999 were the first returns to which affected EIC claimants would have to attach a Form 8862 for recertification. In preparation for that event, IRS provided little information to taxpayers on what to expect when they sought recertification. IRS issued recertification guidelines to service center examiners at the beginning of the 1999 filing season but, according to examiners we interviewed, gave no formal training on recertification to examination staff. As described in appendix II, we and TIGTA found that service centers did not consistently follow the recertification guidelines, and a number of forms and letters IRS used for recertification contained inconsistent or irrelevant information. IRS’s outreach and correspondence to taxpayers and its training of examiners have improved since then. For example, IRS began to distribute basic information on the recertification program through its web site on the Internet, Publication 596 (Earned Income Credit) was revised to include a section on what taxpayers need to do if they have been disallowed the EIC as a result of audit, some changes were made to improve the quality of IRS correspondence, and more guidance was provided to examiners. “The law now requires when we deny EIC , we must also deny it for any succeeding years unless you provide information showing you are entitled to the credit. You must, therefore, complete and attach Form 8862, Information to Claim Earned Income Credit After Disallowance, to the next return on which you claim EIC. While we determine if you are entitled to the credit, we will delay any refund due. If you claim EIC on your return without attaching a completed Form 8862, we will disallow the credit. You can get Form 8862 at most locations where tax forms are available. You will also be able to submit Form 8862 electronically when you file federal tax return…” None of the 1999 IRS publications, forms, and instructions regarding the EIC provided any information on the recertification process or requirements other than the need to file Form 8862. Even IRS’s publication of the need to file Form 8862 was not completely effective. An internal IRS study found that of the 312,000 required-to-recertify taxpayers, 38 percent (118,989) claimed the EIC again for tax year 1998. However, nearly 46 percent of these taxpayers (54,194 of the 118,989) did not attach the Form 8862 with their returns and thus were automatically denied the EIC. Within IRS, there was also confusion over the recertification process. At the beginning of the 1999 filing season, IRS issued recertification guidelines for Service Center examiners, but examiners we interviewed said that there was no formal training for examiners on recertification. With some exceptions pertaining to which EIC children an examiner should seek verification and how the recertification indicator should be handled after a taxpayer has been recertified, the recertification process essentially follows IRS’s normal process for conducting examinations via correspondence. During our review of the 1999 filing season, we found that (1) form letters that IRS sent to taxpayers seeking recertification contained inconsistent and irrelevant information; (2) form letters that IRS sent to taxpayers asked for information beyond that specified in the recertification guidelines; and (3) service centers were not consistently following the recertification process. A more detailed review by TIGTA disclosed, among other things, that (1) the indicator used to identify taxpayers who must recertify was not always removed accurately; (2) some suspended refunds were not released timely; (3) recertification audits were not always processed in a timely manner; (4) not all recertification determinations were accurate; and (5) IRS correspondence was unclear. TIGTA attributed these problems, in part, to (1) the IRS correspondence used did not clearly explain how the program worked or what was required for the taxpayer to be recertified and (2) IRS did not ensure that employees received, understood, and implemented recertification procedures. (See app. II for TIGTA’s findings and IRS’s corrective actions.) Outreach to taxpayers for filing seasons 2000 and 2001 improved compared with 1999. For example, in 2000, IRS revised Publication 596 (Earned Income Credit) by expanding the section on EIC recertification. The publication provided examples of who would be required to file Form 8862 and alerted taxpayers that they may have to provide additional documentation before being recertified. In 2001, IRS included questions on EIC recertification in the “Frequently Asked Questions” section of its Web site and further expanded the chapter on EIC recertification in Publication 596. The 2001 improvement in outreach was especially critical because the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106- 170) had tightened the definition of an eligible foster child for EIC purposes. IRS publicized this change on its Web site, in Publications 596 and 553 (Highlights of 2000 Tax Changes), and on Schedule EIC. Recertification training for examiners also improved compared with 1999. EIC training videos that were sent to IRS’s processing centers for the 2001 filing season included materials on recertification. IRS also incorporated the recertification guidelines into the Internal Revenue Manual section dealing with correspondence examinations in an effort to improve program consistency. Forms and letters were revised and examiners were instructed, via IRS’s internal Taxpayer Service Electronic Bulletin Board, to correct improper handling of recertification cases. Since July 1999, we and the Treasury Inspector General for Tax Administration (TIGTA) have reported several concerns about the EIC Recertification Program and have made several recommendations. In response to those recommendations, IRS implemented several corrective actions. The recommendations and corrective actions are described in tables 2 and 3. To help identify any problems taxpayers may have in understanding and complying with the EIC recertification process and determine how consistently IRS examiners assess evidentiary support, we conducted a telephone survey of IRS examiners doing recertification audits. We obtained from IRS a list of all examiners who were working on EIC recertification cases as of April 2001. From that list of 323 examiners, we selected a simple random sample of 105 examiners. We found that 12 of those 105 examiners were not doing recertification audits at the time of our survey and 3 others were unavailable for us to interview during our survey timeframe. Therefore, our survey results represent the views of about 277, or about 97 percent, of the estimated 286 examiners doing recertification audits at the time of our survey. The estimates we made from our telephone survey and their 95-percent confidence intervals are provided in table 4. In addition to those named above, Karen Bracey, Tara Carter, Art Davis, Ben Douglas, Ann Lee, Susan Mak, Anne Rhodes-Kline, Clarence Tull, and James Ungvarsky made key contributions to this report. | The earned income credit (EIC) is a refundable tax credit available to low-income, working taxpayers. Administering the EIC is not an easy task for the Internal Revenue Service (IRS). IRS has to balance its efforts to help ensure that all qualified persons claim the credit with its efforts to protect the integrity of the tax system and guard against fraud and other forms of noncompliance associated with EIC. Although IRS made some changes to its correspondence, improved its examiner training, and expanded taxpayer outreach, certain aspects of the recertification process continue to cause problems for taxpayers. Since the inception of the EIC Recertification Program in 1998, IRS has taken steps to improve some of the letters and forms it uses to correspond with taxpayers about the program. However, two standard forms that IRS uses in corresponding with taxpayers as part of the recertification process can lead to unnecessary taxpayer burden. IRS asks taxpayers to submit certain information as part of the process that can be difficult for some EIC claimants to obtain or is inconsistent with what many examiners consider acceptable. |
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Floods can result in the loss of lives, extensive damage to property and agriculture, and large-scale disruptions to business and infrastructure, such as transportation and water and sewer services. The National Oceanic and Atmospheric Administration estimates that floods cause about 140 deaths in the United States each year, and the Army Corps of Engineers estimates that floods cause $6 billion in average annual losses. Congress established NFIP in the National Flood Insurance Act of 1968 to provide policyholders with some insurance coverage for flood damage as an alternative to disaster assistance, and to try to reduce the escalating costs of repairing flood damage.subsequently modified by various amendments, including the Flood Disaster Protection Act of 1973 (1973 Act) and the National Flood The program was Insurance Reform Act of 1994. And most recently, NFIP was amended by the Biggert-Waters Flood Insurance Reform Act of 2012. The 1973 Act added certain requirements that, according to FEMA officials, were intended to encourage community participation in NFIP. Specifically, as a condition of future federal financial assistance, communities are required to participate in NFIP and to adopt adequate floodplain ordinances with effective enforcement provisions consistent with federal standards in order to reduce or avoid future flood losses. Figure 1, which shows the location of U.S. Indian reservations and major flood disaster declarations over a 25-year period, indicates that many Indian tribes reside in areas that have experienced multiple floods. The 1973 Act denied direct federal financial assistance and financing by private lending institutions regulated by federal regulators for acquisition or construction purposes in participating communities where flood insurance was available unless the property was covered by flood insurance. Prior to the 1973 Act, the purchase of flood insurance had been voluntary. However, this mandatory purchase requirement, further amended by the National Flood Insurance Reform Act of 1994, effectively requires owners of property to obtain flood insurance if they are located in a Special Flood Hazard Area (SFHA) within a community participating in NFIP and obtain a mortgage from a federally regulated lending institution or a federal agency lender or receive direct federal financial assistance for acquisition or construction purposes. The mandatory purchase requirement applies to secured mortgage loans from financial institutions such as banks, savings and loan associations, savings banks, and credit unions that are supervised by federal agencies, including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. It also applies to all mortgage loans secured by real estate on which a building is constructed in an SFHA for which flood insurance is available if purchased by Fannie Mae and Freddie Mac in the secondary mortgage market. Loans and grants through financial assistance programs from agencies such as the Federal Housing Administration and the Department of Veterans Affairs are also affected. The requirement also extends to several federal programs that assist Indian tribes. For example, recipients of funds from BIA’s Housing Improvement Program, HUD’s Indian Housing Block Grant (IHBG) and Indian Community Development Block Grant (ICDBG), and several USDA Rural Development loan programs are required to purchase flood insurance if an assisted structure is in an SFHA. Finally, individuals in SFHAs who receive federal disaster assistance after September 23, 1994, for flood disaster losses to real or personal property are required, as a condition for receiving future disaster assistance, to purchase and maintain flood insurance coverage on the property. According to FEMA, in December 2012 the average NFIP policy cost about $600 per year, with policies in SFHAs typically costing more and some policies outside SFHAs costing less. FEMA identifies and maps flood-prone areas throughout the United States and its territories that are eligible to participate in NFIP. According to a Congressional Research Service (CRS) report on NFIP, FEMA also makes flood hazard information available on its website for viewing or purchasing. The report notes that FEMA works with communities to develop new flood hazard data as part of a flood insurance study, issues public notification about maps, and engages in education and outreach to help ensure that community leaders and residents understand the mapping process and the appropriate use of flood maps. The CRS report further notes that reliable flood risk data, including updated flood maps, and educating residents about flood risk, contribute to mitigating future flood losses. Most areas of flood hazard are commonly identified on Flood Insurance Rate Maps (FIRM), and areas not yet identified by a FIRM may be mapped on Flood Hazard Boundary Maps. Several areas of flood hazard are identified on these maps, one of which is the SFHA. The SFHA is a high-risk area defined as any land that would be inundated by a flood having a 1 percent chance of occurring in a given year (base flood); this is the equivalent of a 26 percent chance of flooding over a 30- year mortgage. According to FEMA, the SFHA constitutes a reasonable compromise between the need for building restrictions to minimize potential loss of life and property and the economic benefits to be derived from floodplain development. Development may take place within an SFHA as long as it complies with local floodplain management ordinances, which must meet minimum federal requirements. Flood insurance is required for insurable structures within high-risk areas to protect federal financial investments and assistance used for acquisition or construction purposes within communities participating in NFIP. In July 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012. The act extends NFIP for 5 years and makes reforms to the program that include (1) phasing out subsidies for many properties, (2) raising the cap on annual premium increases for other policies from 10 to 20 percent, (3) clarifying that certain multifamily properties are eligible for NFIP policies, (4) imposing minimum deductibles for flood claims, (5) requiring NFIP to establish a reserve fund, and (6) establishing a technical mapping advisory council to deal with map modernization issues. The act also calls for an assessment by FEMA and GAO, separately, of options and strategies for privatizing NFIP in the future and authorizes FEMA to pursue private risk-management initiatives to determine the capacity of private insurers and markets to assist communities in managing the full range of financial risks associated with flooding. Because of its subsidized premium rates and catastrophic hurricane- related floods in recent years, NFIP has accrued a substantial debt that stood at nearly $18 billion as of October 2012. We previously reported that NFIP was designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than with tax dollars, and that FEMA had statutory authority to borrow funds from Treasury to keep NFIP solvent in years when losses were high. We noted that by design NFIP was not actuarially sound, because Congress authorized subsidized insurance rates for policies covering certain structures to encourage communities to join the program. Since 2000, NFIP has experienced several catastrophic loss years (years with $1 billion or more in losses). These years include 2001, 2004, 2005, and 2008. By the end of 2012, NFIP is expected to have experienced another catastrophic loss year because of the enormous damage from the October storm known as Superstorm Sandy. Under FEMA’s NFIP regulations, a community is defined as any state or area or political subdivision thereof or any Indian tribe or authorized tribal organization, or Alaska Native Village or authorized native organization, that has the authority to adopt and enforce floodplain management ordinances for the area under its jurisdiction. Indian tribes, authorized tribal organizations, Alaska Native villages, and authorized native organizations that have land use authority are considered communities by NFIP and can join the program even if no flood hazard map exists that covers all tribal lands. See 44 C.F.R. § 206.110(k). where the community is participating in NFIP, unless the property is covered by flood insurance. Participating communities can receive discounts on flood insurance if they establish floodplain management programs that go beyond the minimum requirements of NFIP. FEMA can suspend communities that do not comply with the program and communities can withdraw from the program (both with sanctions). Currently, more than 21,000 communities participate in NFIP. Communities participating in NFIP do so as part of either the regular or emergency program. A community participating in the regular NFIP program is usually provided with a FIRM and a flood insurance study. As part of their agreement to participate in NFIP, communities adopt and enforce floodplain management ordinances and FIRMs. If communities do not adopt and enforce these ordinances, they can be placed on probation or suspended from the program. However, such actions take place only after FEMA has taken steps to help the community become compliant. The NFIP emergency program is the initial phase of a community’s participation in NFIP and was designed to provide a limited amount of flood insurance. A community participating in the emergency program either does not have an identified and mapped flood hazard or has been provided with a Flood Hazard Boundary Map, and the community is required to adopt limited floodplain management standards to control future use of its floodplain. According to FEMA, fewer than 3 percent of the more than 21,000 communities participating in NFIP are in the emergency program. The federal government has consistently recognized Indian tribes as distinct, independent political communities with the inherent powers of a limited sovereignty that has never been extinguished. As of August 2012, there were 566 federally recognized tribes—341 in the contiguous 48 To help manage tribal affairs, tribes have states and 225 in Alaska.formed governments and subsidiaries of tribal governments, including schools, housing, health, and other types of corporations. The United States has a trust responsibility to recognized Indian tribes and maintains a government-to-government relationship with them. Tribal lands vary dramatically in size, demographics, and location. They range from the Navajo Nation, which consists of about 27,000 square miles across portions of Arizona, New Mexico, and Utah, to some tribal land areas in California of less than 1 square mile. Over 176,000 American Indians live on the Navajo reservation, while some other tribal lands have fewer than 50 Indian residents. Some Indian reservations have a mixture of Indian and non-Indian residents. Most tribal lands are rural or remote, although some are near metropolitan areas. We have reported in the past that some tribes are landless. See table 4 in GAO, Indian Issues: BLM’s Program for Issuing Individual Indian Allotments on Public Lands Is No Longer Viable, GAO-07-23R (Washington, D.C.: Oct. 20, 2006). See Brendale v. Confederated Tribes and Bands of Yakima Indian Nations, 492 U.S. 408 (1989). reservation boundaries, have been inherited or purchased by non-Indians and Indian tribes generally lack jurisdiction over land owned by non- Indians. In some cases, although a tribe is not an NFIP participant, the tribe may be located in another community that participates in NFIP. A proposed amendment to the Robert T. Stafford Disaster Relief and Emergency Assistance Act would allow Indian tribes to request a major disaster declaration by the President. The proposed amendment would provide Indian tribes with this authority so that they would not be required to rely on assistance through a presidential declaration requested by the Federal officials with whom we spoke generally viewed state or locality.this amendment as a positive action in the interest of tribes. For example, USDA Rural Development officials said that this authority would make it easier for tribes to access disaster relief resources. Representatives of several tribes we interviewed said that such a change would open up direct communication between the federal government and Indian tribes. However, questions remained about how the proposed amendment would be implemented. It is not yet clear how the proposed Stafford Act amendment would affect Indian tribes’ willingness to participate in NFIP. According to FEMA, as of August 2012, 37 out of 566 federally recognized tribes nationwide—roughly 7 percent—were participating in NFIP (see table 1). The number of policies for each tribe ranged from 1 to 175, and 14 participating tribes had no individual policies. Across all participating Indian tribes, 414 policies were in place, accounting for less than 1 hundredth of a percent of all NFIP policies. FEMA’s data also show that, among communities that have received flood hazard maps but are not participating in NFIP, there are 46 tribal communities. Federal agency officials, tribes, and others described several factors that affect whether tribes purchase flood insurance through NFIP or other programs. FEMA does limited mapping in tribal communities. Flood maps show communities and homeowners the level of flood risk they face. According to FEMA, as of October 2012, 78 tribal communities had received flood hazard maps.Association, which provides FEMA flood mapping data to mortgage lenders and insurers, told us that some tribes that were not participating in NFIP had not been mapped and that because they did not know their flood risk, they likely did not see the advantages to NFIP participation. In discussing the agency’s mapping efforts, FEMA officials explained that tribal communities generally included small rural areas that were not a high priority for the agency. The officials said that FEMA had focused its mapping efforts on heavily populated urban and coastal areas with a high risk of flooding. The officials also noted that because of the tribes’ sovereignty, the agency needed permission to enter tribal lands and conduct mapping activities and that such permission could be difficult to obtain. Additionally, they were concerned that tribes might not grant Representatives of the National Flood Determination permission for FEMA to publish a map if tribal borders were in dispute. They explained that if FEMA could not overcome these challenges, it might exclude the tribal area from the watershed map. However, they did not provide us with any specific examples of maps with such exclusions. Representatives of a Washington tribe that received its flood hazard maps from FEMA in 2004 told us the tribe had participated in NFIP since 1997, 7 years prior to receiving the maps. The tribe initially participated in NFIP’s emergency program and then became a regular participant once its maps were finalized. They explained that the tribe had largely been motivated by a need to clarify its jurisdictional (land and water) area, which flood mapping allowed them to do. Further, they said that joining NFIP had provided an opportunity to obtain flood insurance as a tribal community instead of participating as part of the surrounding county, supporting the tribe’s interest in self-determination. vulnerable to flooding from several sources, and the representatives noted that it had long been proactive in disaster mitigation efforts as a whole. Emergency officials from another tribe told us that approximately 10 percent of their reservation was mapped and that the mapping had been done by the Army Corps of Engineers. They said their understanding was that until recently, FEMA did not conduct flood mapping on federal reservations. As previously noted, FEMA assigns a unique community identification number to each community listed in its NFIP Community Information System database. The actions of a specific community under NFIP directly impact the availability and cost of NFIP policies for its residents. For example, a community’s actions could result in its residents receiving NFIP policy discounts. For more on Indian self-determination, see GAO-10-326. 9 were in the 1-year “opportunity period” for addressing any identified flood hazards and joining NFIP, and 2 had been determined to have some flood risk but were not participating. One representative of a participating Washington tribe suggested that tribes that are most at risk for flooding should be given priority in efforts to encourage tribal participation in NFIP. The tribal representative said that expecting those not highly vulnerable to flooding to purchase costly flood insurance when they have other priorities would be difficult. When we spoke with an emergency management official from a nonparticipating Wisconsin tribe, he agreed that because the tribe had not experienced a major flood, there was a general lack of urgency on the part of tribal leadership about NFIP participation. Many tribes lack the resources or administrative capacity to join NFIP. FEMA officials told us that affordability affected tribes’ participation in NFIP as it did other low-income communities and individuals. The officials also told us that they had seen slow to no insurance policy growth in areas of the country where the economy was not performing well. A representative of the National Flood Determination Association agreed that the cost of coverage could limit tribes’ participation, noting that there is a general lack of funding for mapping. Further, he said that many rural communities, including tribal communities, were not in favor of adopting land use regulations and did not have the resources to adopt and implement them. Representatives of the participating Washington tribe with the highest number of individual policies as of August 2012 acknowledged that NFIP participation was administratively burdensome and costly. In particular, they explained that developing flood damage reduction ordinances and then implementing the ordinances required dedicated staff that not all tribes have. In general, they acknowledged that many tribes lacked the resources that this tribe had to pursue NFIP participation. Similarly, a Wisconsin tribal official said that pursuing NFIP participation could be especially challenging for tribes that lacked emergency, planning, or zoning functions and tribes that may not even have developed building codes on their lands. He emphasized that such limitations should be taken into account in examining why tribes may not be participating in NFIP. Many tribes view affordability as a significant issue for their members in purchasing NFIP policies. Many tribal representatives said that affordability would be an issue for tribal members. For instance, representatives of an Oklahoma tribe told us that while affordability would not affect the tribe’s decision to participate in the program, because the tribe would use NFIP to insure its government and commercial buildings, it would be a factor for individual tribal members. Specifically, they explained that paying flood insurance premiums would be challenging for individuals who already lacked the resources to afford homeowner, renter, and automobile insurance. Representatives of other tribes agreed that NFIP premiums would be costly for the members of their tribes. Emergency management representatives of a large western tribe told us they were not aware of any tribal members who had flood insurance on their homes and that even homeowner insurance coverage was rare. They explained that the average annual household income on the reservation was between $12,000 and $15,000 and that unemployment was at least 28 percent. A tribal housing official from Alaska whose members can participate in NFIP through the surrounding borough told us that he had found that most members of his tribe dropped their homeowners insurance as soon as their homes were paid off and that he expected they would do the same with required flood insurance, which An official for another Oklahoma tribe can cost more than $1,000 a year.that was participating in NFIP but had no active individual policies said he did not believe flood insurance was a priority for members of his tribe, whose average annual household income was $6,000. Figure 2 shows a Native Alaska fishing village that has experienced flooding but whose residents, according to the tribe’s housing director, have not purchased NFIP flood insurance due to the high cost. Unique Indian issues also impact tribal participation in NFIP. As previously noted, all but one of the tribes in Alaska lack a reservation. Because the tribes lack jurisdiction to enact and enforce land use ordinances over the land where they reside, they cannot directly participate as communities in NFIP. In many cases, the tribes are co- located with other government entities that may participate in NFIP, such as cities and boroughs, and their members may access NFIP through those other entities. Alaska state officials told us that an estimated 66 percent of the Alaska Native population could participate in NFIP because they lived in a city or borough that participated in the program. Based on data we compiled and analyzed, 58 of 225 Alaska tribes were co-located with a participating community (see table 2). Tribes in Oklahoma and elsewhere that do not have reservations—as well as tribes with reservations—face similar challenges in adopting and enforcing land use ordinances because they lack jurisdiction over certain land. Tribes with reservations do not generally have authority to adopt and enforce land use ordinances for land within the reservation’s boundaries owned by non-Indians. Likewise, representatives of an Oklahoma tribe told us that its lack of participation in NFIP was due in part to a reluctance to face possible sanctions because of the tribe’s limited ability to enact and enforce ordinances for land owned by non- Indians. For example, they explained that if a home that had experienced repeated flooding was located on land where the tribe had limited jurisdiction, the tribe could not take action to mitigate future flood damage without the owner’s permission. They said they were aware that NFIP does not have a workaround for such circumstances. The tribe had chosen to insure all tribal structures and vehicles under a private policy. In addition, representatives of several tribes explained that tribal structures differ from other local government structures but that FEMA did not take those differences into account, making participation difficult for some tribes. For example, representatives of a participating Washington tribe told us that in preparing its multihazard mitigation plan for FEMA approval, the tribe realized that the plan template had been created for states, as it called for input from counties within the jurisdiction. Instead of counties, the tribe had to substitute less specific geographic areas within the tribal community. The same tribe was participating in NFIP’s Community Rating System program, which allows communities to receive discounts on policies for their residents based on floodplain management actions the community takes beyond NFIP’s minimum requirements. The representatives explained that NFIP also lacked a tribal template for the Community Rating System program, which they said would facilitate the tribe’s participation. Without flood hazard maps, tribal communities, including those that may be in areas with a higher risk of flooding, may not be sufficiently aware of their flood risk. Tribes also may be reluctant to pursue NFIP participation if they are uncertain about whether they would qualify and could meet the program’s requirements. Further, those with fewer resources and less administrative capacity may be less proactive in requesting that FEMA map their communities, even though they may be vulnerable to floods. FEMA’s outreach to tribes in the last few years has largely consisted of emergency management and homeland security training for tribal officials through its Emergency Management Institute (EMI), direct technical assistance to tribes in preparing their multihazard mitigation plans, and nationwide outreach for NFIP through its regional offices and the NFIP FloodSmart marketing campaign. FEMA officials told us that the agency helped to educate tribal officials about NFIP and floodplain management through courses offered by EMI under a mitigation curriculum that includes courses for floodplain managers on their roles and responsibilities, flood insurance, and NFIP rules and regulations. FEMA has also developed an emergency management tribal curriculum to collaborate with tribal governments in building emergency management capability and partnerships to ensure continued survival of tribal nations and communities. To some extent, FEMA’s efforts have helped some tribes better understand the flood hazards that they face. According to FEMA officials, more than 2,000 members from more than 300 Indian tribes have taken courses through EMI. The officials added that each regional office had a floodplain management specialist as the NFIP point of contact for Indian tribes. Officials from two tribes told us that they had participated in EMI training. One tribal emergency management official in Wisconsin told us that he participated in training with an EMI tribal curriculum group that communicated monthly. FEMA officials also described the direct technical assistance that they provided to tribes that were preparing hazard mitigation plans. According to FEMA, developing the plans involves identifying the tribe’s critical infrastructure, major risks and vulnerabilities, and actions to reduce those risks and vulnerabilities for various types of disasters, including floods. This assistance provides tribes with an opportunity to learn about the risks that their individual communities may face. Representatives from several tribes told us that they had completed approved mitigation plans or were in the process of completing their plans. Two of the tribes with whom we spoke had their plans approved in 2010. FEMA FloodSmart officials explained that they tried to reach communities nationwide with the FloodSmart campaign, but that they targeted those communities that were most at risk for flooding. Among these communities, they focused on urban areas which had a higher concentration of potential flood insurance buyers than rural areas. They explained that FloodSmart used a tiered marketing strategy that was based on a number of factors that point to a high potential return on investment of federal dollars, including: (1) flood insurance policy purchase history, (2) potential flood risk as determined by volume of SFHA properties, (3) flood event history, (4) volume of structures, and (5) media cost. As such, rural areas, including Indian areas, generally received lower priority. FloodSmart officials told us that since February 2007, a total of 671,000 acquisition-based direct mail pieces had been sent to approximately 383,000 distinct household addresses within zip codes that intersected with Indian reservations. Moreover, according to FloodSmart officials, on average, 112,000 direct mail pieces were sent to Indian reservations each year, the majority of which were sent to addresses for properties in an SFHA. However, several tribal representatives with whom we spoke still told us that they would like more information about NFIP and its requirements so that they could decide whether to participate in the program and encourage their members to purchase policies through the program. In addition, representatives from a few tribes and from an insurance company told us that marketing campaigns or other outreach efforts may have little effect in Indian communities without the buy-in of tribal leaders. HUD and USDA Rural Development provide assistance in the form of housing and infrastructure grants, loans, and loan guarantees to Indian tribes. According to officials from both agencies, while neither HUD nor USDA is required to provide NFIP outreach, the agencies worked with tribes on housing issues that may include determining flood risk to housing assistance projects and assessing housing-related issues after disasters, such as floods. In addition, the officials said that their field staff had FEMA FloodSmart program material on hand for interested parties, including Indian tribes. As part of the IHBG and ICDBG programs, HUD officials in the Office of Native American Programs told us that they worked with tribes to identify their priorities and to help them determine how to best use HUD funds as an investment in addressing their needs. In addition, under both IHBG and ICDBG, recipients can use program funds to cover flood insurance premiums for properties in some high-risk areas. HUD officials said that they conducted outreach to housing authorities in locations where floods and other disasters had occurred to assess the status of HUD housing stock and to identify displaced families. HUD officials also said that they coordinated with FEMA and other agencies locally so that the agencies could work together to assess grantees’ damages and needs following a disaster, but that they did not know which tribes participated in NFIP. HUD regional officials said that they worked closely with individual tribes that had been impacted by flooding and other disasters and could offer technical and financial assistance to the tribes. Officials from three tribes told us that in their experience, HUD officials generally did not approve of using HUD assistance to build in an SFHA. An official from one of these tribes told us that to address HUD’s requirements for one of its HUD- assisted housing developments, the tribe built pads on all of the houses it was constructing to elevate them out of the flood zone. In addition, officials in HUD’s Office of Environment and Energy told us that they provided environmental training and invited grantees, including tribes, to attend this training. USDA Rural Development has a Native American Coordinator who interacts with tribes on programmatic issues, including challenges and issues that arise due to flooding. We spoke with the national coordinator, who explained that each state office serving a federally or state recognized Indian tribe designated an individual to serve as the USDA Rural Development state Native American Coordinator. He explained that the role had typically been a collateral duty although, in the past, three states had employed full-time Native American Coordinators. The coordinator’s efforts related to NFIP primarily would be liaising between tribal staff and the appropriate Rural Development staff tasked with ensuring compliance with program requirements for USDA-funded construction or development. Specifically, USDA officials told us that they ensured compliance with NFIP requirements only for USDA-funded projects where construction or development occurred in an SFHA in an NFIP participating community. They explained that USDA’s evaluation of NFIP applicability was part of National Environmental Policy Act In these cases, USDA officials said they ensured that reviews.mitigation actions were taken and when this was impractical, the applicant for USDA funding purchased flood insurance. The officials told us they did not provide any assistance for developing floodplain management approaches, but required that borrowers comply with applicable state or local floodplain ordinances or permits. Both HUD and USDA officials told us that when an area had not been mapped, they might rely on tribal elders or another knowledgeable source in determining the location of flood-prone areas. Representatives from HUD and USDA, tribal representatives, and private insurers all agreed that more could be done to encourage tribes to participate in flood insurance programs. However, FEMA noted that it was limited in its efforts by the unique legal issues surrounding Indian tribes and their lands. FEMA also told us its focus was on mapping more highly populated areas, which typically did not include Indian tribal communities. HUD and USDA acknowledged that more information and support could encourage tribes to participate in NFIP. For instance, HUD officials in the Northern Plains region, where more than 30 federally recognized tribes are located, told us that there was likely a need for more education among tribes. The officials said that they were aware that FEMA had to prioritize limited federal dollars for flood mapping activities and that tribal lands might not be a top priority. However, they noted that tribes also might not be proactive in requesting flood maps for their communities because they had received conflicting information about FEMA’s authority to map tribal lands. The officials said they had invited FEMA to a regional meeting in the last year to share information on disaster topics, including floods and flood insurance, with tribal housing officials from the region. As previously noted, officials from HUD’s Office of Environment and Energy also told us that they were increasing opportunities for HUD grantees, including tribes, to obtain information and training on environmental topics such as flood risks. Tribal representatives had a number of suggestions that could lead to increased tribal participation, ranging from expanding FEMA outreach and education to requiring tribes to have flood insurance. They suggested, among other things, more emphasis on educating tribes on the importance of flood insurance, as at least one tribe had been experiencing more rain each year; more outreach to tribes, including those without flood hazard maps, to help them understand their vulnerability to floods and the advantages of NFIP participation; meetings that brought together FEMA officials and elected tribal councils that could make decisions on behalf of their tribes; federal grants to help tribes develop elevation certificates and to retrofit older properties to lower risk and make the policies more affordable for members; a simulation exercise that included the host tribe, FEMA officials, and other government officials with whom tribes would need to coordinate in a flood-related disaster; and an amendment to the NFIP statute to address issues specific to tribes’ limited ability to adopt and enforce land use ordinances. At least one tribal representative said that it would be reasonable for Congress to require a flood mitigation plan across communities and tribal lands, regardless of risk level, and that tribes with critical infrastructure in a flood-prone area should be required to participate in NFIP or sign a waiver of future flood assistance. However, another representative suggested that FEMA should address the land use ordinance issue and determine, with the tribes’ input, whether NFIP had been financially beneficial to tribal members who were able to purchase flood insurance in the nontribal community where they lived. Insurance company officials we spoke with, including a Write-Your-Own company and a broker, emphasized the importance of respecting the cultural issues of dealing with tribes in any targeted outreach activities. As we have seen, for example, the FloodSmart campaign sent thousands of pamphlets to individual residents on Indian lands. One insurance broker that targets Indian tribes told us that the company had received three requests for policies after the mailing. She told us that the company had learned that tribal members tend to rely on the views of their tribal leaders for guidance and that without the buy-in of these leaders, marketing FloodSmart materials to individual members would likely not be a successful strategy. Insurance and reinsurance company officials we spoke with were aware of the Biggert-Waters Flood Insurance Reform Act of 2012 requiring FEMA and GAO to assess options and strategies for privatizing NFIP in the future and authorizing FEMA to pursue private management initiatives.examine whether it would be in its interest to become more involved now, given that future legislation would likely increase the private sector’s role in flood insurance. This official added that his company recognized that NFIP was not actuarially sound and that expected additions to the nearly A reinsurance official said that his company had begun to $18 billion deficit from Superstorm Sandy could accelerate congressional interest in greater private sector involvement in providing flood insurance. Other private sector insurance options may offer tribes an alternative to NFIP. A private insurer proposed two related options that could allow tribes to purchase flood insurance at a potentially lower cost than under NFIP. The first would involve expanding the existing eligible flood insurance risk-sharing pools to obtain the critical mass of policies necessary to make low-cost flood insurance policies affordable to Indian households. The second would establish a new private “microinsurance” program offering low-premium policies with small coverage limits tailored specifically to Indian tribes, based on similar operations in developing countries. Nonprofit Insurance Risk Pool: Two of the tribes we contacted had purchased flood insurance through an insurance risk pool offered by AMERIND Risk Management Corporation. AMERIND was organized in 1986 as a collaborative program between HUD and some Indian housing authorities to provide insurance protection for Native American low-income housing. It currently operates as a multitribal nonprofit corporation working with over 400 tribes and administers risk-sharing pools. Since 2002, AMERIND has offered a flood insurance endorsement to its standard policy, limited to HUD-assisted Indian housing. Company officials explained that through a members-only risk pool, the flood endorsement provides flood coverage to about 56,000 structures on tribal lands and charges a universal rate of $10 per structure per year (see table 3). AMERIND has a coverage limit of $15,000 for each covered structure. An Arizona tribe we contacted uses AMERIND insurance on its HUD- assisted tribal housing, and the policies included the flood protection endorsement. According to the tribal representative, the tribe has used this insurance option for about 8 years. One Oklahoma tribe we contacted had not purchased AMERIND’s flood insurance endorsement but had purchased property insurance from the company. This representative said that because of its affordability compared with NFIP and because the company is a multitribal corporation, he would refer individual members to AMERIND if they lived in HUD IHBG-assisted housing within a floodplain and needed to purchase flood insurance. USDA Rural Development also has approved AMERIND as an eligible nonflood insurer for its single- family housing programs, so Indian tribes and their members can use an appropriate AMERIND product to insure projects financed through these programs. According to USDA, the intent is to facilitate use of its programs by Indian tribes and their members for projects on trust land when conventional insurance coverage is unavailable, difficult to access, or expensive. However, the current nonprofit insurance risk-pooling option has limitations. First, while the premium rate may be lower than NFIP’s, the coverage limits for flood insurance are also generally lower. Representatives for AMERIND told us that coverage limits were low because the company had not been successful in obtaining reinsurance on the private market that would allow the company to mitigate its risk and offer full replacement costs for each structure. AMERIND does offer to provide double coverage ($30,000 per structure) for flood losses, but the premiums are more than 10 times the universal rate, ranging from about $150 to $200 per structure. These premiums are generally below NFIP rates for properties with similar coverage inside SFHAs and are generally comparable to NFIP rates for similar coverage outside SFHAs. Second, because AMERIND’s flood insurance coverage is available for HUD IHBG- assisted structures only, tribes cannot use it for all structures on tribal lands. The tribes we interviewed that used AMERIND for flood insurance were able to obtain coverage only for HUD IHBG-assisted structures. Because of this limitation, AMERIND does not have the critical mass of policies necessary to offer private low-cost flood insurance to all Indian households. Third, communities may still face consequences if they are identified as having SFHAs and choose to obtain non-NFIP flood insurance. According to FEMA, NFIP aims to do more than simply encourage property owners to purchase flood insurance. It also encourages them to take measures to mitigate potential flood damage to their properties, and NFIP coverage is available only when certain flood protection standards have been implemented. Private Microinsurance: Another potential private sector option would be a private microinsurance program. Microinsurance is a relatively new product that allows insurers to offer low-premium policies with small coverage limits in developing areas. The concept operates much like AMERIND’s risk pool and is structured to provide low-income policyholders with a degree of “livelihood protection” or emergency expense support rather than full indemnity for loss. We spoke with officials from a reinsurance company that was recently awarded a grant from a member of the World Bank group to develop a market for microinsurance in an agriculture-based developing country. These officials and officials from the reinsurance company’s insurance subsidiary said that, given the recent congressional interest in looking into private options for flood insurance, they would be interested in working with AMERIND or helping to develop another Native American flood insurance program that would cover all tribal member homeowners and businesses. They said that a mandatory coverage provision would solve the coverage problem and reduce uncertainty, making the provision of microinsurance more attractive to and sustainable for insurers and reinsurers. But they added that even with mandatory group coverage, they saw benefits to mapping all lands, because a private microinsurance risk pool would need to charge more for properties that were located on unmapped tribal lands than for similar properties located on mapped tribal lands. During the course of our work for this report, FEMA developed a draft statement of work for its upcoming private market assessment of NFIP. The draft statement, dated December 17, 2012, included a requirement for the contractor to assess a broad array of instruments, including reinsurance, microinsurance, and flood insurance pools. FEMA officials confirmed that the inclusion of microinsurance and insurance pools in the study was finalized after we raised and discussed those alternatives with them and that they considered both alternatives to be worth studying. FEMA officials told us that they planned to issue the statement of work early in January 2013. Congress created NFIP with the intent of providing affordable flood insurance to communities and households in order to financially protect property owners and reduce the cost of federal postdisaster assistance, but participation by Indian tribes has been low. Even on Indian lands that have experienced flooding, tribes and tribal members often do not participate, and the total number of policies written to tribes and tribal members accounts for less than 1 hundredth of a percent of FEMA’s portfolio. FEMA has provided tribes with training and technical assistance and has to some extent helped tribes to understand the flooding risks they face. However, several factors have contributed to the low participation rate, including limited mapping on Indian lands; affordability; lack of information on NFIP; and tribal land use issues, including confusion about legal restrictions on activities on Indian lands. Limited mapping, in particular, has contributed to a lack of awareness both of the risk of flooding and of the benefits of NFIP. FEMA has generally focused its mapping efforts on densely populated and coastal areas in order to make the best use of its resources. However, increased mapping of less densely populated rural areas, including Indian lands, is in line with Congress’s focus on increasing tribes’ participation in NFIP and is key to raising awareness of the types of flood risks residents of these areas face. Expanding its flood mapping efforts will challenge FEMA to balance its need to make the best use of scarce resources with the needs of these previously underserved communities. To help increase Indian tribes’ participation in NFIP, we recommend that the Administrator of FEMA examine the feasibility of making mapping of tribal lands a higher priority. We provided a draft of this report for review and comment to USDA Rural Development, FEMA within the Department of Homeland Security, HUD, and BIA within the Department of the Interior. A letter from the Director of the Departmental GAO-OIG Liaison Office within the Department of Homeland Security stated that FEMA will take steps to make mapping of tribal lands a higher priority. The director also stated that doing so will be challenging due to FEMA’s scarce resources and noted the agency’s appreciation for GAO’s acknowledgment of its resource limitations. In addition, the director said that FEMA will consider the suggestions made by tribal representatives for increasing tribal participation in flood insurance programs. The letter is reprinted in appendix II. We also received technical comments from USDA Rural Development, FEMA, and HUD, which we incorporated in the report as appropriate. BIA did not provide any comments. We are sending copies of this report to appropriate congressional committees, and the Secretaries of Agriculture, Homeland Security, Housing and Urban Development, and Interior. This report will also be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Affairs 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 examine (1) factors contributing to the current low levels of National Flood Insurance Program (NFIP) participation by Indian tribes, (2) the Federal Emergency Management Agency’s (FEMA) efforts to increase tribes’ participation in NFIP, and (3) administrative and legislative actions that could encourage Indian tribes and their members to increase their participation in NFIP and potentially other flood insurance programs. For the purposes of this review, we limited our study primarily to flood insurance policies held on Indian tribal lands (such as reservations), because FEMA does not collect demographic data such as race or ethnic origin of NFIP policyholders. Therefore, no comprehensive data are available on members of Indian tribes who are living in nontribal communities and may carry individual NFIP policies. We also interviewed representatives from Alaska, because many Alaska Native communities are vulnerable to floods, but do not have designated reservations that could participate in NFIP. With only one reservation in the state, tribes in Alaska can participate in NFIP only through the municipalities in which their communities are located. To address all three objectives, we reviewed NFIP laws and policy documents. We reviewed FEMA data on communities participating in NFIP, including those designated as tribal communities, and on tribes that had flood hazard maps but were not participating in NFIP for various reasons. FEMA provided us with information on its process for collecting and analyzing the data in its Community Information System database and on the agency’s data reliability measures. We determined that the data FEMA provided to us were sufficiently reliable for our reporting purposes. In addition, we reviewed prior GAO work on flood insurance, Indian tribes, and disaster preparedness, and reports by the Congressional Research Service, to compile background information on NFIP. We interviewed and gathered documentation from officials at FEMA and other federal agencies with programs that assist Indian tribes, such as the Bureau of Indian Affairs (BIA) within the Department of the Interior, Department of Housing and Urban Development (HUD), and the U.S. Department of Agriculture (USDA) Rural Development. In addition, we reviewed regulations for those agencies’ programs. We spoke with representatives from the State of Alaska; the National Flood Determination Association, which provides flood mapping data to mortgage lenders and insurers; the insurance and reinsurance industries; a nonprofit risk-pooling organization; FloodSmart, which administered FEMA’s NFIP media campaign; and selected Indian tribes. We selected the tribes from among those on FEMA’s lists of tribes that were participating in NFIP and those that had flood hazard maps but were not participating in NFIP. We selected a purposive non-representative sample of eight participating tribes for interviews based on the number of individual policies within each tribe, geographic diversity, and tribe size. We also selected a purposive non-representative sample of six nonparticipating tribes for interviews based on the reason for nonparticipation, geographic diversity, and tribe size. In addition, our prior work on the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA) program partially informed the tribes we selected. Specifically, because we had already established communication with certain tribes, we selected them over comparable tribes on either list. Because of our time constraints and several selected tribes being impacted by a natural disaster (Superstorm Sandy), we were able to interview five participating and five nonparticipating tribes. We also judgmentally selected a tribe in Alaska that we had contacted previously to obtain a perspective on NFIP from a tribe in that state. To obtain perspectives from the insurance industry, we interviewed representatives from an insurance company that we contacted while conducting prior work related to the Write-Your-Own insurance program, a vendor that administers NFIP flood policies for Write-Your-Own insurance companies, and an insurance broker that specializes in working with Indian tribes. To determine factors contributing to the current low levels of NFIP participation by Indian tribes, we reviewed FEMA’s data on tribal community participation. We also asked FEMA officials about the agency’s process for mapping Indian lands (or providing flood hazard maps to Indian communities), and options for tribes to participate in NFIP. In our interviews with other federal officials, tribal representatives, and others, we asked about factors that may positively or negatively affect whether tribes participate in NFIP. To determine the efforts FEMA was making to increase awareness of and encourage participation in NFIP by Indian tribes, we asked officials at FEMA about outreach and technical assistance they provided to Indian tribes related to floods and flood insurance. In addition, we asked FloodSmart representatives about any efforts to market NFIP to Indian tribes and their members. We also asked officials at BIA, HUD, and USDA about information they may share with tribes on flood insurance in providing program support. Further, we asked tribal representatives about their interactions with FEMA and other agencies and information or assistance they had received related to NFIP. To determine what administrative or legislative actions could encourage Indian tribes and their members to increase their participation in NFIP and potentially other flood insurance programs, we reviewed NFIP regulations and legislation and guidance on FEMA coordination with and outreach to Indian tribes. We interviewed representatives from the insurance and reinsurance industries about other flood insurance options, in addition to NFIP, that may facilitate tribes’ purchase of flood insurance. We also asked federal officials and tribal representatives about actions that FEMA or Congress could take to encourage tribes participating in NFIP to increase their use of the program and tribes not participating to join NFIP. Participating: Based on number of individual NFIP policies held by the tribe, size of tribe, and geographic diversity, a total of eight tribes were selected for inclusion as well as six backup tribes. Tribes and backup tribes were selected within each region, except in the Northeast region where there was only one tribe included in our sample frame. One group of selected tribes had the largest number of policies and the backups had the second largest number of policies. The other group of tribes had the lowest number of policies. Among the cohort of lowest policies, within each region, tribes selected were those with the largest enrollment and the backups were those with the second largest enrollment. Nonparticipating: Based on reason for nonparticipation (such as withdrawn or suspended from the program), size of tribe, and geographic diversity, a total of six tribes were selected for inclusion as well as three back-up tribes. Tribes and backup tribes were selected within each region, except in the Northeast region where there was only one tribe included in our sample frame. Additionally, the one withdrawn tribe and the one suspended tribe are also included in our selected tribes. In the other three regions, one group of selected tribes had the largest number tribal enrollment and the backups had the second largest tribal enrollment. We conducted this performance audit from August 2012 to January 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, Andy Finkel (Assistant Director), Bernice Benta-Jackson, Emily Chalmers, Brian Friedman, Jeffery Malcolm, Marc Molino, Patricia Moye, Roberto Pinero, and Andrew Stavisky made key contributions to this report. | Indian tribes' participation in NFIP is extremely low, even though some Indian lands are at high risk of flooding. In response to a Moving Ahead for Progress in the 21st Century Act mandate, GAO examined (1) factors affecting Indian tribes' participation in NFIP, (2) FEMA's efforts to increase tribes' participation in NFIP, and (3) administrative and legislative actions that could increase tribes' participation. GAO reviewed FEMA data on community participation in NFIP and prior GAO reports on flood insurance and Indian tribes, interviewed officials from selected Indian tribes and insurance companies, and collected information from relevant agencies and industry officials. As of August 2012, just 37 of 566 federally recognized tribes (7 percent) were participating in the National Flood Insurance Program (NFIP), and 3 tribes accounted for more than 70 percent of policies. A number of factors have affected tribes' participation. First, the Federal Emergency Management Agency (FEMA) has not placed a high priority on mapping rural areas, including many Indian lands, for flood risk, and most tribal lands remain unmapped. Without flood hazard maps, tribal communities may be unaware of their flood risk, even in high-risk areas. Partly for this reason, the risk of flooding is perceived as relatively low on many tribal lands. Further, tribes may lack the resources and administrative capacity needed to administer NFIP requirements, and NFIP premiums are often too high for low-income tribal members. Finally, unique tribal issues can make participation difficult. For example, some Indian tribes do not have reservations over which they can enact and enforce the land use ordinances that are required for NFIP participation. Instead, many have lands that were allotted to individuals rather than to a tribal entity, limiting the tribes' jurisdiction. FEMA has done some outreach to tribes, largely through emergency management and homeland security training for tribal officials, technical assistance to tribes that are preparing their multihazard mitigation plans, and marketing through the NFIP FloodSmart campaign. FEMA officials told us that the courses offered through its Emergency Management Institute helped to educate tribal officials about NFIP and floodplain management and that its curricula included courses for floodplain managers on their roles and responsibilities, flood insurance, and NFIP rules and regulations. One tribal representative told us that he was participating in an ongoing curriculum and several tribes had developed multihazard mitigation plans. Finally, both the Department of Housing and Urban Development and the U.S. Department of Agriculture, Rural Development may provide NFIP information to Indian tribes as they provide assistance in the form of housing and infrastructure grants, loans, and loan guarantees. Tribal representatives suggested steps that FEMA could take to encourage participation in NFIP--for example, placing a higher priority on mapping Indian lands and increasing FloodSmart marketing to tribal leaders rather than individuals. Given ongoing congressional interest in private sector alternatives to NFIP, GAO also explored whether private alternatives exist that could offer affordable coverage to low-income tribal members--for example, by expanding access to risk-pooling programs that could help insure more tribal households. One such program already insures thousands of Indian properties. Another relatively new product, microinsurance, would involve insurers offering less expensive policies with relatively low coverage limits but coverage for all tribes. FEMA said that its NFIP privatization study mandated by the Biggert-Waters Flood Insurance Reform Act of 2012 would include an assessment of these alternatives. GAO recommends that the FEMA Administrator examine ways to make mapping of tribal lands in flood-prone areas a higher priority. FEMA agreed with our recommendation. |
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Medicare traditionally has paid DMEPOS suppliers through fee schedule amounts based on suppliers’ historical charges to Medicare. The purpose of CBP is to improve how Medicare payment amounts are set by paying only competitively selected contract suppliers amounts based on competitive bids, thereby providing Medicare program savings and reducing Medicare beneficiaries’ out-of-pocket expenses for DMEPOS items and services. CMS and its CBP implementation contractor—Palmetto GBA—administer and implement the CBP and its bidding rounds. In each competitive bidding area included in a CBP bidding round, suppliers can bid for one or more product categories’ CBP-covered items.evaluated based on the supplier’s eligibility, financial status, and bid prices. From this evaluation, the CBP payments—referred to as single payment amounts—are determined for each CBP-covered item in each The suppliers’ bids are competitive bidding area, and the winning suppliers are selected. Winning suppliers are then offered CBP contracts. If the supplier accepts its contract offer, it agrees to accept Medicare assignment on the CBP- covered items for the product category and in the competitive bidding area involved,amounts. and to be paid the relevant CBP single payment CMS was also required to take steps to ensure that small suppliers could be awarded CBP contracts, and accordingly set a target that 30 percent of the qualified suppliers in each product category in each competitive bidding area would be small suppliers as defined for CBP. where the small supplier target is not initially met, CMS may award additional small suppliers CBP contracts after the agency has determined the number of suppliers needed to meet or exceed CMS’s estimated beneficiary demand. To help ensure beneficiary access and choice, CMS tries to award at least five contracts in each product category in each CMS is required by law to recompete the CBP competitive bidding area.contracts at least once every three years. (See fig. 1 for CBP’s legislative history and program implementation timeline.) For CBP, CMS has defined a small supplier as one that generates gross revenue of $3.5 million or less in annual receipts including both Medicare and non-Medicare revenue. A qualified supplier is a bidder that has met certain requirements, including having been found financially sound, and its bids will be used to determine the single payment amounts and to select the contract suppliers. Pub. L. No. 105-33, § 4319(a), 111 Stat. 251, 392-4 (1997) (codified, as amended, at 42 U.S.C. § 1395w-3). Pub. L. No. 108-173 § (302)(b), 117 Stat. 2066, 2224-30 (2003) (codified, as amended, at 42 U.S.C. § 1395w-3). Items and services covered by the competition were durable medical equipment (DME) and related supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. Pub. L. No. 110-275, § 154(a)(2), 122 Stat. 2494, 2560-3 (2008) (codified, as amended, at 42 U.S.C. § 1395w-3). The Medicare Improvements for Patients and Providers Act of 2008 and implementing regulations require CMS to notify suppliers of missing financial documentation if their bids are submitted within the covered document review date, which is the later of: (1) 30 days before the final date for the close of the bid window; or (2) 30 days after the bid window opens. For the round 1 rebid, CMS was required to notify eligible suppliers of missing financial documentation within 45 days after the end of the covered document review date. For other competitive bidding program (CBP) rounds, CMS is required to notify eligible suppliers of missing financial documentation within 90 days after the end of the covered document review date. The national mail-order competition includes all parts of the United States, including the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, and American Samoa. The CBP rounds include: Round 1 rebid. CMS awarded contracts to 356 contract suppliers for the provision of DME items and services in nine product categories in nine competitive bidding areas. The contracts took effect on January 1, 2011 and expired after three years on December 31, 2013, except for the mail-order diabetic testing supplies contracts, which expired on December 31, 2012. Round 2. Round 2 expands CBP to another 100 competitive bidding areas in 91 metropolitan statistical areas. The single payment amounts for covered items were effective July 1, 2013 under round 2 contracts. The round 2 product categories are the same as the round 1 rebid except for the addition of the negative pressure wound therapy (NPWT) category, the deletion of the complex power wheelchairs and mail-order diabetic supplies categories, and the extension of the support surfaces category to all round 2 competitive bidding areas.The round 2 contracts are for a term of 3 years. National mail-order diabetic testing supplies program. The CBP national mail-order diabetic testing supplies program competition was conducted at the same time as round 2, and its competitively determined single payment amounts were effective July 1, 2013. Unlike in the round 1 rebid, suppliers bidding for the national program had to demonstrate that their bids would cover at least 50 percent, by sales volume, of all types of diabetic testing strips on the market. These contracts are for a term of 3 years. Non-mail order Medicare payments are the same as the mail-order single payment amounts for the CBP-covered items. Round 1 recompete. In anticipation of the expiration of the round 1 rebid contracts, in 2012 CMS recompeted contracts for the nine round 1 rebid competitive bidding areas, referred to as the round 1 recompete. The round 1 recompete’s six product categories differ from the round 1 rebid categories by adding infusion pumps, NPWT pumps, deleting complex wheelchairs, and creating a new category that includes home equipment, such as hospital beds and commode chairs. The recompete contracts have a 3-year term, with an effective date of January 1, 2014. A contract supplier may no longer participate in CBP if CMS terminates its contract, if it voluntarily withdraws from Medicare, or if it has experienced a certain type of change of ownership. CMS can terminate a contract supplier’s CBP contract if a supplier fails to meet its contractual obligations. In that case, CMS may request that the supplier submit a corrective action plan, suspend or terminate the contract, preclude it from participating in CBP, or revoke its billing number. A contract supplier that has its CBP contract terminated may continue to operate as a Medicare supplier and submit Medicare claims for non-CBP covered items and services. Contract suppliers may choose to voluntarily withdraw from Medicare, and thus no longer be a Medicare supplier. Contract suppliers may also have a change in ownership that impacts their participation in CBP, but their CBP contracts may be transferred only under certain circumstances. A change in ownership, also referred to as a CHOW, may result in either (1) a new entity or company that did not exist before the merger or acquisition transaction; or (2) a successor entity or company that exists before the transaction, merges or acquires a contract supplier, and continues to exist as it did before the transaction. If a contract supplier is negotiating an ownership change, the supplier must notify CMS in advance and CMS may award the CBP contract to the entity that merges with or acquires the contract supplier in certain circumstances. These circumstances include when the successor entity is acquiring the assets of the contract supplier and submits a signed agreement to CMS in advance of the acquisition stating that it will assume all obligations under the contract. Medicare beneficiaries residing in competitive bidding areas have several sources available to help them locate contract suppliers and receive assistance for CBP-related issues. CBP Online Contract Supplier Locator. To locate a CBP contract supplier, beneficiaries can use the CMS online supplier locator tool on CMS’s Medicare website. The contract locator tool contains the names of the contract suppliers in each competitive bidding area, as well as the product categories for which they furnish CBP-covered items. Contract suppliers are responsible for submitting information regarding the specific brands of items they furnish in the upcoming quarter, and CMS uses this information to update the supplier locator. 1-800-MEDICARE Inquiries. CMS has directed beneficiaries to call its 1-800-MEDICARE beneficiary help line with CBP questions— referred to by CMS as inquiries. Callers are assisted by trained CBP customer service representatives (CSR) who use several scripts to answer general questions about CBP and specific product categories and assist beneficiaries in finding CBP suppliers. If a beneficiary’s inquiry cannot be addressed by the scripts, the CSR will forward the inquiry to an advanced-level CSR who will research the issue and respond to the beneficiary’s inquiry. Palmetto GBA and CMS regional offices. Palmetto GBA, the CBP implementation contractor, investigates all beneficiary or supplier complaints related to alleged CBP contract violations. In addition, Palmetto GBA provides CBP-related information and updates through its website. Local Palmetto GBA staff are stationed in the competitive bidding areas and work with CMS regional staff to monitor CBP activities and identify and address any emerging issues. CMS also uses its regional offices as the focal point for calls that cannot be resolved by 1-800-MEDICARE; for example, the offices may assist when a CSR is unable to help a beneficiary find a contract supplier. Competitive Acquisition Ombudsman (CAO). The CMS CAO was created to respond to CBP-related complaints and inquiries made by suppliers and individuals, and works with CMS officials and contractors and Palmetto GBA to resolve them. The CAO is required to submit an annual report detailing CBP-related activities to Congress. CMS has implemented several activities to monitor whether beneficiary access or satisfaction have been affected by the implementation of CBP. Inquiries and Complaints to 1-800-MEDICARE. CMS tracks all CBP-related inquiries to 1-800-MEDICARE. All calls are first classified as inquiries and CMS defines as a CBP complaint only those inquiries that cannot be resolved by any 1-800-MEDICARE CSR and is elevated to another entity, such as Palmetto GBA, CMS’s regional offices, or the CAO for resolution. Beneficiary Satisfaction Surveys. CMS conducted pre and post- implementation surveys to measure beneficiary satisfaction with CBP’s round 1 rebid. The pre-implementation survey was conducted from June to August 2010, the first post-implementation survey was conducted from August to October 2011, and the second post- implementation survey was conducted in June 2013. CMS surveyed beneficiaries in the nine round 1 rebid competitive bidding areas, as well as the nine comparator areas. National Claims History. CMS conducts daily monitoring of national Medicare claims data to identify utilization trends, monitor beneficiary access, address aberrations in services, and target potential fraud and abuse. CMS tracks health outcomes—such as hospitalizations, emergency room visits, physician visits, admissions to skilled nursing facilities, and deaths—for beneficiaries likely to use a CBP-covered product and who have used a CBP-covered product, in both competitive bidding areas and comparator areas to determine whether health outcomes in the competitive bidding areas remain consistent with national trends. CMS posts quarterly reports of these health outcomes on its website. Form C. Each quarter, CMS requires contract suppliers to submit a Form C that lists the specific CBP-covered DME items they plan to furnish the following quarter—including the brand names and equipment models. According to Palmetto GBA, this information is used to update the Medicare supplier directory tool and to evaluate beneficiary access to competitively bid items, as well as the quality of items and services. Secret shopping. CMS has conducted secret shopping calls in which individuals posed as beneficiaries and requested items, such as specific diabetic supplies from contract suppliers to determine whether the suppliers offer the supplies they claim to furnish. Secret shopping is conducted on a limited ad-hoc basis and may be done in response to specific complaints received, or to evaluate certain contract suppliers and monitor their performance and compliance with the terms of their CBP contracts. Our analysis of Medicare claims data found that for five of the six product categories we examined, the number of distinct beneficiaries furnished CBP-covered items generally decreased more in the competitive bidding areas than in the comparator areas in each month of 2011 and 2012 compared to the same month of 2010. CMS continued several ongoing monitoring activities and reported that the CBP round 1 rebid did not affect beneficiary access and satisfaction in its second year. In addition, several Medicare beneficiary advocacy groups that we interviewed did not report widespread access issues among their members. Our analysis of Medicare claims data found that the number of distinct beneficiaries furnished CBP-covered items generally decreased more in the nine competitive bidding areas than in the nine comparator areas in each month of 2011 and 2012 compared to the same month of 2010 for five of the six product categories we analyzed. However, the larger decreases in the number of beneficiaries furnished CBP-covered items in the competitive bidding areas do not necessarily indicate that CBP- covered beneficiaries did not receive needed DME. As CMS has reported, the CBP may have curbed previous inappropriate distribution of some CBP-covered items in competitive bidding areas. Our analysis found that fewer beneficiaries received one or more enteral product category items in each month of 2011 and 2012 compared to the same month of 2010. In 2012, the declines were roughly equivalent in the competitive bidding areas and the comparator areas. (See fig. 2.) For example, in the competitive bidding areas, the number of CBP-covered beneficiaries who received one or more items in May 2012 decreased by about 4 percent compared to May 2010. In the comparator areas, the number of beneficiaries who received one or more items was about 6 percent lower in May 2012 compared to May 2010. Our analysis found that fewer beneficiaries received one or more hospital bed product category items in all months of 2011 and 2012 compared to the same month of 2010 in the competitive bidding areas, with consistently lesser declines in the comparator areas over the same period. (See fig 3.) Our analysis of Medicare claims data found that the number of beneficiaries who received one or more oxygen product category items each month of 2011 and 2012 compared to the same month of 2010 decreased more in the competitive bidding areas than in the comparator areas, although there were substantial declines in both types of areas. (See fig. 4.) For example, compared to May 2010, the number of beneficiaries furnished one or more oxygen product category items decreased by about 9 percent in May 2011 and by about 22 percent in May 2012 in the competitive bidding areas. For the comparator areas, the number of beneficiaries furnished one or more items decreased by about 5 percent in May 2011 and by about 16 percent in May 2012. Our analysis found that substantially fewer beneficiaries in the competitive bidding areas received one or more walkers product category items in each month of 2011 and 2012 compared to the same month of 2010, although there were also declines in the comparator areas. (See fig. 5.) For example, compared to May 2010, the number of CBP-covered beneficiaries who received one or more walkers product category items was about 26 percent lower in May 2011 and about 24 percent lower in May 2012. In the comparator areas, compared to May 2010, 6 percent fewer beneficiaries received one or more walkers product category items in May 2011 and about 5 percent fewer beneficiaries received one or more of these items in May 2012. We found that fewer beneficiaries in the competitive bidding areas received one or more standard power wheelchair product category items each month of 2011 and 2012 compared to the same month of 2010. (See fig. 6.) For example, compared to May 2010, about 16 percent fewer beneficiaries in the competitive bidding areas received one or more standard power wheelchair product category items in May 2011 and about 15 percent fewer in May 2012. We did not include like information for the comparator areas because CMS changed the payment policy for standard power wheelchairs in non-competitive bidding areas only, making a comparison to the competitive bidding areas difficult. This change in payment policy, which was effective January 1, 2011, eliminated the option for the lump sum purchase payment for standard power wheelchairs in all non-competitive bidding areas. As it did in 2011, CMS continued several ongoing activities to monitor CBP’s effects on beneficiaries in 2012. CMS’s activities included monitoring the number of CBP-related inquiries and complaints made to 1-800-MEDICARE and the health outcomes of CBP-covered beneficiaries in competitive bidding areas. CMS reported that the implementation of the CBP round 1 rebid did not result in beneficiary access issues in the first two years of the program. In addition, representatives of several Medicare beneficiary advocacy groups that we interviewed did not report that widespread access issues occurred. According to data provided by CMS, 1-800-MEDICARE received a total of 44,249 CBP-related questions—referred to by CMS as inquiries—in 2012, which was fewer than the 127,466 CBP-related inquiries reported in 2011. The total number of quarterly CBP-related inquiries to 1-800-MEDICARE ranged from a high of 56,941 in the first quarter of 2011 (17,672 product- related inquiries plus 39,269 general CBP inquiries) to a low of 7,969 in the fourth quarter of 2012 (4,119 product-related inquiries plus 3,850 general CBP inquiries). (See fig. 8.) The majority of total inquiries for both 2011 and 2012 were general in nature; for example, CMS officials told us that inquiries were related to questions about the program or finding a contract supplier. About 2 million beneficiaries reside in CBP round 1 rebid competitive bidding areas; the ratio of inquiries to 1-800-MEDICARE compared with CBP beneficiaries is approximately 1 inquiry for every 45 beneficiaries. As was also the case in 2011, CMS data showed that the majority of all CBP product-category specific inquiries to 1-800-MEDICARE—over 13,000 in 2012—were related to mail-order diabetic supplies. The enteral product category and support surfaces product category received the fewest number of inquiries. (See fig. 9.) All calls to 1-800-MEDICARE are initially classified as inquiries and only recorded as complaints if they cannot be resolved by a CSR. In 2012, CMS classified 43 CBP-related calls to 1-800-MEDICARE as complaints, which was a decline from 151 complaints in 2011. Among the 43 complaints, 13 complaints were specific to the walkers product category, which was almost more than twice the number of complaints associated with any of the other product categories. Twelve of the 13 complaints were related to a specific walker brand and model that can be billed under HCPCS code E0147, which has the highest single payment amount of all CBP-covered HCPCS codes included in the walkers product category. Some complainants reported that contract suppliers would not provide the specific walker brand and model prescribed by beneficiaries’ physicians because the CBP single payment amount is lower than the cost of the item. According to Palmetto GBA data, in response to one complaint, it conducted secret shopping calls to two contract suppliers and was told by both that they did not carry the specific walker brand and model and could not obtain it. After Palmetto GBA explained the terms of their contracts, both contract suppliers then agreed to provide it. Half of these 12 complaints originated in the Miami competitive bidding area, where there was a decline in utilization for these walkers. According to CMS, the agency continues to monitor national Medicare claims data to identify utilization trends, monitor health outcomes and beneficiary access, address aberrations in services, and target potential fraud and abuse. As part of this effort, CMS monitors a range of health outcomes—including deaths, hospitalizations, emergency room visits, physician visits, and admissions to skilled nursing facilities—for beneficiaries likely to use a CBP-covered item or who have used a CBP- covered item, in both competitive bidding areas and their comparator areas. In both 2011 and 2012, CMS’s monitoring of health outcomes from national claims data indicated that CBP-covered beneficiaries continued to have access to necessary and appropriate CBP-covered items and supplies, and that health outcomes in the competitive bidding areas were consistent with national trends. However, as we previously reported,while these outcomes are reassuring, they may not reflect other outcomes that did not require physician, hospital, or emergency room visits, such as whether beneficiaries received the DME item they needed on time, or whether health outcomes were caused by problems accessing CBP-covered DME. CMS data show that the agency monitored beneficiary access by conducting more secret shopping calls in 2012 than it did in 2011—300 versus 32. According to that data, the highest number of secret shopping calls in 2012 involved the oxygen product category (109) and the second highest number of calls involved the walker product category (58). According to CMS officials, secret shopping calls were prompted by beneficiary and industry concerns expressed to CMS. For example, CMS officials told us that the agency received complaints that contract suppliers were not providing liquid oxygen equipment and specific walker models. According to these officials, when conducting secret shopper calls, CMS provides contract suppliers additional education on competitive bidding program and supplier quality standard requirements. CMS then conducts subsequent secret shopper calls to verify that the contract suppliers are adhering to the requirements. CMS conducted a pre-CBP implementation survey in 2010 and post-CBP implementation survey in 2011 to measure beneficiary satisfaction with the CBP round 1 rebid’s first year. According to CMS data, the agency obtained responses from at least 400 beneficiaries in each of the nine competitive bidding areas and nine comparator areas to collect beneficiary satisfaction ratings for six questions related to the beneficiary’s initial interaction with DME suppliers, the training received regarding DME items, the delivery of the DME item, the quality of service provided by the supplier, the customer service provided by the supplier, and the supplier’s overall complaint handling. According to CMS data, results of the pre-2010 and post-CBP 2011 implementation surveys showed that responses from beneficiaries were similar and generally positive in both the competitive bidding areas and comparator areas.CMS officials told us that CMS conducted a follow-up beneficiary satisfaction survey in June 2013 using the original survey questions and methodology, but as of November 20, 2013, survey results were not yet available. We interviewed representatives from several beneficiary advocacy groups about their members’ experiences with CBP, and whether they were aware of any CBP-related beneficiary access and choice issues that may have occurred among their members. The beneficiary groups represent beneficiaries with specific issues, such as those with diabetes and disabilities requiring wheelchairs. In general, these representatives either reported no or few concerns, or provided anecdotal examples of beneficiary access issues, such as difficulty obtaining wheelchair repairs, or difficulty locating contract suppliers. They did not indicate that their CBP-covered beneficiary members had been negatively affected by widespread access issues or concerns in the first two years of the CBP round 1 rebid. For the round 1 rebid product categories we examined, a small number of contract suppliers accounted for a large portion of Medicare total allowed charges across 2011 and 2012. One contract supplier had a high percentage of the total market share for the standard power wheelchair product category across 2011 and 2012, but was terminated as a contract supplier in 2013. Few contract suppliers left the CBP through contract terminations, voluntarily withdrawing from Medicare, or having had a change in ownership. We examined the contract supplier market share development for six product categories in 2011 and 2012 and found that the trends for each product category were relatively consistent across the nine competitive bidding areas. For each product category, we illustrate typical market share development trends by showing examples from two competitive bidding areas. (See fig. 10 through fig. 21.) For five of the six product categories, we found that, in general, the top 4 suppliers—those with the highest individual Medicare total allowed charges across all quarters of 2011 and 2012—accounted for a large portion of the market in all competitive bidding areas, although the top 4 suppliers for each product In our examples, the category could vary by competitive bidding area.top 4 suppliers’ combined market share in the fourth quarter of 2012 ranged from 50 percent for the enteral product category in the Dallas competitive bidding area to 86 percent for the walkers product category in the Orlando competitive bidding area. Our analysis of Medicare claims data for the CPAP/RAD product category indicates that, in general, the market share among the top 4 contract suppliers increased steadily, the combined market share for the other contract suppliers’ remained relatively consistent with some small increases, and the non-contract suppliers’ combined market share decreased throughout 2011 and 2012. For example, in the Pittsburgh competitive bidding area, by the fourth quarter of 2012, the top 4 contract suppliers combined had about 63 percent of the market, while the other 10 contract suppliers combined had 35 percent of the market. (See fig. 10.) This is fairly similar to the contract supplier market share trend in the Cleveland competitive bidding area, where the top 4 contract suppliers combined had about 73 percent of the market and the other 8 contract suppliers combined had about 26 percent in the fourth quarter of 2012. (See fig. 11.) Our analysis of Medicare claims data for the enteral product category indicates that, in general, the market share of the top 4 contract suppliers and all other contract suppliers combined remained relatively consistent or increased throughout 2011 and 2012. For example, in the Cincinnati competitive bidding area, the top 4 contract suppliers combined had about 70 percent or more of the market share throughout 2011 and 2012. For that same time period, the other 10 contract suppliers combined generally had about 20 percent of the market in that area. (See fig. 12.) In the Dallas competitive bidding area, the top 4 contract suppliers combined had less of the market share—between about 43 to 55 percent each quarter of 2011 and 2012—while the other 20 contract suppliers had more of the market share each quarter. (See fig. 13.) Our analysis of Medicare claims data for the hospital bed product category indicates that contract suppliers’ percentages of Medicare total allowed charges increased steadily throughout 2011 and 2012 as non- contract suppliers’ percentages of Medicare total allowed charges substantially decreased. In both the Riverside and Orlando competitive bidding areas, the top 4 contract suppliers accounted for more than 80 percent of the market by the fourth quarter of 2012, with the other contract suppliers totaling about 10 percent of Medicare total allowed charges in each of the areas. (See fig.14 and fig. 15.) Our analysis of Medicare claims data for the oxygen product category indicates that the market share of the top 4 contract suppliers and all other contract suppliers combined remained relatively consistent or increased from the first quarter of 2011 to the fourth quarter of 2012. For example, in the Cleveland competitive bidding area, the top 4 suppliers had about 65 percent of the market in the first quarter of 2011 and about 71 percent of the market in the fourth quarter of 2012. (See fig. 16.) In the Kansas City competitive bidding area, the top 4 suppliers had about 71 percent of the market in the first quarter of 2011 and about 83 percent of the market in the fourth quarter of 2012. (See fig. 17.) Our analysis of Medicare claims data for the walkers product category indicates that the market share of the top 4 contract suppliers and all other contract suppliers combined remained relatively consistent throughout 2011 and 2012. For example, in the Pittsburgh competitive bidding area, the top 4 contract suppliers combined had at least 65 percent of the total market share each quarter of 2011 and 2012. The other 11 contract suppliers combined had between about 20 to 30 percent of the market share each quarter over that time period. (See fig. 18.) The Orlando competitive bidding area showed a similar market share trend where the top 4 contract suppliers combined maintained at least 72 percent of the total market share each quarter of 2011 and 2012. The other 13 contract suppliers combined consistently had about 20 percent each quarter. (See fig. 19.) Our analysis of Medicare claims data for the standard power wheelchair product category indicates that the market share for the top contract supplier, The Scooter Store’s Alliance Seating & Mobility Division (The Scooter Store), was very high in all quarters of 2011 and 2012 across all competitive bidding areas. Specifically, The Scooter Store had the highest individual supplier percent of all CBP-covered Medicare total allowed charges across all quarters of 2011 and 2012 combined for the standard power wheelchair product category in eight of the nine competitive bidding areas, and the second highest in the ninth competitive bidding area. The Scooter Store’s individual percentages of all Medicare total allowed charges in the fourth quarter of 2012 were: Pittsburgh (82 percent), Orlando (81 percent), Miami (75 percent), Riverside (72 percent), Cleveland (62 percent), Dallas (60 percent), Charlotte (48 percent), Kansas City (41 percent), and Cincinnati (37 percent). In the Miami competitive bidding area, Medicare claims data show that The Scooter Store’s highest individual percentage of all Medicare total allowed charges was about 84 percent in the second quarter of 2011. (See fig. 20.) In the Riverside competitive bidding area, The Scooter Store’s highest individual percentage of all Medicare total allowed charges was about 72 percent in the fourth quarter of 2012. (See fig. 21.) In September 2013, CMS issued a termination notice, with an effective date of October 26, 2013, for The Scooter Store’s CBP round 1 rebid contract in all competitive bidding areas. Prior to issuing the termination notice, CMS removed all references to both The Scooter Store and its Alliance Seating & Mobility Division from all CBP round 1 rebid contract supplier lists on its website in March 2013. A CMS official told us that the removal occurred because of compliance issues identified with The Scooter Store’s round 1 rebid contract and that CMS began initiating the contract termination process at that time. According to CMS, it carefully scrutinizes CBP bidders to ensure that only qualified suppliers are selected to participate in the program; however, The Scooter Store had been the subject of allegations of fraud prior to being awarded a contract in both CBP’s round 1 and round 1 rebid. Specifically, in 2007, The Scooter Store entered into a civil settlement agreement with the U.S. Government to resolve several lawsuits and agreed to pay $4 million and relinquish its right to receive reimbursement for pending Medicare claims.violated the civil False Claims Act and defrauded the United States by, among other things, enticing some beneficiaries to obtain power scooters covered by Medicare and Medicaid and then supplying more costly power wheelchairs that beneficiaries did not want, did not need, or could not use. In one of the lawsuits, the Government alleged that the company Although too soon to determine the full effects, The Scooter Store’s 2013 termination as a contract supplier could potentially result in access issues for beneficiaries residing in the CBP round 1 rebid competitive bidding areas. For example, one round 1 rebid contract supplier we interviewed told us that her company received calls from some of The Scooter Store’s beneficiaries seeking wheelchair repairs. However, this contract supplier and two others told us that some contract suppliers are reluctant or unwilling to repair a wheelchair that they did not originally provide because if the contract suppliers did the repairs, and CMS later determined that The Scooter Store had furnished a wheelchair that did not meet documentation requirements, CMS could recover payments made to the repairing contract suppliers. In the round 1 rebid’s second year, a few contract suppliers—8 percent— had their contracts terminated by CMS or voluntarily withdrew from Medicare, and some had an ownership change. Contract suppliers continued to use subcontractors to provide certain services to beneficiaries in the round 1 rebid competitive bidding areas, but no new agreements were disclosed in 2012. The number of grandfathered suppliers decreased in 2012 to the point that CMS discontinued its monitoring as rental agreements expired. By the end of the CBP’s second year, 27 of the original 356 contract suppliers—about 8 percent—had been terminated by CMS or had voluntarily withdrawn from Medicare, according to CMS data. Eleven contract suppliers were terminated—4 in 2012 and 7 in 2011. Nine terminated suppliers were small suppliers as defined for CBP. One terminated supplier was not experienced in one of its competitive bidding areas; all were experienced in their product categories. The 11 terminated contract suppliers had a total of 22 round 1 rebid product category and competitive bidding area combinations. (See table 1.) The oxygen product category and the Miami competitive bidding area were the most affected. Sixteen contract suppliers withdrew voluntarily from Medicare, 7 in 2012 and 9 in 2011. Of these 16 withdrawn suppliers, 13 were small suppliers. Two suppliers that withdrew had no experience in 1 of their product categories; and all 16 were experienced in their competitive bidding areas. The 16 suppliers that withdrew had a total of 37 round 1 rebid product category and competitive bidding area combinations. (See table 2.) The oxygen product category and the Miami competitive bidding area were the most affected. During the round 1 rebid’s first two years, 12 of the original 356 round 1 rebid contract suppliers—3 percent—had a change in ownership. (See table 3.) For 11 of the 12 changes, CMS awarded the round 1 rebid contracts to the acquiring entity as the entity assumed the obligations under these contracts. In 2012, the only ownership change involved a contract supplier that purchased another contract supplier, but did not assume the purchased supplier’s CBP contracts. In this ownership change, the purchasing contract supplier already had CBP contracts in the same competitive bidding areas for the same product categories, and began serving the purchased contract supplier’s Medicare beneficiaries including its grandfathered beneficiaries. While contract suppliers have continued to use subcontractor suppliers to assist them in furnishing items to CBP-covered beneficiaries, CMS officials told us no contract suppliers disclosed any new subcontracting agreements in 2012 or during the first three months of 2013. As of April 2013, CMS data indicated that 116 distinct contract suppliers have had at least one subcontracting agreement; in total, there were 730 agreements involving 228 distinct subcontractor suppliers. Forty-seven percent (55) of the 116 contract suppliers had one subcontract agreement. The other 61 contract suppliers had multiple subcontracts, including one contract supplier with 50 agreements. Eight of the 116 contract suppliers had subcontract agreements that ended in 2011, 2012, or early 2013. CMS officials also told us that the number of grandfathered suppliers had so diminished that the agency was no longer monitoring them after the second quarter 2012. As we previously reported, the number of grandfathered suppliers had declined steadily during the rebid’s first year (2011); in December 2011, 22 percent (575 of 2,594) of the grandfathered suppliers were still billing Medicare for CBP-covered beneficiaries they had at the end of December 2010, the year before the CBP began. Comparing the third quarters of 2010, before the rebid began, and 2012, the rebid’s second year, both the number of suppliers and their Medicare allowed charges generally decreased more in the competitive bidding areas than in the comparator areas. (See app. I.) The number of suppliers with Medicare allowed charge amounts of $2,500 or more per quarter decreased an average of 27 percent in the competitive bidding areas, and 5 percent in the comparator areas. (See table 4.) All nine competitive bidding areas and six of the nine comparator areas experienced decreases in those supplier numbers. The Miami competitive bidding area experienced the greatest change in suppliers—decreasing by 227 suppliers—a 32 percent change. The number of large suppliers, which we define as having quarterly allowed Medicare charges of $100,000 or more, decreased an average of 18 percent in the competitive bidding areas, while there was essentially no change in the average number of large suppliers in the comparator areas. All nine competitive bidding areas and three of the nine comparator areas had decreases in these large suppliers. The Cincinnati competitive bidding area had the greatest percentage decrease in suppliers at this level—32 percent. The total Medicare allowed charges for the same time period also decreased for all nine competitive bidding areas and all nine comparator areas. (See app. II.) The average decrease for the competitive bidding areas was 28 percent, and 7 percent for the comparator areas. (See table 5.) There were three competitive bidding areas with the highest total charge decrease of 32 percent, including for example, the Cincinnati area’s charges that decreased about $4.2 million from third quarter 2010 ($12.9 million) to third quarter 2012 ($8.7 million). The Orlando competitive bidding area had the lowest percentage decrease change— 22 percent—a decrease in total charges of about $3.3 million. Among the comparator areas, the highest total charge decrease was San Diego— 15 percent—a decrease of about $2 million (from $13.7 million to $11.6 million), while Virginia Beach had the lowest decrease— 0.1 percent—or $17,077 (from $12,603,542 to $12,586,465). The CBP round 1 rebid’s savings for both the Medicare program and the rebid-covered beneficiaries continued in the second year, with CMS reporting total savings of more than $400 million in the rebid’s first two years due to its lower payments, decreased utilization, and lower beneficiary coinsurance. In the rebid’s second year, beneficiary utilization of CBP-covered DME items continued to decrease—more in the rebid’s competitive bidding areas than the comparator areas. CMS’s monitoring activities, however, did not indicate beneficiary access issues. As we reported in 2012, we do not assume that all pre-CBP utilization was appropriate, and CBP may be continuing to reduce unnecessary utilization. CMS’s fraud prevention efforts may also be affecting DME utilization. Continued monitoring of CBP experience is important to determine the full effects it may have on Medicare beneficiaries and DME suppliers. It will be important to determine whether the DME utilization trends in the round 1 rebid’s first two years are similar to those in CBP’s other rounds. With the CBP’s 3-year round 1 rebid complete, the CBP’s 2013 round 2 expansion into an additional 100 competitive bidding areas, the 2013 implementation of the national mail-order diabetic testing supplies program, and the 2013 selection of the new contract suppliers in the original nine areas for the next 3-year contracts beginning in 2014, significant new data will soon be available to further assess the impact of the program. HHS reviewed a draft of this report and provided written comments which are reprinted in appendix III. HHS also provided technical comments, which we incorporated as appropriate. In its general comments, HHS stated that CMS will continue monitoring the CBP to ensure Medicare beneficiaries are not adversely affected by the program, including continuing to use its real-time claims monitoring system. The monitoring activities are important as the CBP has expanded to include 100 additional competitive bidding areas and a national mail-order program for diabetic testing supplies. HHS also stated that it anticipates CBP will provide substantial savings for both the Medicare Part B Trust Fund and Medicare beneficiaries. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services and appropriate congressional committees. The report will also be available at no charge on our website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. In addition to the contact named above, key contributors to this report were Martin T. Gahart, Assistant Director; Yesook Merrill, Assistant Director; Todd Anderson; Dan Lee; Drew Long; Michelle Paluga; Hemi Tewarson; and Opal Winebrenner. Medicare: Review of the First Year of CMS’s Durable Medical Equipment Competitive Bidding Program’s Round 1 Rebid. GAO-12-693. Washington, D.C.: May 9, 2012. Medicare: The First Year of the Durable Medical Equipment Competitive Bidding Program Round 1 Rebid. GAO-12-733T. Washington, D.C.: May 9, 2012. Medicare: Issues for Manufacturer-level Competitive Bidding for Durable Medical Equipment. GAO-11-337R. Washington, D.C.: May 31, 2011. Medicare: CMS Has Addressed Some Implementation Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program for the Round 1 Rebid. GAO-10-1057T. Washington, D.C.: Sept. 15, 2010. Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program. GAO-10-27. Washington, D.C.: Nov. 6, 2009. Medicare: Covert Testing Exposes Weaknesses in the Durable Medical Equipment Supplier Screening Process. GAO-08-955. Washington, D.C.: July 3, 2008. Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical. GAO-08-767T. Washington, D.C.: May 6, 2008. Medicare: Improvements Needed to Address Improper Payments for Medical Equipment and Supplies. GAO-07-59. Washington, D.C.: Jan. 31, 2007. Medicare Payment: CMS Methodology Adequate to Estimate National Error Rate. GAO-06-300. Washington, D.C.: March 24, 2006. Medicare Durable Medical Equipment: Class III Devices Do Not Warrant a Distinct Annual Payment Update. GAO-06-62. Washington, D.C.: March 1, 2006. Medicare: More Effective Screening and Stronger Enrollment Standards Needed for Medical Equipment Suppliers. GAO-05-656. Washington, D.C.: Sept. 22, 2005. Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending for Power Wheelchairs. GAO-05-43. Washington, D.C.: Nov. 17, 2004. Medicare: Past Experience Can Guide Future Competitive Bidding for Medical Equipment and Supplies. GAO-04-765. Washington, D.C.: Sept. 7, 2004. Medicare: CMS Did Not Control Rising Power Wheelchair Spending. GAO-04-716T. Washington, D.C.: April 28, 2004. | To achieve Medicare savings for DME, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required that CMS implement the CBP for certain DME. In 2008, the Medicare Improvements for Patients and Providers Act terminated the first round of supplier contracts and required CMS to repeat the CBP round 1—referred to as the round 1 rebid, resulting in the award of contracts to suppliers with CBP payments that began January 1, 2011. GAO was asked to review issues concerning the rebid's second year of operation—2012. This report reviews the round 1 rebid's effects on (1) Medicare beneficiaries, (2) the market share of contract suppliers, and (3) all suppliers, including both contract and non-contract suppliers (the suppliers not awarded rebid contracts.) To examine the effects on Medicare beneficiaries, GAO compared Medicare claims data for 2011 and 2012 with that for 2010, the year before the round 1 rebid. GAO also examined other information about CMS's efforts to monitor the effects of the CBP, and interviewed DME industry representatives and officials from Medicare beneficiary organizations. To examine the effects on both contract and non-contract suppliers, GAO compared Medicare claims data for 2012 with that for 2010 and analyzed other data provided by CMS. The Medicare competitive bidding program (CBP) for durable medical equipment (DME) is administered by the Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Services. Under the CBP, only competitively selected contract suppliers can furnish certain DME product categories (such as oxygen supplies and hospital beds) at competitively determined prices to Medicare beneficiaries in designated competitive bidding areas. The CBP's round 1 rebid was in effect for a 3-year period, from 2011 through 2013. It included nine DME product categories in nine geographic areas. For CBP monitoring purposes, CMS also selected nine comparator areas that were demographically similar to the rebid areas. GAO's analysis found that in 2012, the second year of the round 1 rebid: The number of beneficiaries furnished DME items included in the CBP generally decreased more in the CBP areas than in the comparator areas. For example, the number of beneficiaries furnished oxygen supplies decreased by about 22 percent in the CBP areas and by about 16 percent in the comparator areas. According to CMS, CBP may have reduced inappropriate usage of DME and these decreases do not necessarily reflect beneficiary access issues. Based on its monitoring tools, which include comparing changes in the health outcomes of beneficiaries in the CBP areas to those in the comparator areas, CMS has concluded that beneficiaries have not been affected adversely by the CBP. In general, a small number of contract suppliers had a large proportion of the market share in the nine competitive bidding areas. The top four contract suppliers generally accounted for a large proportion of the market in all CBP areas, although the top four suppliers for each product category were not the same in every competitive bidding area. CMS has reported that few contract suppliers had contracts terminated by the agency or voluntarily withdrew from Medicare. The total number of DME suppliers and Medicare allowed charges decreased more in the CBP areas than in the comparator areas. For example, the number of suppliers in the CBP areas with Medicare allowed charges of $2,500 or more decreased, on average, 27 percent. In the comparator areas, supplier numbers decreased by 5 percent. The decreases in supplier numbers may reflect other factors, such as CMS's efforts to reduce Medicare DME fraud. The round 1 rebid's first 2 years achieved Medicare cost savings of about $400 million as estimated by CMS, and did not appear to have adversely affected beneficiary access to CBP-covered items. However, with CBP's national mail-order diabetic testing supplies program and expansion into an additional 100 bidding areas in July 2013, it will be important for CMS to continue its efforts to monitor the effects of the CBP. In commenting on a draft of this report, HHS cited the results of CMS's monitoring of beneficiaries' access to CBP items as evidence that CBP has not adversely affected beneficiaries. |
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VA’s disability compensation claims process starts when a veteran submits a claim to VA (see fig. 1). A claim folder is created at 1 of VA’s 57 regional offices, and a Veterans Service Representative (VSR) then reviews the claim and helps the veteran gather the relevant evidence needed to evaluate the claim. Such evidence includes the veteran’s military service records, medical examinations, and treatment records from Veterans Health Administration (VHA) medical facilities and private medical service providers. Also, if necessary to provide support to substantiate the claim, VA will provide a medical examination for the veteran. Once VBA has gathered the supporting evidence, a Rating Veterans Service Representative (RVSR)—who typically has more experience at VBA than a VSR—evaluates the claim and determines whether the veteran is eligible for benefits. If so, the RVSR assigns a percentage rating. A veteran may subsequently reopen a claim to request an increase in disability compensation from VA if, for example, a service-connected disability worsens or a new disability arises. If the veteran disagrees with VA’s decision regarding a claim, he or she can submit a written Notice of Disagreement to the regional office handling the claim. In response to such a notice, VBA reviews the case and provides the veteran with a written explanation of the decision— known as a Statement of the Case—if VBA does not grant all appealed issues. If the veteran further disagrees with the decision, he or she may appeal to the Board of Veterans’ Appeals (the Board) which conducts a hearing at the veteran’s request, then grants benefits, denies the appeal, or returns the case to VBA to obtain additional evidence necessary to decide the claim. If the veteran is dissatisfied with the Board’s decision, he or she may appeal, in succession, to the U.S. Court of Appeals for Veterans Claims, to the Court of Appeals for the Federal Circuit, and finally to the Supreme Court of the United States. In recent years, VA compensation claims processing timeframes have increased. Specifically, the average days pending increased from 116 days in fiscal year 2009 to 254 days in fiscal year 2012. During the same time period, the average days to complete increased from 161 to 260 days. VBA also collects data on the timeliness of the different phases of the claims process, which is used to identify trends and bottlenecks throughout the process. In fiscal year 2011, each phase took longer on average than its stated agency timeliness target (see fig. 2). In fiscal year 2011, the national averages for the initiating development, gathering evidence, and rating decision phases were 44, 72, and 57 days, respectively, over their timeliness targets. In recent years, VA’s claims processing production has not kept pace with the substantial increase in incoming claims. In fiscal year 2011, VA completed over 1 million compensation rating claims, a 6 percent increase from fiscal year 2009. However, the number of VA compensation rating claims received had grown 29 percent—from 1,013,712 in fiscal year 2009 to 1,311,091 in fiscal year 2011 (see fig. 3). As a result, the number of backlogged claims—defined as those claims awaiting a decision for more than 125 days—has increased substantially since 2009. As of August 2012, VA had 856,092 pending compensation rating claims, of which 568,043 (66 percent) were considered backlogged. One factor that contributed to the substantial increase in claims received was the commencement in October 2010 of VBA’s adjudication of 260,000 previously denied and new claims when a presumptive service connection was established for three additional Agent Orange diseases. VBA gave these claims a high priority and assigned experienced claims staff to process and track them. VBA officials said that 37 percent of its claims processing resources nationally were devoted to adjudicating Agent Orange claims from October 2010 to March 2012. VBA officials in one regional office we spoke to said that all claims processing staff were assigned solely to developing and rating Agent Orange claims for 4 months in 2011, and that no other new and pending claims in the regional office’s inventory were processed during that time. Also during this time period, special VBA teams—known as brokering centers—which previously accepted claims and appeals from regional offices experiencing processing delays, were devoted exclusively to processing Agent Orange claims. According to VBA, other factors that contributed to the growing number of claims include an increase in the number of veterans from the military downsizing after 10 years of conflict in Iraq and Afghanistan, improved outreach activities and transition services to servicemembers and veterans, and difficult financial conditions for veterans during the economic downturn. Similar to claims processing, VA regional office appeals processing has not kept pace with incoming appeals received. For example, in fiscal year 2012, VA received 121,786 Notices of Disagreement. However, the number of Statements of the Case that were processed by VBA was only 76,685. As a result, the number of Notice of Disagreements awaiting a decision grew 76 percent from fiscal years 2009 to 2012 and, during that period, the time it took VA to process a Statement of the Case increased 57 percent—from 293 days to 460 days on average. According to VBA officials, staff shortages represent a primary reason that appeals timeliness at VA regional offices has worsened. For example, VBA officials at each of the five regional offices we met with stated that over the last several years appeals staff have also had to train and mentor new staff, conduct quality reviews, as well as develop and rate disability claims to varying degrees. A 2012 VA OIG report noted that VA regional office managers did not assign enough staff to process appeals, diverted staff from processing appeals, and did not ensure that appeals staff acted on appeals promptly because, in part, they were assigned responsibilities to process initial claims, which were given higher priority. According to VA officials, federal laws and court decisions over the past decade have expanded veterans’ entitlement to benefits but have also added requirements that can negatively affect claims processing times. For example, the Veterans Claims Assistance Act of 2000 (VCAA) added a requirement that VA assist a veteran who files a claim in obtaining evidence to substantiate the claim before making a decision. This requirement includes helping veterans obtain all relevant federal and non-federal records. VA is required to continue trying to obtain federal records, such as VA medical records, military service records, and Social Security records, until they are either obtained or the associated federal entity indicates the records do not exist. VA may continue to process the claim and provide partial benefits to the veteran, but the claim cannot be completed until all relevant federal evidence is obtained. Because VA must consider all evidence submitted throughout the claims and appeals process, if a veteran submits additional evidence or adds a condition to a claim late in the process it can require rework and may subsequently delay a decision, according to VBA central office officials. VBA officials at regional offices we spoke to said that submitting additional evidence may add months to the claims process. New evidence must first be reviewed to determine what additional action, if any, is required. Next, another notification letter must be sent to the veteran detailing the new evidence necessary to redevelop the claim. VA may also have to obtain additional records or order another medical examination before the claim can be rated and a decision made. Furthermore, while VA may continue to process the claim and provide partial benefits to the veteran, a claim is not considered “complete” until a decision is made on all submitted conditions. Moreover, a veteran has up to 1 year, from the notification of VA’s decision, to submit additional evidence in support of the claim before the decision is considered final. Similarly, for an appeal, veterans may submit additional evidence at any time during the process. If the veteran submits additional evidence late in the process after VA completes a Statement of the Case, VA must review the new evidence, reconsider the appeal, and provide another written explanation of its decision—known as a Supplemental Statement of the Case. Congress recently passed a law allowing VA to waive review of additional evidence submitted after the veteran has filed a substantive appeal and instead have the new evidence reviewed by the Board to expedite VA’s process of certifying appeals to the Board. According to VBA officials, delays in obtaining military service and medical treatment records, particularly for National Guard and Reserve members, have significantly lengthened the evidence gathering phase. According to VBA officials, 43 percent of Global War on Terror veterans are National Guard and Reserve members. Department of Defense (DOD) guidance requires military staff to respond to VA requests for National Guard and Reserve records in support of VA disability compensation claims. However, VBA area directors and officials at all five regional offices we met with acknowledged that delays in obtaining these records are system-wide. Military records of National Guard or Reserve members can often be difficult to obtain, in particular, because these servicemembers typically have multiple, non-consecutive deployments with different units and their records may not always be held with their reserve units and may exist in multiple places. Moreover, according to VBA officials, National Guard and Reserve members may be treated by private providers between tours of active duty and VA may have to contact multiple military personnel and private medical providers to obtain all relevant records, potentially causing delays in the evidence gathering process. Difficulties obtaining SSA medical records can also lengthen the evidence gathering phase. Although VBA regional office staff have direct access to SSA benefits payment histories, they do not have similar access to medical records held by SSA. If a veteran submits a disability claim and reports receiving SSA disability benefits, VA is required to help the veteran obtain relevant federal records, including certain SSA medical records, to process the claim. VBA’s policy manual instructs claims staff to fax a request for medical information to SSA and if no reply is received, to wait 60 working days before sending a follow-up request. If a response is not received after 30 days, claims staff are instructed to send an email request to an SSA liaison. VBA officials at four of the five regional offices we reviewed told us that when following this protocol, they have had difficulty obtaining SSA medical records in a timely fashion. Moreover, they reported having no contact information for SSA, beyond the fax number, to help process their requests. In complying with VA’s duty to assist requirement, VBA staff told us they continue trying to retrieve SSA records by sending follow-up fax requests until they receive the records or receive a response that the records do not exist. VBA area directors said some regional offices have established relationships with local SSA offices and have better results, but obtaining necessary SSA information has been an ongoing issue nationally. For example, officials at one regional office said a response from SSA regarding a medical records request can sometimes take more than a year to receive. VBA’s work processes, stemming mainly from its reliance on a paper- based claims system, can lead to misplaced or lost documents, and contribute to lengthy processing times. VBA officials at three of the five regional offices we met with noted that errors and delays in handling, reviewing, and routing incoming mail to the correct claim folder can delay the processing of a claim or cause rework. For example, VBA officials at one regional office said that claims may be stalled in the evidence gathering phase if mail that contains outstanding evidence is misplaced or lost. In addition, claims staff may rate a claim without knowledge of the additional evidence submitted and then, once the mail is routed to the claim folder, have to rerate the claim in light of the new evidence received. Furthermore, VBA officials told us that processing can also be delayed if mail staff are slow to record new claims or appeals into IT systems. As of August 2012, VBA took 43 days on average to record Notices of Disagreement in the appeals system—36 days longer than VBA’s national target. VBA area directors said that mail processing timeliness varies by regional office and that the more efficient offices in general do a better job of associating mail with the correct claims folder. VBA officials also said that moving physical claims folders among regional offices and medical providers contributes to lengthy processing times. According to a 2011 VA OIG report, processing delays occurred following medical examinations because staff could not match claims- related mail with the appropriate claim folders until the folders were returned from the VA Medical Center. In addition, processing halts while a claim folder is sent to another regional office or brokering center. Based on a review of VA documents and interviews with VBA officials, we identified 15 efforts with a stated goal of improving claims and appeals timeliness. We selected 9 for further review—primarily based on interviews with VBA officials and a review of recent VA testimonies—that have the purpose of reducing disability claims and appeals processing times. VBA has several ongoing efforts to leverage internal and external resources to better manage its workload (see fig. 4). For example, VBA began the Veterans Benefits Management Assistance Program (VBMAP) in late fiscal year 2011 to obtain contractor support for evidence gathering for approximately 279,000 disability claims. Under VBMAP, the contractor gathers evidence in support of a claim and then sends the claim file back to the originating regional office, which reviews the claim for completeness and quality and then assigns a rating. Contractor staff are required to complete their work within 135 days of receiving the file and provide VBA with status reports that include several measures of timeliness, including the time it took to receive medical evidence from providers and to return a claim to VBA for rating. As of June 2012, VBA regional offices we spoke with were awaiting the first batch of claims that were to be sent to the contractors. To help speed up the claims and appeals processes, VBA also has several efforts that modify program requirements or change procedures (see fig. 4). The Fully Developed Claims (FDC) program began as a pilot in December 2008 and was implemented nationwide in June 2010. Normally, once a veteran submits a claim, VBA will review the claim and then send the veteran a letter detailing additional evidence required to support it. The FDC program eliminates this step because the required notification is provided to the veteran directly on the FDC form, thus reducing the time VBA would normally spend gathering evidence for the veteran. In exchange for expedited processing, veterans participating in the FDC program send VBA any relevant private medical evidence with the claim and certify that they have no additional evidence to provide. According to VBA officials, in the first 2 years of the program, VBA processed 33,001 FDC claims, taking an average of about 98 days to complete—8 days longer than the goal of 90 days for these claims. However, as of July 2012, veteran participation in the FDC program had been low—only 4 percent of all compensation rating claims submitted in 2012. The Claims Organizational Model initiative is aimed at streamlining the overall claims process (see fig. 4). For this initiative, VBA created specialized teams that process claims based on their complexity. Specifically, an “express team” processes claims with a limited number of conditions or issues; a “special operations” team processes highly complex claims, such as former prisoners of war or traumatic brain injury cases; and a core team works all other claims. Each of these teams is staffed with both development and ratings staff, which VBA believes will lead to better coordination and knowledge-sharing. Under this model, VBA also redesigned the procedures that mailrooms use to sort and process incoming claims. As of December 2012, VBA had implemented the initiative at 51 regional offices. According to VA, the remaining regional offices will be transitioned to the Claims Organizational Model by the second quarter of fiscal year 2013. In 2010, VBA began to develop the Veterans Benefits Management System (VBMS), a paperless claims processing system that is intended to help streamline the claims process and reduce processing times (see fig. 4). According to VBA officials, VBMS is intended to convert existing paper-based claims folders into electronic claims folders and allow VBA employees electronic access to claims and evidence. Once completed, VBMS is also expected to allow veterans, physicians, and other external parties to submit claims and supporting evidence electronically. In August 2012, VA officials told us that VBMS was still not ready for national deployment, citing delays in scanning claims folders into VBMS as well as other software performance issues. A recent VA OIG report also concluded that VBMS has experienced some performance issues and the scanning and digitization of claims lacked a detailed plan. However, according to VA, as of December 2012, 18 regional offices were piloting VBMS and all regional offices are expected to implement VBMS by the end of calendar year 2013. We have noted that VA’s ongoing efforts should be driven by a robust, comprehensive plan; however when we reviewed VBA’s plan documents, we found that they fell short of established criteria for sound planning. Specifically, VBA provided us with several documents, including a PowerPoint presentation and a matrix that provided a high-level overview of over 40 initiatives, but, at the time of our review, could not provide us with a robust plan that tied together the group of initiatives, their inter- relationships, and subsequent impact on claims and appeals processing times. Although there is no established set of requirements for all plans, components of sound planning are important because they define what organizations seek to accomplish, identify specific activities to obtain desired results, and provide tools to help ensure accountability and mitigate risks. In our December 2012 report, we recommended that VBA seek improvements for partnering with relevant federal and state military officials to reduce the time it takes to gather military service records from National Guard and Reserve sources. We also recommended that VBA develop improvements for partnering with Social Security Administration officials to reduce the time it takes to gather medical records. Lastly, we recommended that VBA develop a robust backlog reduction plan for its initiatives that, among other best practice elements, identifies implementation risks and strategies to address them and performance goals that incorporate the impact of individual initiatives on processing timeliness. VA generally agreed with our conclusions and concurred with our recommendations, and summarized efforts that are planned or underway to address them. For example, VA stated it has recently initiated several interagency efforts to the timeliness of record exchanges between VBA and DOD. In addition, VA stated that it is working with SSA to pilot a web- based tool to provide VA staff a secure, direct communication with SSA and to automate VA’s requests for SSA medical records. VA also agreed with our recommendation to develop a robust backlog plan for VBA’s initiatives and, subsequent to our report, published the Department of Veterans Affairs (VA) Strategic Plan to Eliminate the Compensation Claims Backlog. This plan includes implementation risks and performance metrics used to track the cumulative effect of its initiatives on processing times but still lacks individual performance goals and metrics for all initiatives. In conclusion, for years, VA’s disability claims and appeals processes have received considerable attention as VA has struggled to process disability compensation claims in a timely fashion. Despite this attention, VA continues to wrestle with several ongoing challenges—some of which VA has little or no control over—that contribute to lengthy processing timeframes. For instance, the number and complexity of VA claims received has increased. VBA is currently taking steps to improve the timeliness of claims and appeals processing; however, prospects for improvement remain uncertain because timely processing remains a daunting challenge. Chairman Sanders, Ranking Member Burr, and Members of the Committee, this concludes my prepared statement. I am pleased to answer any questions you may have. For further information about this testimony, please contact Daniel Bertoni 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 testimony. Other key contributors to this testimony include Lucas Alvarez, James Bennett, Michelle Bracy, Brett Fallavollita, Dan Meyer, James Rebbe, Ryan Siegel, Walter Vance, and Greg Whitney. 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. | This testimony discusses the Department of Veterans Affairs' (VA) disability benefits program, which provides monetary support to veterans with disabling conditions that were incurred or aggravated during military service. In fiscal year 2013, VA estimates it will provide $59.6 billion in compensation benefits to 3.98 million veterans and their families. For years, the disability claims process has been the subject of concern and attention by VA, Congress, and Veterans Service Organizations (VSO), due in part to long waits for decisions and the large number of pending claims. For example, the average length of time to complete a claim increased from 161 days in fiscal year 2009 to 260 days in fiscal year 2012. Moreover, VA's backlog of claims--defined as claims awaiting a decision for over 125 days--has more than tripled since September 2009. In August 2012, approximately two-thirds of the 568,043 compensation rating claims--which include pension and disability rating claims--were backlogged. In addition, timeliness of appeals processing at VA regional offices has also slowed by 56 percent over the last several years. This testimony is based on a GAO report released on December 21, 2012, titled Veterans' Disability Benefits: Timely Processing Remains a Daunting Challenge, and, also include information updated to reflect the status of improvement efforts. This testimony focuses on (1) factors that contribute to lengthy disability claims and appeals processing times at VA regional offices and (2) status of the Veterans Benefits Administration's (VBA) recent improvement efforts. GAO found a number of factors--both external and internal to VBA--have contributed to the increase in processing times and subsequent growth in the backlog of veterans' disability compensation claims. For example, the number of claims received by VBA has increased as the population of new veterans has swelled in recent years. Moreover, due to new regulations that established eligibility for benefits for new diseases associated with Agent Orange exposure, VBA adjudicated 260,000 previously denied and new claims for related impairments. Beyond these external factors, issues with the design and implementation of the program have also contributed to timeliness challenges. For example, the law requires VA to assist veterans in obtaining records that support their claim. However, VBA officials said that delays in obtaining military records--particularly for members of the National Guard and Reserve--and Social Security Administration (SSA) medical records impact VA's duty to assist, possibly delaying a decision on a veteran's disability claim. Further, VBA's paper-based claims processing system involves multiple hand-offs, which can lead to misplaced and lost documents and cause unnecessary delays. Concerning timeliness of appeals, VBA regional offices have in recent years shifted resources away from appeals and towards claims, which has led to lengthy appeals timeframes. VBA has a number of initiatives underway to improve the timeliness of claims and appeals processing. Such efforts include leveraging VBA staff and contractors to manage workload, modifying and streamlining procedures, improving records acquisition, and redesigning the claims and appeals processes. According to VBA officials, these efforts will help VA process all veterans' claims within VA's stated target goal of 125 days by 2015. However, the extent to which VA is positioned to meet its ambitious processing timeliness goal remains uncertain. VBA provided us with several planning documents, but, at the time of our review, could not provide us with a plan that met established criteria for sound planning, such as articulating performance measures for each initiative, including their intended impact on the claims backlog. GAO has recommended that VBA (1) partner with military officials to reduce timeframes to gather records from National Guard and Reserve sources, (2) work with SSA to reduce timeframes to gather SSA medical records, and (3) develop a robust plan for its improvement initiatives that identifies performance goals that include the impact of individual initiatives on processing timeliness. VA generally agreed with our conclusions and concurred with our recommendations, and identified efforts that it has planned or underway to address them. |
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The Army’s reserve components are the Army Reserve and Army National Guard. The Army Reserve is comprised of units that support combat forces and is restricted to federal missions. The Guard has both combat and support units and federal and state responsibilities. The Guard is to be organized and resourced for federal wartime missions, according to Guard policy. Federal missions range from participating in full-scale military conflicts to operations other than war, backfilling active forces deployed on operational missions, providing training support to the active component, supporting domestic disaster relief and emergency operations under federal control, and providing strategic reserve forces to meet unknown contingencies. The Guard’s state missions typically involve support for state officials and organizations during domestic civil emergencies and natural or man-made disasters. The size of DOD’s forces and budgets has declined with the end of the Cold War and pressures to reduce the deficit. In 1989 the Guard had about 457,000 personnel. By the end of fiscal year 1996, the Guard plans to have 373,000 personnel in 54 separate state and territorial military commands in the 50 states, District of Columbia, Puerto Rico, U.S. Virgin Islands, and Guam. About 161,000 Guard personnel are to be in 42 combat brigades, including 67,000 in 15 enhanced brigades. The remaining 212,000 personnel are in headquarters units and units that support combat. By the end of fiscal year 1999, the Guard plans to be down to 367,000 personnel, with about 187,000 personnel in the combat units, including the 67,000 in the enhanced brigades. The Guard’s 42 combat brigades are organized as follows: 8 divisions comprised of 3 brigades each, 15 enhanced brigades, and 3 separate combat units, consisting of 2 separate brigades and a scout group. In addition to the combat units, the Guard has elements that support combat units, such as engineers, military police, military intelligence, and transportation. The enhanced brigade concept, described in DOD’s 1993 Report on the Bottom-Up Review, became effective on October 1, 1995. The concept provides for 15 separate brigades that are not part of a divisional structure during peacetime and that are required to be ready to deploy at the Army’s highest readiness level within 90 days of mobilization. The enhancements, according to the bottom-up review, are training and resources above those provided to the Guard’s other combat forces. The enhancements are to enable the 15 brigades to achieve peacetime readiness goals so that they can meet their deployment criteria by the end of fiscal year 1998. The President’s budget request for fiscal year 1996 included $5.5 billion for the Guard, which represents about 2.2 percent of DOD’s budget request and 9.3 percent of the Army’s request. About $1.7 billion of the $5.5 billion request is for the Guard combat units. The remaining $3.8 billion is for such organizations as headquarters units and elements that support combat. These other organizations receive most of the funds because they include support elements that are the first to deploy. For fiscal year 2001, the Guard’s budget is projected to be about $6 billion, with about $1.8 billion for combat units. Table 1 further breaks down these budgets. In March 1993, DOD initiated a comprehensive bottom-up review to assess the nation’s defense strategy, force structure, and budgets to counter regional aggression in the post-Cold War environment. DOD judged it prudent to maintain the capability to fight and win two nearly simultaneous major regional conflicts. To execute the two-conflict strategy, DOD determined that the Army must maintain 10 divisions in the active forces augmented by 15 reserve enhanced brigades and associated support forces. The bottom-up review report stated that the reserve component must adapt to meet new challenges. Accordingly, this means making smarter use of reserve component forces by adapting them to new requirements, assigning them missions that properly use their strengths, and funding them at a level consistent with their expected missions during a crisis or war. The bottom-up review concluded that the Army’s reserve components should be reduced to 575,000 personnel by 1999—a 201,000 decrease since fiscal year 1989. The review specified that the reserve components’ combat structure would be about 37 brigades, 15 of which would be enhanced. A group of senior officers of the Army, its reserve components, and organizations that represent Army component issues was tasked with providing a recommendation to the Secretary of the Army on the allocation of the 575,000 personnel between the Guard and the Army Reserve. The group allocated 367,000 personnel to the Guard and 208,000 to the Army Reserve. In addition to the 15 enhanced brigades specified in the bottom-up review, the Guard, in concert with the Army, determined that it would retain 8 combat divisions, 3 separate combat units, and numerous support units. The Guard’s eight combat divisions and three separate combat units are not required to accomplish the two-conflict strategy, according to Army war planners and war planning documents that we reviewed. The Army’s war planners at headquarters and at U.S. Forces Command stated that these forces are not needed during or after hostilities cease for one or more major regional conflicts. Moreover, the Joint Chiefs of Staff have not assigned the eight combat divisions or the three separate combat units for use in any major regional conflict currently envisioned in DOD planning scenarios. The missions for these divisions and units, according to the bottom-up review, include (1) providing the basis for rotation when forces are required to remain in place over an extended period after the enemy invasion has been deterred, (2) serving as a deterrent hedge to future adversarial regimes, and (3) supporting civil authorities at home. According to Army officials involved in the review, there was no analysis to determine the appropriate number of forces required to perform these missions. The Guard’s 15 enhanced brigades are the principal reserve component ground combat forces. The bottom-up review report states that one important role for these brigades is to supplement active component divisions, should more ground combat power be needed to deter or fight a second major regional conflict. Although the bottom-up review specified a need for 15 enhanced brigades and the Joint Chiefs of Staff have made all 15 brigades available for war planning purposes, the planners have identified requirements for less than 10 brigades to achieve mission success in the war fight. However, these plans are evolving and the number of brigades required may change. This lesser number of brigades is generally consistent with the required reserve combat forces included in the Army’s current Total Army Analysis process. That process projects the Army’s future support needs based on the future combat force. According to U.S. Forces Command planners, the enhanced brigades that are not required to achieve mission success in the war fight are considered to be strategic reserve that can either be used for occupational forces once the enemy has been defeated or for other missions. Other roles would be to replace active forces stationed overseas or engaged in peacekeeping operations should the replaced forces be needed for a regional conflict. The Guard has a wide range of state missions. These missions include the defense of states or other entities from disorder, rebellion, or invasion; emergency and disaster relief; humanitarian assistance; and community support activities. In crisis situations, the governors primarily use the Guard to supplement civil agencies after those agencies have exhausted their resources. According to Guard officials at the state level, the state expects the local authorities to respond first, followed by county, and then state resources. If the crisis exceeds the state’s civil capabilities, the Guard can be called on for added support. For example, needs far exceeded the state’s civil agencies’ capabilities after Hurricane Andrew devastated south Florida. Therefore, the Governor called up almost 50 percent of Florida’s Army and Air Guard personnel for such tasks as providing temporary shelters, removing debris, distributing food and water, and providing security. For situations beyond a state’s capabilities, the Governor can ask the President to declare a federal emergency. When this declaration is made, the Federal Emergency Management Agency becomes the coordinating agency between state and federal agencies. For example, Florida’s immediate assistance needs after Hurricane Andrew exceeded the capacity of the state’s resources, including its Guard forces. As a result, the Governor requested and received a presidential disaster declaration that entitled the state to obtain federal funding and assistance from federal agencies and the active military. The federal government has added several domestic initiatives to the Guard’s federally funded state missions. For example, newly acquired initiatives include drug interdiction and counter-drug activities, drug demand reduction programs, medical assistance in underserved areas, and the Civilian Youth Opportunities program. Although federally funded, the state governors authorize missions like these under the control of authorized Guard officials. Given the concerns for potential hardships to Guard members, their families, and their employers, most state Guard leaders plan to rotate Guard members used in state missions lasting longer than 7 days. For example, in both the Midwest floods of 1993 and Hurricane Andrew in 1992, Guard personnel were rotated, which resulted in the use of a greater number of personnel, but for shorter durations. Guard officials at the state level said that general soldier skills, such as discipline and following a chain of command, are often all that are needed to satisfy state missions. In the specialized skills areas, they said that support skills and equipment such as engineering, transportation, medical support, aviation, and military police are most often needed. In the states we visited, we were told that Guard members were asked to perform a variety of tasks on state active duty. For example, in California, the Guard provided homeless shelters for people displaced by major earthquakes, patrolled the streets of Los Angeles during a riot, and provided support to firefighters during wild fires. In Kansas and Utah, Guard members filled sandbags to fight flooding. In the previously mentioned study, which was required by the National Defense Authorization Act for Fiscal Year 1994, RAND reported that the Army and Air Guard in fiscal year 1993 experienced the highest number of state active duty days in over 10 years. The 54 state and territorial Guard entities reported spending over 460,000 duty days on state missions, involving over 34,000 members of the total Guard. This equated to about 6 percent of the total available Army and Air Guard personnel. Almost 50 percent of the Guard’s use that year was due to the Midwest floods. As might be expected, Guard usage for state missions varies from state to state and year to year. For example, RAND reported that the Florida Army and Air Guard were on state active duty in 1992 for Hurricane Andrew for over 80 days, with a peak personnel commitment of some 6,200 out of a total strength of about 13,500, or about 46 percent. RAND also reported that New York, with an Army and Air Guard strength of about 20,000, had its highest Guard usage in 6 years in 1994. During that year, the state used about 6,000 Guard workdays, which amounts to about 1 state active duty day per year for about 30 percent of the state’s total Army and Air Guard strength. This latter experience is typical of many states during the same period. RAND reported that, nationally, state demands on the Army and Air Guard are not significant. Moreover, the Guard’s own data do not show sizable demands on its personnel and resources for state missions. As such, RAND concluded that, even in a peak use year, state missions would not require a large portion of the Guard and should not be used as a basis for sizing the Guard force. It also concluded that the Guard is large enough to handle both state and federal missions, even in the unlikely, but possible, event of simultaneous peak demands. The Army is studying the redesign of the Guard’s combat structure to meet critical shortages in support capabilities. In May 1995, the Army’s Vice Chief of Staff chartered a work group to develop alternatives and make recommendations for using the Guard’s combat structure to meet critical shortages in support forces. According to the group’s charter, the Army has undertaken this effort because it is critically short support forces, but continues to maintain Guard combat units that are excess to war-fighting requirements. review the Army’s future unresourced support requirements, review the structure and missions of the Guard combat elements and develop options for changing the structure to meet future Army requirements, conduct a resource feasibility assessment of the options to determine whether the Army possesses or is able to program the resources needed to equip and maintain the redesigned structure, and refine and prioritize the options for presentation to the Army leadership by March 1996. The group’s charter established certain parameters such as (1) the Guard’s planned end strength will not change, (2) the redesign efforts will consider the Guard’s need to remain responsive to state missions, and (3) the redesign effort is not intended to reduce the number of Guard division headquarters. Previous studies have also recognized the need for changes to the Guard’s combat structure. In December 1992, we reported that opportunities existed to break up some Guard divisions and convert some combat units to support units. In March 1995, we reported that the Army would be challenged to provide sufficient numbers of certain types of support units for two major regional conflicts because it had difficulty providing such units in the single conflict Persian Gulf War. We suggested that an option for augmenting the Army’s support capability is to use existing support capability in the eight Guard divisions that DOD did not include in the combat force for executing the two-conflict strategy. We recommended that the Secretary of the Army (1) identify the specific unresourced support requirements that could be met using Guard divisional support units and the personnel and equipment in these units and (2) work with the Guard to develop a plan for employing this capability. The work group is considering this recommendation as one of the options. In accordance with the National Defense Authorization Act for Fiscal Year 1994, DOD established a Commission on Roles and Missions of the Armed Forces, which looked at, among other things, the better use of reserve forces. The Commission determined that the Army’s combat structure exceeds the requirements for a two major regional conflict scenario and concluded that reserve component forces with lower priority tasks should be eliminated or reorganized to fill shortfalls in higher priority areas. In its report, the Commission cited the example of the Army’s eight Guard divisions that were required for possible war with the former Soviet Union, but are not needed for the current national security strategy. The report noted that the bottom-up review did assign the eight Guard divisions secondary missions such as serving as a deterrent hedge to future adversarial regimes; however, it also said that eight divisions is too large a force for these secondary missions. The Commission’s report also noted that at the same time, the Army estimated that it is short 60,000 support troops for a two regional conflict strategy. The Army’s most recent Total Army Analysis process also projects a shortage of 60,000 support troops, primarily in transportation and quartermaster units. The Commission report also stated that, even after the support shortfalls were filled, there would still be excess combat spaces in the total Army and recommended eliminating these spaces from the active or reserve components. The end of the Cold War and budgetary pressures have provided both the opportunity and the incentive to reassess defense needs. Because the Guard’s combat forces exceed projected war requirements and the Army’s analysis indicates a shortage of support forces, we believe it is appropriate for the Army to study the conversion of some Guard combat forces to support roles. Therefore, we recommend that the Secretary of Defense, in conjunction with the Secretary of the Army and the Director, Army National Guard, validate the size and structure of all of the Guard’s combat forces and that the Secretary of the Army prepare and execute a plan to bring the size and structure of those combat forces in line with validated requirements. If the Army study suggests that some Guard combat forces should be converted to support roles, we recommend that the Secretary of the Army follow through with the conversion because it would satisfy shortages in its support forces and further provide the types of forces that state governors have traditionally needed. Moreover, to the extent that there are Guard forces that exceed validated requirements, the Secretary of Defense should consider eliminating them. DOD agreed with our findings and recommendations. It stated that before its review is finalized, all shortfalls will be validated against requirements set forth in the national military strategy. It also stated that until ongoing studies are completed, it is premature to restructure or eliminate Army National Guard units. DOD’s comments are shown in appendix I. To determine the federal and state roles and missions of the Guard’s combat units, we interviewed cognizant officials and obtained and analyzed documents from DOD, the Army, the Army National Guard, and RAND in Washington, D.C.; U.S. Army Forces Command, Fort McPherson, Georgia; and State Area Commands and combat units in Alabama, California, Kansas, South Carolina, Utah, Virginia, and Washington. To determine the efforts by DOD and the Army to redesign the Guard combat divisions, we interviewed cognizant officials and obtained and analyzed documents from DOD, the Army, the Army National Guard, U.S. Army Forces Command, and the U.S. Army Training and Doctrine Command’s Force Development Directorate, Fort Leavenworth, Kansas. We conducted this review from February to November 1995 in accordance with generally accepted government auditing standards. We are providing copies of this report to appropriate House and Senate committees; the Secretaries of Defense and the Army; the Director of the Army National Guard; and the Director, 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. The major contributors to this report were Robert Pelletier, Leo Sullivan, Lee Purdy, and Ann Borseth. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the: (1) roles and missions of the Army National Guard's combat units; and (2) efforts by the Department of Defense (DOD) and the Army to redesign the Guard's combat divisions. GAO found that: (1) despite reductions, the Army National Guard's combat units may still be too large for projected war requirements; (2) the Guard's eight remaining combat divisions and three separate combat units are not needed to meet the two-conflict strategy or any probable conflict scenarios; (3) DOD considers the excess Guard forces to be a strategic reserve that could be used as occupational and rotational forces, a deterrent against aggressive regimes, and support for civilian authorities, but it did not present any analytical support for the continued force levels; (4) DOD has not finalized plans for 15 enhanced Guard combat brigades, and fewer than 15 may be needed; (5) state missions often require more support skills and equipment than Guard combat forces, which usually supplement other state resources in emergencies; (6) over the last decade, states have needed only a fraction of the Guard's personnel to meet their emergency requirements; (7) the Army is studying ways that the Guard could meet critical shortages in its support capabilities; and (8) DOD believes that since Guard forces exceed combat needs, reserve components with lower priority tasks should be eliminated or reorganized to meet higher priorities. |
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The enormous challenge involved in making information systems Year 2000 compliant is managerial as well as technical. Agencies’ success or failure will largely be determined by the quality of their program management and executive leadership. The outcome of these efforts will also depend on the extent to which agencies have institutionalized key systems development and program management practices, as well as on their ability to execute large-scale software development or conversion projects. To assist agencies with these tasks, our Year 2000 assessment guide discusses the scope of these challenges and offers a structured, step-by-step approach for reviewing and assessing an agency’s readiness to handle the Year 2000 problem. The assessment guide states that the Year 2000 program should be managed as a single, large information systems project. The assessment guide describes in detail the five phases of a Year 2000 conversion process (i.e., awareness, assessment, renovation, validation, and implementation). Each of these phases represents a major Year 2000 program activity or segment. To successfully address the Year 2000 problem, effective program and project management is required for all five phases. Appendix I contains a description of these phases. To make its information systems Year 2000 compliant, IRS must (1) convert existing systems by modifying application software and data and upgrading hardware and systems software, if needed; (2) replace systems if correcting them is not cost-beneficial or technically feasible; or (3) retire systems if they will not be needed by 2000. IRS’ Chief Information Officer (CIO) established several parallel efforts to help ensure that IRS achieves Year 2000 compliance by January 1999. These efforts include creating the Century Date Change Project Office, which is responsible for coordinating the conversion of most existing information systems that can be made Year 2000 compliant as well as ensuring that all systems are converted in accordance with the same standards. The Century Date Change Project Office adapted our Year 2000 conversion model phases and established a 14-step process to track the progress of its Year 2000 conversion efforts. Some of the steps involved in converting existing systems include (1) converting applications; (2) upgrading hardware and/or systems software for mainframes, minicomputers/file servers, and personal computers; (3) upgrading telecommunications networks; and (4) ensuring that external data exchanges are Year 2000 compliant. The other parallel Year 2000 efforts are 2 major replacement efforts: (1) the replacement of the Distributed Input System (DIS) and the Remittance Processing System (RPS) with the Integrated Submission and Remittance Processing (ISRP) system and (2) the consolidation of the mainframe computer processing operations at 10 service centers to 2 computing centers. IRS personnel use DIS to input taxpayer data and RPS to input remittance data. According to IRS, these systems are old, and it is not cost-beneficial to make them Year 2000 compliant. Therefore, IRS decided to replace DIS and RPS with ISRP. A two-phase pilot of ISRP is under way during 1998 at IRS’ Austin Service Center. Nationwide implementation is scheduled for January 1999. As a part of its mainframe consolidation effort, IRS is to (1) replace and/or upgrade service center mainframe hardware, systems software, and telecommunications infrastructure; (2) replace about 16,000 terminals that support frontline customer service and compliance operations; and (3) replace the communication replacement system that provides security functions for on-line taxpayer account databases. Replacements of the terminals and the communication replacement system are critical to IRS’ achieving Year 2000 compliance. IRS is undertaking the non-Year 2000 aspects of mainframe consolidation because it concluded that consolidation would satisfy the Office of Management and Budget’s Bulletin 96-02, which directs agencies to consolidate information processing centers; be consistent with IRS’ planned modernization architecture; and save an estimated $356 to $500 million from fiscal years 1997 through 2003. IRS’ original mainframe consolidation schedule called for moving mainframe computer processing operations and the communication replacement system from 10 service centers to 2 computing centers between December 1997 and December 1998. The mainframe consolidation project is to provide the hardware, systems software, and telecommunications infrastructure for 40 mission-critical systems whose application software is being converted under the direction of the Century Date Change Project Office. IRS is experiencing delays in completing conversion efforts for its existing systems and major systems replacement efforts. IRS has made the most progress in converting its applications for the systems it has deemed mission-critical. Conversion efforts for systems software and hardware, telecommunications networks, and external data exchanges are still in the initial steps of IRS’ 14-step conversion process. The completion schedule for mainframe consolidation, with the exception of the Year 2000 critical aspects, has been extended beyond December 1998. Table 1 shows how IRS has allocated each of the 14 steps in its conversion process to our Year 2000 assessment, renovation, validation, and implementation phases. Much of IRS’ early Year 2000 efforts in 1996 focused on the awareness and assessment phases of the applications for existing information systems controlled by the CIO. In May 1997, IRS began assessing the date dependencies of applications for information systems that were controlled by either field offices or business functional areas (hereafter referred to as field/customer systems). As a result of the CIO and field/customer system assessments that were completed as of March 31, 1998, IRS had identified 127 mission-critical systems, including 7 telecommunications systems. As of April 24, 1998, IRS reported that it had completed the first 12 steps of its 14-step conversion process on applications for about 46 percent (59 systems) of its 127 mission-critical systems. In doing so, IRS fell short of its goal of having the applications for 66 systems converted by January 31, 1998. IRS’ schedule calls for completing the first 12 steps for the remaining 54 percent (68 systems) of the mission-critical systems by January 1999. IRS officials said that they believe they are on track for meeting that goal. IRS is still in the initial steps of its 14-step conversion process for most of its systems software, hardware, and telecommunications network components. IRS is also still in the initial stages of converting its external data exchanges. Appendix II provides additional information on the status of the conversion process for each of these areas. Of these infrastructure areas, according to IRS, telecommunications networks present the most significant conversion challenge and may be at the highest risk for not being done by January 1999. According to IRS, the capability to exchange information, both voice and data, between various computer systems is the backbone of IRS’ ability to perform all of its tax processing and customer service functions. IRS uses a telecommunications network that is supported through the Department of the Treasury and additional networks that are unique to IRS. As of March 10, 1998, IRS had an inventory of the components that are included in Treasury’s network and was verifying a preliminary inventory of the components in the networks unique to IRS. At the time of our review, a contractor was doing a risk assessment to help develop a conversion schedule so that the most important work would be scheduled first to minimize adverse impacts if IRS is not able to complete all of its telecommunications work by January 1999. IRS’ systems replacement efforts (i.e., ISRP and mainframe consolidation) are experiencing some delays. For example, certain ISRP software development that was to be completed in April 1998 is now scheduled to be done by June 16, 1998. As a result, the time available for testing before the start of the second phase of the pilot has been reduced. ISRP project office officials still anticipate that ISRP will be implemented nationwide by December 1998. The completion schedule for consolidating the data processing portion of service center operations has been extended from December 1998 until after June 1999. According to IRS officials, the need for this extension stems from numerous factors, including field office concerns about the ambitious schedule and expanded business requirements for security, disaster recovery, and testing. At the time we were finalizing this report, IRS officials said they were assessing various technical alternatives for meeting the expanded business requirements. They said they expect a revised business case and budget estimates that reflect the impact of both the schedule and requirements changes to be completed in June 1998. IRS officials said they expect to complete the Year 2000 portions of mainframe consolidation (i.e., terminal replacement and the communication replacement system) by the original completion date of December 1998. However, the communication replacement system has been experiencing some difficulties and is somewhat behind its original schedule for system testing. In our briefing to your office, we said that IRS’ ability to meet future milestones was at increased risk because IRS lacked a master schedule showing the relationships and interdependencies among the many Year 2000 efforts that must be completed in 1998. According to our assessment guide, a master conversion and replacement schedule should be a part of an agency’s Year 2000 program plan. This schedule could be used to (1) establish the sequential relationships among all of the tasks associated with all Year 2000 activities; (2) identify how much a task’s milestone completion date could slip without affecting other tasks; (3) help determine whether programming and testing resources will be available when needed, given the concurrent milestone completion dates for various tasks; and (4) provide a tool for assigning programming and testing resources that are essential to the success of all efforts in the most efficient manner. Understanding the schedule and resource interdependencies of all the key activities that are needed to make its systems Year 2000 compliant is imperative if IRS is to make its mission-critical systems Year 2000 compliant on time. For example, IRS’ mainframe consolidation project is behind schedule because of start-up delays and problems with implementing the systems software that is being used to consolidate one of the mainframe platforms. As a result of the problems with the commercial off-the-shelf software, additional testing is being done that was not initially expected. This testing requires staff from IRS’ Information Systems Office of Technical Support, which is also supporting the Century Date Change Project Office in other efforts. A master schedule showing both task and resource requirements should help identify whether any of the individual Year 2000 efforts will require the same staff for the same time period. Recognizing that several major and complex projects, including application software changes that are needed to implement recent tax legislation, must be completed before the 1999 filing season, in November 1997, the Commissioner of Internal Revenue announced the establishment of an executive steering committee. This committee is to identify risks to the 1999 filing season and the entire Year 2000 effort and take actions to mitigate those risks. As a part of this effort, IRS developed a Century Date Change Project Schedule for its Year 2000 activities. While the project schedule identifies the tasks for major Year 2000 activities, their corresponding start and finish dates, and the primary organizations responsible for them, the schedule does not yet establish a link between related tasks or analyze how the timing of the various tasks may affect resource availability. Until these actions are complete, IRS cannot project whether resources will be available when needed for concurrent tasks. Thus, IRS faces the risk that resources may not be available when needed. On February 12, 1998, IRS issued a statement of work for a contractor to provide program management support to the Commissioner’s newly established executive steering committee. One of the support activities that IRS identified in the statement of work was the development of an integrated schedule identifying (1) the interfaces and dependencies among Year 2000 projects and (2) efforts to implement legislative changes for the 1999 filing season. IRS expects this schedule, along with related tasks and dependencies, to be available in June 1998. If properly developed, this schedule should meet the intent of the master conversion and replacement schedule called for in our assessment guide. The contractor is to work closely with IRS staff who are responsible for the various Year 2000 efforts to assess resource needs for new requirements or resource shortages for existing requirements. The contractor also is to identify and recommend alternatives for allocating resources to help IRS meet all of its requirements. Contingency planning was the second risk area we identified during our briefing to your office. Under IRS’ contingency planning approach, IRS may be jeopardizing the continuity of operations for core business processes in the event that Year 2000-induced system failures occur. IRS’ Century Date Change Project Office has developed a “Century Date Change Contingency Management Plan.” This plan states that “developing contingency procedures for all of IRS’ numerous systems will require a significant amount of knowledgeable resources, in most cases the same resources assigned to perform the actual century date change conversion effort.” To minimize the number of contingency plans that IRS would have to develop, the contingency management plan calls for developing contingency plans only for those business functions or processes that are supported by application software projects that are at risk of not being made Year 2000 compliant on schedule. The Century Date Change Project Office has established criteria to identify such projects. For these projects, IRS is to initiate a business function impact analysis. Once that analysis is complete, technical and business owners evaluate available alternatives, including using any existing contingency procedures, such as manual procedures, or an alternative technological solution, such as commercial off-the-shelf software. IRS plans to use a similar approach for initiating contingency plans for business functions when the conversion of infrastructure areas, such as systems software, external data exchanges, and telecommunications network components, falls behind schedule. IRS’ “Century Date Change Contingency Management Plan” does not address the likelihood that information systems that are converted on schedule may experience system failures. As a result, IRS will be ill-prepared to effectively manage Year 2000-induced system failures that could affect core business processes. IRS’ contingency management plan does not address the possibility that (1) IRS may have overlooked a date dependency during its assessment phase of applications or infrastructure areas or (2) even if system conversion and replacement efforts are completed on time and fully tested, unexpected failures may occur. Aspects of contingency planning are under way for IRS’ replacement projects (i.e., ISRP and mainframe consolidation). For example, the ISRP project office has developed a contingency plan that identifies (1) various risks to the ISRP pilot and nationwide implementation, (2) the probability of those risks, and (3) contingency options for addressing those risks. IRS is also taking steps to make its existing service center mainframe computers Year 2000 compliant in the event that the consolidation of tax processing to the computing centers is not completed according to schedule. IRS expects to make its existing service center mainframe computers Year 2000 compliant by January 1999. Also, as part of a larger effort to enhance IRS’ disaster recovery capabilities, IRS officials said they have identified expanded disaster recovery requirements for service center data processing. At the time we were finalizing this report, IRS officials said they were assessing various technical alternatives for meeting those requirements so they can be incorporated in the mainframe consolidation project. Our exposure draft on business continuity and contingency planning states that agencies must start business continuity and contingency planning now to reduce the risk of Year 2000 business failures. Among other things, the exposure draft states that agencies need to do a business impact analysis to determine the effect of mission-critical system failures on the viability of agency operations. This analysis is to include examining business priorities; dependencies; service levels; and, most important, the business process dependency on mission-critical information systems. According to our exposure draft, the business impact analysis triggers the development of contingency plans for each core business process, including any information system components that support that process. Contingency plans would also address the actions IRS may take, for example, to notify taxpayers in the event that Year 2000 failures cause significant delays in processing tax returns and issuing refunds. IRS has undertaken efforts in the past to identify its core business processes as a part of various reengineering efforts that could be the starting point for a business impact analysis. For example, in 1996, as part of an effort to redesign its work processes, IRS began an effort to identify and map core business processes. IRS is still assessing some of its infrastructure components and faces the risk of not completing all of its Year 2000 efforts by January 1999. Moreover, IRS, like other agencies, is likely to encounter Year 2000-induced failures in some systems that were fully assessed, tested, and implemented. IRS’ “Century Date Contingency Management Plan” focuses on developing contingency plans only for business functions that are supported by application software projects that are behind schedule. The possibility exists that existing contingency or disaster recovery plans that were developed for other than Year 2000 purposes may be applicable to Year 2000 failures. However, if these plans are not applicable, under IRS’ “Century Date Contingency Management Plan,” IRS has no assurance that its core business processes will be able to continue to function, albeit, possibly at some reduced level of service, in the event that Year 2000-induced failures occur in systems that were converted according to schedule. We recommend that the Commissioner of Internal Revenue take the following steps to better ensure that IRS has adequately assessed the vulnerabilities of its core business processes in the event of Year 2000-induced system failures: solicit the input of business functional area officials to identify IRS’ core business processes and prioritize those processes that must continue in the event of Year 2000-induced failures; map IRS’ mission-critical systems to those core business processes; determine the impact of information system failures on each core business assess any existing business continuity and contingency plans that may have been developed for non-Year 2000 reasons to determine whether these plans are applicable to Year 2000-induced failures, and develop and test contingency plans for core business processes if existing plans are not appropriate. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designated representative. IRS provided us with comments during a May 4, 1998, meeting with the Acting Chief Information Officer and his staff. Those comments were reiterated in a May 8, 1998, letter from the Commissioner of Internal Revenue, which is reproduced in appendix III. The Commissioner said that IRS agrees that it must develop contingency plans to manage any adverse impacts of a less-than-fully successful century date program, and that IRS will take the following actions to address our recommendations regarding contingency planning. He said that to leverage the limited resources on the remaining Year 2000 conversion and testing efforts, IRS will focus contingency planning on those areas that have the greatest risk and highest business impact. Specifically, the Commissioner said the Acting Chief Information Officer will be working with the other Chief Officers to document IRS’ current business processes, the systems that support them, the impact if these processes or systems fail, and the probability or potential for Year 2000 risk. The Commissioner said that contingency plans will be developed for those areas that meet all of the following criteria: (1) high business impact, (2) high risk associated with failure, and (3) high probability of systems failure/instability due to Year 2000 conversion. We believe that these actions, if implemented properly, address most of the steps we identified in our contingency planning recommendations and should put IRS in a better position to respond to unexpected failures as a result of the Year 2000 problem than was the case under its previous contingency planning approach. However, we remain concerned that IRS will be ill-prepared in the event a failure occurs in a high business impact area that is supported by a system that IRS assesses as having a low probability of failure, but subsequently fails unexpectedly. We recognize that IRS needs to leverage its resources, particularly its information systems resources, to ensure that it completes all of the required Year 2000 conversion work on schedule. However, we believe it would be prudent for IRS’ business officials who are responsible for high business impact areas, regardless of the perceived Year 2000 risks, to begin identifying alternative business procedures or processes that may need to be implemented in the event of unexpected systems failure. In addition to commenting on our recommendations, IRS provided us with updated information on the status of its Year 2000 efforts. We have incorporated that updated information in the report where appropriate. The updated information is also included in IRS’ “Status Update Summary,” which is also reproduced in appendix III. To determine IRS’ progress and identify the risks facing its Year 2000 conversion efforts, we interviewed officials from the National Office, computing centers, service centers, regions, and district offices. We analyzed and compared IRS’ planning, budget, and performance-monitoring documentation with our Year 2000 assessment guide as a part of a structured approach for reviewing IRS’ conversion efforts. We did not review existing business continuity or contingency plans that IRS may have been developing for other than Year 2000-induced failures. We conducted our work in accordance with generally accepted government auditing standards between October 1996 and May 1998. We are sending copies of this report to the Subcommittee’s Ranking Minority Member; the Chairmen and Ranking Minority Members of the House Committee on Ways and Means and the Senate Committee on Finance, Subcommittee on Taxation and IRS Oversight; various other congressional committees; the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director of the Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. The major contributors to this report are listed in appendix IV. Please contact me at (202) 512-9110 if you have any questions about this report. Our Year 2000 assessment guide describes in detail the five phases that agencies need to complete when making their systems Year 2000 compliant. Each of the following phases represents a major Year 2000 program activity or segment: Awareness. This phase entails defining the Year 2000 problem, gaining executive level support and sponsorship, and ensuring that everyone in the organization is fully aware of the issue. It is also during this phase that the agency is to establish a Year 2000 program team and develop an overall strategy. Assessment. This phase entails assessing the Year 2000 impact on the agency, identifying core business areas, inventorying and analyzing the systems supporting the core business areas, and prioritizing the conversion or replacement of these systems. It is also during this phase that the agency is to initiate contingency planning and identify and secure the necessary resources. Renovation. This phase deals with converting, replacing, or eliminating selected systems and applications. In so doing, it is important that the agency consider the complex interdependencies among the systems and applications. Validation. This phase deals with testing, verifying, and validating all converted or replaced systems and applications and ensuring that they perform as expected. This entails the agency testing in an operational environment the performance, functionality, and integration of converted or replaced systems, applications, and databases. Implementation. This phase entails deploying and implementing Year 2000-compliant systems and components. It is also during this phase that the agency’s data exchange contingency plans are implemented, if necessary. This appendix contains additional information on the status of IRS’ infrastructure areas that were in the initial steps of IRS’ 14-step conversion process at the time of our review. These initial steps are comparable to either our assessment or renovation phase of our Year 2000 Conversion Model. According to the Office of Management and Budget’s guidelines, agencies were to have completed the assessment phase by June 1997. IRS placed a priority on assessing its mainframe computers first because these computers encompass most of IRS’ tax processing systems. IRS is still assessing its telecommunications networks, external data exchanges, and the systems software and hardware for minicomputers/file servers and personal computers. IRS has completed its assessment of its mainframe computers and has scheduled their conversion. All existing mainframe hardware and systems software are currently scheduled to be converted between January 1998 and January 1999. IRS’ mainframe computer systems constitute the core of IRS’ data processing activities, including the processing of tax return and remittance data and the storage of taxpayer account and collection activity data. These systems are currently located at IRS’ 10 service centers, the Martinsburg Computing Center, and the Detroit Computing Center. Most of IRS’ mainframe computers are being replaced as a part of IRS’ mainframe consolidation project. In the event that not all centers can be consolidated by 2000, IRS is proceeding with plans to make its existing mainframe hardware and systems software at the service centers Year 2000 compliant. Some mainframe computers, such as those supporting master-file processing at the Martinsburg Computing Center and others at the Detroit Computing Center, are not included in the mainframe consolidation project. These mainframe computers are to be upgraded to achieve Year 2000 compliance by January 1999. IRS is still in the assessment phase for its telecommunications networks. IRS relies extensively on telecommunications networks to accomplish its mission. According to the IRS’ Year 2000 Telecommunications Project Management Plan, the IRS’ telecommunications network is a critical component of IRS’ tax processing and customer service operations. The capability to exchange information, both voice and data, among its various computer systems is the backbone of IRS’ ability to perform all of its tax processing and customer service functions. According to the Commissioner’s Executive Steering Committee documents, the telecommunications networks conversion is significantly behind schedule for meeting the January 1999 milestone. Although IRS has established conversion schedules for the mission-critical areas of its telecommunications networks and is integrating these schedules into an overall plan, many of the individual components that make up these mission-critical areas have not been fully assessed. Generally, these components have not been fully assessed because IRS’ inventory of telecommunications resources has not been sufficiently detailed to allow IRS to (1) confirm the Year 2000-compliant status of all telecommunications components, (2) develop detailed conversion schedules, and (3) track conversion progress against those schedules. In part, the inventory has been difficult to compile because IRS’ telecommunications networks include both IRS-owned and multiple vendor-maintained networks and equipment, such as the Treasury-supported network, that cannot be easily combined to serve as a comprehensive source of information. IRS, Treasury, and contractors have formed integrated teams to address the Year 2000 telecommunications issues. IRS is currently validating the inventory of the Treasury-supported network by conducting site-specific inventories at its service centers. In addition to needing quality inventory data, IRS’ conversion solutions and plans for some areas are largely dependent on the ability of vendors to provide Year 2000-compliant products in a timely manner. After these products are received, IRS must test them to ensure that they work within IRS’ own data processing environment. According to IRS officials, a test plan for the Treasury-supported network has been developed. Given the large extent to which IRS relies on telecommunications networks to accomplish its mission and the high degree of risk associated with not making IRS’ telecommunications networks Year 2000 compliant, IRS’ telecommunications project plan calls for steps to mitigate this risk. The plan calls for initiating efforts to ensure that the portions of IRS’ telecommunications networks that are most critical to IRS’ operations are scheduled first and receive the necessary resources in accordance with their priority to IRS’ operations. At the time of our review, a contractor was doing a risk assessment to help develop a conversion schedule so that the most important work is scheduled first to minimize adverse impacts if IRS is not able to complete all of its telecommunications work by January 1999. According to IRS documents, this risk assessment will also trigger the development of contingency plans for mission-critical systems that are found to be at risk for not being converted on time. As an additional contingency measure, according to IRS, it is building redundancy into telecommunications networks to provide limited access if a portion of the network fails due to Year 2000 compatibility issues. IRS hopes to complete its assessment of external data exchanges by June 30, 1998. IRS, like most organizations, exchanges data in an electronic format with other organizations for a variety of purposes. These data exchanges involve both other government agencies as well as private sector organizations. For example, IRS (1) transmits information electronically to the Treasury’s Financial Management Service (FMS) for the purposes of reporting revenue receipts and the issuance of refund checks and (2) receives wage information (W-2) from the Social Security Administration (SSA) to verify the accuracy of individuals’ reported income. IRS also receives interest income data from banks and provides information to many states to assist them with taxpayer compliance activities. In September 1997, IRS initiated a plan to identify (1) all of its external data exchange organizations and (2) the actions needed to ensure that data exchanges are not adversely impacted by the Year 2000 problem. IRS has notified these organizations that Treasury has adopted a four-digit date field. IRS reports that as part of its application conversion efforts it has already converted more than 50 percent of the more than 300 data files that it exchanges with more than 400 organizations. A key portion of the remaining work involves contacting each of the organizations and verifying that it is aware of the IRS’ plans for conversion and it has taken steps to ensure the continued receipt and transmission of data. IRS has also identified a group of organizations whose external data exchanges are most critical to IRS’ operations and plans to commit additional attention and resources to these organizations to ensure that Year 2000 data exchange issues are thoroughly addressed. These organizations include government agencies, such as FMS, SSA, and the Federal Reserve, as well as private firms that are involved in activities such as the Electronic Federal Tax Payment System for federal employment tax deposits and banks that provide “lockbox” processing of $170 billion in remittances annually. To ensure that these most critical areas are thoroughly addressed, IRS has hired a contractor to conduct site visits to validate that the systems that receive/provide these data are on track to be Year 2000 compliant. At the time of our review, IRS was validating its inventory of external data exchanges and obtaining agreements regarding the organizations’ plans for converting their systems so that data exchanges can be made Year 2000 compliant. For the most part, IRS has completed its assessment of its minicomputer/file-server hardware and systems software. In the last 10 to 15 years, IRS has developed a number of information systems that use minicomputer and file-server technologies, rather than the mainframe-based technology that it has used for the past 30 years. IRS has identified 39 mission-critical systems that use minicomputer and file-server technologies. These systems support a variety of programs, including electronic filing, customer service, returns processing, fraud detection, criminal investigation, and compliance research activities. Many of these systems input data to IRS’ mainframe-based systems and, as such, are key elements of IRS’ tax processing system. Because organizational control over these systems is scattered across various project offices within IRS’ information systems organization and business or functional units, IRS has taken longer to identify and assess these systems than it has taken for its mainframe-based systems. The lack of an accurate inventory has also hindered progress in completing the assessment of these systems. IRS is relying on vendors to provide the Year 2000 solution for 12 platforms (i.e., a combination of computer hardware and systems software). These platforms currently support 39 mission-critical systems and several other important applications. According to the Commissioner’s Executive Steering Committee documents, IRS established March 15, 1998, as the date by which IRS wanted some assurance by the vendors that a Year 2000 solution existed for these platforms. Of the 12 platforms, 2 will be retired (1 of which will be replaced when ISRP is implemented nationwide.) IRS has determined that two platforms cannot be made Year 2000 compliant, and, at the time of our review, IRS was still evaluating its replacement options for them. As of April 10, 1998, IRS had either received or was about to receive the eight remaining platforms. IRS had identified a relational database as its greatest risk for its minicomputers and file servers because it supports 15 mission-critical systems, and IRS is the vendor’s only customer for this product. IRS officials told us that as of May 8, 1998, the vendor had provided a version of this database to IRS for testing. IRS officials said that once testing is completed, they will take the necessary steps to procure this database and make it available to the various users. Despite having identified the Year 2000 solutions for various minicomputer/file-server platforms, as of May 8, 1998, IRS had not yet completed a plan for migrating business or functional organizations from their current minicomputer/file-server platforms to the ones that are Year 2000 compliant. Specifically, as of May 8, 1998, IRS was beginning to develop for business and functional organizations (1) a schedule of critical tasks, (2) the associated milestones for completing the tasks, and (3) guidance on how to complete the tasks. IRS is in the assessment phase for personal computer hardware and commercial software (i.e., systems software and applications). IRS uses personal computers extensively for a wide range of functions, including (1) providing customer service staff with access to taxpayer account databases, (2) allowing compliance staff to collect detailed information and do complex calculations while working in the field, (3) entering information from tax returns and remittances, and (4) doing essential administrative functions. IRS has identified 134,000 personal computers that it must assess to determine if the hardware and/or the associated systems software is Year 2000 compliant or must be converted. IRS has estimated that approximately 60,000 of these computers support mission-critical functions. Of these 60,000 computers, IRS is currently replacing approximately 16,000 as part of IRS’ service center mainframe consolidation project. IRS’ goal is to convert all personal computers by January 1999. The Century Date Change Project Office is assigning Year 2000 conversion responsibility for personal computers to the organizations within IRS that currently share responsibility for purchasing and maintaining personal computers and their associated commercial software. According to the Century Date Change Project Office, as of March 1998, it had assigned responsibility for converting 75,000 of these personal computers. A. Carl Harris, Assistant Director Joanna Stamatiades, Evaluator-in-Charge Robert Arcenia, Senior Evaluator Linda Standau, Senior Evaluator Ronald Heisterkamp, 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. 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A recorded menu will provide information on how to obtain these lists. | GAO reviewed the Internal Revenue Service's (IRS) efforts to have its information systems function correctly when processing dates beyond December 31, 1999, focusing on: (1) IRS' progress in converting its systems according to the guidelines in GAO's year 2000 assessment guide; (2) the risks IRS faces to completing the year 2000 effort on time; and (3) risks to the continuity of IRS operations in the event of year 2000-induced system failures. GAO noted that: (1) according to IRS, before January 1999, it needs to complete 12 steps of its 14-step process for converting: (a) the applications for its existing systems; (b) the telecommunications networks; and (c) systems software and hardware for mainframes, minicomputers/file servers, and personal computers; (2) in addition, before January 1999, IRS needs to: (a) ensure that external data exchanges will be year 2000 compliant; (b) implement the Integrated Submission and Remittance Processing System and, at a minimum, the year 2000 portions of mainframe consolidation; and (c) modify application software to implement tax law changes for the 1999 and 2000 filing seasons; (3) if these efforts are not completed, IRS' tax processing and collection systems may fail to operate or may generate millions of erroneous tax notices, refunds, interest calculations, and account adjustments; (4) for the conversion of its existing systems, IRS has made more progress on its applications than on its information systems infrastructure; (5) specifically, as of April 24, 1998, IRS reported that it had completed the first 12 steps of its 14-step conversion process for applications for about 46 percent of the 127 systems it has deemed as mission-critical; (6) IRS expects to convert the applications for the remaining 54 percent of the mission-critical systems by January 1999; (7) the two major systems replacement efforts, which are also expected to follow IRS' 14-step conversion process, are experiencing some schedule slippages; (8) IRS officials said they expect to complete the year 2000 portions of the mainframe consolidation by the original completion date of December 1998; (9) GAO identified two risk areas for IRS' year 2000 effort: (a) the lack of an integrated master conversion and replacement schedule; and (b) a limited approach to contingency planning; (10) since GAO's briefing, IRS has decided to have a contractor develop an integrated schedule of its year 2000-related efforts, including making all of the necessary tax law changes for 1999; (11) IRS officials said they hope to have a baseline, master integrated schedule in June 1998; and (12) in part, due to IRS officials' concerns that the same resources that are doing year 2000 conversion work would be needed to do contingency planning, IRS officials decided to develop a process that would minimize the number of contingency plans that would have to be developed. |
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The Department of Health and Human Services (HHS) is responsible for the administration and oversight of federal funding to states for services to foster children under title IV-E of the Social Security Act. The states are responsible for administering foster care programs, which are supported in part with federal funds. These funds reimburse the states for a portion of the cost of maintaining foster children whose parents meet federal eligibility criteria for the funds. The criteria are based in part on the income level of the parents. Federal expenditures for the administration and maintenance of foster care cases eligible for title IV-E were $3.2 billion in 1997. When foster children are not eligible for title IV-E funding, they may be eligible for child-only benefits under the Temporary Assistance for Needy Families (TANF) program, which are partially funded by the federal government. Otherwise, states and counties must bear the full cost of caring for foster children. Within the foster care system, children can be placed in any of a number of temporary settings, including kinship care, family foster care, private for-profit or nonprofit child care facilities, or public child care institutional care. In the kinship care setting, foster children are placed with their relatives. While the definition of “relatives” varies somewhat by state, relatives are typically adults who are related to a foster child by blood or marriage. They may also be family friends, neighbors, or other adults with whom the child is familiar. In this report, kinship care refers to the formal placement of children in the foster care system with their relatives. It does not include informal arrangements for relatives to care for children who are outside the child welfare system and the purview of the courts. Since at least the 1980s, some portion of foster children in this country have been placed with relatives. Some studies contend that the increase in the number of foster children being placed with relatives may have been, at least initially, the result of a shortage of traditional foster homes.Others suggest that kinship care increased as a result of the Adoption Assistance and Child Welfare Act of 1980. This act required states to place children in the “least restrictive (most family like) setting available,” a requirement that has been interpreted by many states as implying a preference for placing foster children with their relatives. The increase in kinship care may also stem in part from litigation (Matter of Eugene F. v. Gross, Sup. Ct., NY County, Index No. 1125/86) that resulted in New York City’s bringing certain children being cared for by relatives into the formal foster care system and making them eligible for publicly funded services. Regardless of the historical impetus behind the growth in kinship care, section 505 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 amended federal law to require that the states consider giving priority to relatives when deciding with whom to place children while they are in the foster care system. Kinship care cases are eligible for federal title IV-E funding if, in addition to other criteria, the caregivers meet state licensing requirements for foster homes and the child’s parents meet the income eligibility criteria.In 1996, in about 60 percent of the kinship care cases in California and about 50 percent of such cases in Illinois, the caregiver received title IV-E funding. In the remaining kinship care cases in these states, the caregiver may have received an Aid to Families with Dependent Children (AFDC) grant, which may have been a child-only grant. Thirty-nine states reported in a 1996 survey conducted by the Child Welfare League of America (CWLA) that in 1995 they had a total of about 107,000 foster children in kinship care, or about one-quarter of all foster children in the United States. In 1995, the proportion of all foster children in each state who were in kinship care ranged from 0.4 to 52 percent. As time passes, states appear to be relying more on kinship care. CWLA has reported that between 1990 and 1995, the number of children in foster care increased by 21 percent (from 400,398 in 1990 to 483,629 in 1995), while the number of kinship care children increased by 29 percent. In 1995, the foster care population in California was 87,010, or about 27 percent larger than it had been in 1990, while the kinship care population was about 36 percent larger. According to our survey, as of September 15, 1997, 51 percent of the 74,133 foster children in California who had been in the system since at least March 1, 1997, were in kinship care. In 1997, the foster care population in Illinois was 50,721, or about 159 percent larger than it had been in 1990, while the kinship care population was about 250 percent larger. Up until July 1995, children whose parents were absent and who were living safely with a relative were considered “neglected” under Illinois state law, and the state generally assumed custody of such children. In these cases, the relative’s home at the time was frequently converted into kinship care within the foster care system. This may have accounted for the growth of the kinship care population in Illinois up until that time. Illinois amended the definition of “neglected child,” effective July 1, 1995, and as a result, such children are no longer considered neglected and the state no longer assumes custody.According to our survey, as of September 15, 1997, 55 percent of the 48,745 foster children in Illinois who had been in the system since at least March 1, 1997, were in kinship care. Federal foster care statutes and regulations, which emphasize the importance of both reunifying families and achieving permanency for children in a timely manner, apply to all foster care cases, whether a child is in kinship care or another foster care setting. Outcomes in foster care cases include (1) family reunification, (2) adoption, (3) legal guardianship, and (4) independent living or aging out of the foster care system, usually at age 18. In emphasizing the goal of family reunification, for example, federal law requires that the states make “reasonable efforts” to reunify foster children with their parents. The law requires that the states develop case plans that among other things describe the services that are to be provided to help parents, children, and foster parents facilitate the children’s return to their own safe home or their permanent placement elsewhere. The states are required to review foster care cases at least every 6 months and must hold permanency planning hearings at least every 12 months, during which a judge or a hearing officer determines whether a state should continue to pursue the current goal or begin to pursue some other permanency goal. When foster children cannot be safely returned to their parents in a timely manner, the Adoption and Safe Families Act of 1997 (enacted after the period covered by our survey) includes a provision requiring the states to begin the process to file a petition to terminate parental rights if a child has been in foster care for 15 of the most recent 22 months, unless (1) required reasonable efforts and services to reunify the family have not been made in accordance with the case plan, (2) a “compelling reason” is documented in the case plan indicating why it would not be in the best interest of the child to terminate parental rights at that time, or (3) at the option of the state, the child is being cared for by a relative. At the same time that the states are required to initiate termination procedures, they must also identify and recruit qualified families for adoption. Thus, if none of the exceptions apply, the law attempts to achieve permanency through adoption. Most research on the quality of kinship care has used the demographic characteristics of the caregivers as indirect indicators of the quality of foster care they provide. Although the studies’ results have varied somewhat, many studies have found that kinship caregivers tend to be older, have less formal education and lower incomes, are less often married, and are less healthy than other foster caregivers. On the basis of these characteristics, child welfare researchers and practitioners have inferred that the quality of kinship care may be lower than the quality of care in other foster care settings. Our analysis of the caseworkers’ responses to our survey of open foster care cases in California and Illinois showed that, overall, the quality of both kinship care and other foster care was good and that in most respects the experiences of children in kinship care and in other foster care settings were comparable. In both states, most caregivers in kinship as well as foster care settings received high scores from their caseworkers when it came to performing parenting tasks. We also found that, in general, children in kinship care in these states experienced significantly more continuity in their lives—that is, continued contact with family, friends, and the neighborhood they lived in before entering foster care—than other foster children. However, we also found that while the caseworker in most kinship as well as other foster care cases believed that the caregivers were likely to enforce court-ordered restrictions on parental visits, the proportion of cases in which this view was held was smaller for kinship care cases than other foster care cases. Moreover, requirements such as standards or approval criteria for becoming a caregiver and training for caregivers were less stringent for kinship care in California and Illinois than for other foster care. In both California and Illinois, most kinship and other foster caregivers received comparably high scores from their caseworker in performing nearly all the parenting tasks we asked about in our survey. These tasks covered three areas: (1) providing day-to-day care, such as providing supervision and emotional support to a child, setting and enforcing limits on the child’s behavior, and making sure the child attends school; (2) ensuring that the child is up-to-date on routine medical examinations; and (3) interacting with medical, mental health, and educational professionals. We found no research that directly measured foster parents’ ability to perform such tasks. For nearly all the parenting tasks we asked about, the caseworkers in more than 90 percent of kinship care and other foster care cases in the two states responded that the caregivers performed those tasks either adequately or very adequately. A smaller percentage—about 80 percent—of the children in kinship care in Illinois, however, were up-to-date on their routine vision and dental examinations, compared with 90 percent of other foster children. State officials in Illinois speculated that this was because kinship caregivers are more likely than other foster caregivers to seek vision and dental care for their foster children only as often as they do for themselves, which is less frequently than state standards and guidelines call for. Those officials believed that other foster caregivers are more likely to follow state standards and guidelines when it comes to their foster children. In both California and Illinois, responses to our survey questions indicated that there was significantly more continuity in the lives of children in kinship care than in other foster care settings. While many mental health professionals agree that continuity in relationships is good for children in general, there is less agreement about the merits of continuity in the lives of abused or neglected children. Experts do agree that contact with siblings, and especially living with siblings, is beneficial for a child and that parental visits with foster children are needed to achieve reunification when this is an appropriate goal. Experts also report that a child’s familiarity with the caregiver lessens the trauma of separation from the family, at least in the short run. Advocates of kinship care further assert that placing a foster child with relatives or friends may help maintain continuity in the child’s life by maintaining ties with the child’s community, school, and church. Many believe, however, that parents who neglect or abuse their children learn this behavior from members of a dysfunctional immediate or extended family. So, living with relatives and continued contact with the community may not be in the best interest of the child because the child continues to live in the environment that may have led to the abuse or neglect. Our survey asked for information about three types of continuity in foster children’s lives: (1) their previous familiarity with the person who became their foster parent; (2) their contact while in foster care with their parents, other relatives, and friends; and (3) their involvement, while in foster care, with the community they lived in before they entered the system. Our analysis showed that there was significantly more continuity in the lives of children in kinship care than in other foster care settings with respect to nearly all the indicators we used to measure these three categories of continuity. In general, our findings were consistent with the results of other research about the relationship of kinship care and continuity in foster children’s lives. In measuring children’s familiarity with the persons who became their foster parents, the results of our survey in both California and Illinois indicated that a significantly larger proportion of children in kinship care than other foster care knew their caregivers before entering the system. In addition, a significantly larger proportion of kinship care children had resided with their caregivers previously. (See fig. 1.) In measuring the extent to which foster children were in contact with their parents, other relatives, and friends in California and Illinois, in significantly more kinship care than other foster cases the caseworkers reported that the children were in contact with family and friends. For example, the caseworkers’ responses to our survey showed that mothers with children in kinship care (24 percent in California, 39 percent in Illinois) visited their children more often than specified in their case plans than did mothers with children in other foster care settings (6 percent in California, 11 percent in Illinois). To put this into perspective, however, in both kinship care and other foster care settings, less than 50 percent of mothers visited their children as often as specified in their case plans. Other research has also shown that parents of children in kinship care are more likely to visit their children at least once a year, and visit them more often per year, than parents of other foster children. In both California and Illinois, in a significantly larger proportion of kinship than other foster care cases the caseworkers noted that one or more of a child’s siblings were living in the same foster home. According to our survey, children in kinship care also had more contact with their friends and relatives other than parents, foster parents, or siblings. (See fig. 2.) Other studies reported similar findings. For example, surveys of foster children in Baltimore County, Maryland, in 1993 and in California from 1988 through 1991 have shown that children in kinship care were more likely to live with siblings than were other foster children. Finally, in measuring children’s contact with the communities they lived in before they entered the system, in significantly more kinship care than other foster care cases in California and Illinois caseworkers indicated that children had contact with their established community. More specifically, in both California and Illinois a larger proportion of children in kinship care than in other foster care settings lived in the same neighborhood they had lived in before entering foster care. (See fig. 3.) This is consistent with other studies of foster children in Illinois.Furthermore, according to our survey, a larger proportion of children in kinship care in each state were attending the school they would have attended had they not entered the system. The number of times caregivers changed during a foster care episode has also been used as an indication of continuity in a child’s life. Previous research in California has shown that foster caregivers changed fewer times per foster care episode in kinship care than other foster care cases; the lives of children in kinship care tended to be more stable while they were in foster care. Our survey suggests that the safety of a somewhat larger proportion of children in kinship care than other foster care in California and Illinois may be at risk because their caregivers may be unwilling to enforce court-ordered restrictions on parental visits. Specifically, in 72 percent of the California kinship care cases and 68 percent of the Illinois kinship care cases in which the parents’ visits with their children were restricted, the caseworkers believed that the caregivers were likely to take the necessary action to enforce the restrictions. In contrast, 92 percent of the caseworkers in other foster care cases in California and 80 percent in other foster care cases in Illinois believed that the caregivers were likely to enforce parental visitation restrictions. (See fig. 4.) As noted earlier, parental visits provide stability for children while they are in foster care. In some cases, however, the court may restrict visits by the parents because it believes the child might be harmed by these visits. In more than 85 percent of our survey cases, the court had restricted visits by the parents. Certain elements of California’s and Illinois’s quality assurance systems are less rigorous for kinship care than for other foster care settings. Both California and Illinois have less stringent requirements for becoming a caregiver and provide less training and support to kinship caregivers. States sometimes treat kinship caregivers differently because of the family bond that is assumed to be present between children and their relatives. They believe this bond mitigates the need for more intrusive state oversight in these cases. While some experts in child welfare believe that this exception for kinship caregivers is reasonable, others believe that while a state has custody of a child, all caregivers should be held to the same standards. To become foster caregivers in California or Illinois, a child’s relatives must meet certain criteria specifically designed for kinship care that are less stringent than the licensing requirements that apply to other foster caregivers. For example, since Illinois does not require kinship caregivers to be licensed, they do not have to meet licensing requirements regarding the number of bedrooms or the square footage in the home. Furthermore, they are exempt from some specific requirements designed to ensure a foster child’s safety in the home. Even though kinship caregivers are not required to meet the same requirements as other caregivers, in California if a foster child is eligible for title IV-E funds, the kinship caregivers receive the same maintenance payment as licensed caregivers would. Unlike in California, kinship caregivers in Illinois can receive the same maintenance payment as other caregivers only if they choose to meet the licensing requirements of other foster caregivers and thereby become licensed. Otherwise, relatives must meet less stringent requirements to provide foster care, which results in a lower maintenance payment. State child welfare officials in Illinois indicated that about 50 percent of the kinship caregivers in the state are licensed to provide foster care. Both California and Illinois require caseworkers to periodically visit all foster children. Caseworkers are required to visit foster children in order to, among other things, monitor the quality of the care they are receiving and determine whether the children or caregivers have any unmet service needs. Generally, in California, caseworkers are required to visit foster children at least once a month. When the goal is something other than family reunification, caseworkers are required to visit at least once every 6 months, because in these cases the children are considered to be in a more stable setting. Illinois requires caseworkers to visit foster children at least once a month, regardless of the permanency goal. According to our survey, caseworkers in California and Illinois visited both foster children in kinship care and those in other settings more often on average than formally required, but they visited children in kinship care less often on average than children in other foster care settings. Eighty-five percent of our cases in California were past family reunification so were required to be visited once every 6 months. In California, caseworkers visited kinship care children an average of 3.8 times in 6 months compared with an average of 5.3 visits to other foster children. Similarly, in Illinois caseworkers visited kinship care children an average of 8 times in 6 months compared with an average of 11.3 visits to other foster children.Our survey results were consistent with other research that has also found that caseworkers tend to visit children in kinship care less frequently than other foster children. California and Illinois provide fewer kinship caregivers with training than other foster caregivers. To help ensure good quality foster care, both states require licensed foster caregivers to receive training in topics such as the child welfare system and procedures and caring for children who have been abused or neglected. Since kinship caregivers are not required to be licensed in either California or Illinois, a smaller proportion of kinship caregivers than other foster caregivers in these states receive such training. Because of funding constraints, California has historically precluded kinship caregivers from receiving such training unless they pay for it themselves. Nonetheless, California state officials believe that kinship caregivers should receive training that is specifically designed for them. The Child Welfare Research Center (CWRC) has found that both kinship caregivers and other foster caregivers in California would like more training on subjects such as foster parent licensing, prenatal drug exposure, and how to interact more effectively with social service agencies. CWRC has also found that kinship caregivers in California want more information about court proceedings related to foster care and how to navigate the child welfare system in order to receive needed services. Some states provide fewer kinship caregivers with support services than other foster caregivers. Services such as respite care, housing support, counseling, transportation, child care, legal services, and access to support groups are designed to help foster caregivers successfully perform their role. Research conducted in California found that a smaller proportion of kinship caregivers received such services than other foster caregivers.This research also found that kinship caregivers in California, reacting to the emotional demands of caring for an abused or neglected relative, also wanted to know more about community resources and mental health services that were available to them. Previous research on children who have left the foster care system has shown that children who had been in kinship care were less likely to be adopted and stayed longer in foster care than other foster children. However, we found no consistent pattern between California and Illinois. In California, we found a pattern similar to the research regarding permanency goals among foster care cases in which a child is still in the system. Specifically, kinship care cases in California less often had the goal of adoption or guardianship (and more often had the goal of long-term foster care) than did other foster care cases. In California, there was no difference between kinship care and other foster care in the length of time children spent in foster care. However, in Illinois, in foster care cases in which a child was still in the system, a larger proportion of kinship care than other foster care cases had the goal of adoption and guardianship, and kinship care cases had been in the system a shorter, not longer, period of time. Because outcomes for kinship care cases differed in these two states, it is likely that state foster care policies and practices rather than the type of foster care setting in which children were placed had the greatest influence over a foster child’s permanency goal and length of time in care. It should also be noted that, in both states, we found that most children, regardless of foster care setting, had been in the system much longer than they should have been if the Adoption and Safe Families Act had been in effect at the time of our survey. Several research studies have looked at foster care outcomes and length of stay. Many of these examined the experiences of a group of children who entered the system in the same year. Most have shown that children in kinship care were less likely than other foster children to be adopted. Most have also shown that children in kinship care spent more time than other foster children in the foster care system. In California, our analysis of the survey data indicated that kinship care cases in the foster care system as of September 15, 1997, were more likely to have the goal of long-term foster care than other foster care cases in the system at that time. Where reunification was no longer considered feasible, our survey showed that 67 percent of the cases in kinship care had a goal of long-term foster care compared with 53 percent of cases in other foster care settings. (See fig. 5.) The large number of children in kinship care with the goal of long-term foster care is not surprising given that according to California officials, the state had only recently begun to offer adoption and guardianship options specifically designed for a foster child’s relatives. Survey responses confirmed this belief. In 74 percent of kinship care cases with a goal of long-term foster care, the caseworkers responded that the primary reason why the children did not have adoption as the goal was that they were being cared for by relatives who did not want to adopt and that moving the children to another home would be detrimental to them. State officials in California pointed out several disincentives for adoption and guardianship in kinship care cases. Certain benefits for foster children in California, such as special priority for assistance in schools and financial assistance for college, are no longer available when they have been adopted. Similarly, title IV-E maintenance payments are not authorized for children who leave the foster care system because of legal guardianship. Guardians who are related to a child could receive a TANF child-only grant on behalf of the child instead of title IV-E payments, but this grant is much lower than the title IV-E maintenance payments. In addition, to qualify for a TANF child-only grant, the guardian would have to provide proof that the child attends school and receives medical examinations. According to our survey, more than half of the open kinship care cases in California with the goal of guardianship had a guardian appointed but remained in the foster care system. This may be because guardians can receive the foster care maintenance payment, which is higher than a TANF child-only grant, if the case remains in the foster care system. While our survey found that, of all foster care children in California, 11.3 percent of children in kinship care and 19.1 percent of other foster children had adoption as the goal, in fact, only 2 percent of the children in foster care were adopted in 1997. Therefore, the state foster care agency has set the goal of adoption for many more foster children than are likely to be adopted, given recent experience. According to our survey in California, as of September 15, 1997, children in kinship care had been in the system about as long as those in other foster care settings. A multivariate analysis of cases in California confirmed that the type of foster care setting was not associated with the time foster children had spent in the system. Both children in kinship care and those in other foster care settings as of September 15, 1997, had already spent more than 60 months on average in foster care. This is 45 months longer than the time now allowed under the Adoption and Safe Families Act before the states are required to file a petition to terminate parental rights. Furthermore, we estimate that of the 37,881 children in kinship care in California as of September 15, 1997, who had been in the system since at least March 1, 1997, nearly 82 percent, or 31,025, had been in the system for 17 months or more. Under federal law, however, children in kinship care may be excluded from the requirement to terminate parental rights once a child has been in foster care for 15 of the past 22 months. In contrast to our findings in California, data from our survey in Illinois indicated that children in kinship care as of September 15, 1997, were more likely to have the goal of adoption or guardianship than other foster children in the system at that time. Specifically, 66 percent of kinship care cases had the goal of adoption or guardianship compared with 47 percent of cases in other foster care settings. (See fig. 6.) According to state officials, Illinois has found that kinship caregivers, contrary to popular belief, are willing to adopt, and Illinois is actively pursuing adoption in these cases. While our survey found that in Illinois 41.3 percent of children in kinship care and 37.9 percent of other foster children had adoption as a goal, in fact, only 4 percent of all foster children were estimated to have been adopted in 1997. Therefore, as in California, the state foster care agency has set the goal of adoption for many more children than are likely to be adopted, given recent experience. Our survey in Illinois indicated that foster children in kinship care as of September 15, 1997, had spent 43 months, on average, in the system. Other foster children had been in care for 53 months, on average, as of that date. A multivariate analysis of cases in Illinois also indicated that the type of foster care setting was associated with the time children had already spent in the system. Children in kinship care had been in the system about 10 fewer months, on average, than other foster children. Although children in other foster care settings in Illinois had spent more months in the system, as of September 15, 1997, than children in kinship care, foster children in general had spent much more time, on average, in the system as of that date than the 15 months allowed with the enactment of the Adoption and Safe Families Act before states are required to file a petition to terminate parental rights. Furthermore, we estimated that of the 26,712 children in kinship care in Illinois as of September 15, 1997, who had been in the system since at least March 1, 1997, 87 percent, or 23,213, had been in the system for 17 months or more. As we noted earlier, however, the law allows the states to exclude children in kinship care from the federal requirement to terminate parental rights in cases in which they have been in care 15 of the past 22 months. Since the fall of 1997, both California and Illinois have been instituting new programs and practices that are designed to (1) increase the likelihood that permanent living arrangements will be found for children in kinship care, as well as other foster care settings, who cannot return to their parents and (2) continue to ensure that kinship care is of good quality. They are pursuing efforts to choose the best kinship caregivers by identifying and locating a larger pool of relatives to draw from when deciding with whom to place foster children. To help ensure that children who cannot return to their parents do not remain in the foster care system indefinitely, California and Illinois recently enacted laws and are developing programs that encourage kinship caregivers and other relatives of foster children to provide permanent homes for them when necessary. Both states also support adoption and subsidized guardianship for children in kinship care as pathways out of the foster care system. Both California and Illinois have stepped up their efforts to identify as many of a foster child’s relatives as possible before deciding with whom to place that child. By expanding the pool of potential foster caregivers, the states hope to help ensure a foster child is placed with the relative who is capable of providing good quality foster care in the short term and who is willing to provide a long-term home if reunification with the parents is not feasible. Illinois requires that a “diligent” search for the parents when a child enters foster care include a search for other relatives, as well. The state is contracting with a firm that specializes in identifying and locating relatives and will conduct such searches routinely in foster care cases statewide. Since January 1, 1998, courts in California have had the authority to order the parents of foster children to disclose the names and residences of all the children’s maternal and paternal relatives. According to California officials, parents before then typically provided the names of only one or two relatives, usually the ones with whom they preferred their child to be placed. In addition, before a foster child is placed with a relative, California now applies an expanded assessment requiring that (1) a detailed background check be conducted; (2) the relative’s capacity to help implement the case plan, including family reunification efforts, be considered; and (3) the relative’s ability and willingness to provide a permanent home for the child also be considered. Recent legislation in California has also created the Kinship Support Services Program, one of whose objectives is to help ensure the good quality of kinship care. Services this program provides include case management; social services referral and intervention aimed at maintaining the kinship family unit—for example, housing, homemaker services, respite care, legal services, and day care; transportation for medical care and educational and recreational activities; individual and group counseling in parent-child relationships and group conflict; counseling and referral services aimed at promoting permanency, including kinship adoption and guardianship; and tutoring and mentoring for the children. Both California and Illinois are attempting to help ensure that children in kinship care spend as little time in the foster care system as possible. Anticipating federal and state legislation requiring the states to move more quickly to secure permanent homes for foster children, including those in kinship care, in 1998 the Illinois Department of Children’s and Family Services instituted new policies and programs related to kinship care to meet this requirement. In California, the move to encourage relatives to provide permanent homes for foster children began with the Governor’s Adoption Initiative of 1996, which is a 5-year plan to “identify and implement strategies to maximize adoption opportunities for children in long-term foster care.” In 1996, the state held a policy summit on kinship care that found that current “permanency options present significant cultural and financial barriers to kin to achieve permanency.” Following is an overview of the activities these states are undertaking to take better advantage of opportunities for permanently placing foster children with their relatives. On January 1, 1998, California instituted a kinship adoption program to remove barriers to adoption by current kinship caregivers and other relatives of foster children. In a kinship adoption, caregivers and relatives are permitted to enter into a kinship adoption agreement, a provision that is not typical in traditional adoptions. This agreement can address visitation rights for parents and other family members, as well as how information about a child is to be shared. The law authorizing the program sets out procedures for the agreement’s enforcement, modification, and termination. Under the terms of kinship adoption, parents may voluntarily relinquish their parental rights and designate the relative who will adopt the child, a provision that is also unique to kinship adoption. Concurrent planning allows for planning for the ultimate return of foster children to their parents, as well as another permanency outcome should family reunification prove infeasible. This process is intended to shorten the length of time it takes to secure another permanent home for children once the court decides that they cannot return to their parents. Illinois has recently begun concurrent planning; it is particularly useful when parents have previously been unwilling or unable to provide a safe home for their children or when repeated clinical interventions have failed. “A successful concurrent planning program is one in which the number of children who enter long-term foster care is significantly reduced (ideally, eliminated), the time the typical child spends in the system is reduced, virtually all young children who do not reunify are adopted rather than placed with legal guardians, the number of children replaced is reduced significantly, the proportion of relinquishments increases, and social workers’ comfort with the quality of adoptive families increases.” HHS has granted both Illinois and California a 5-year waiver of the restriction the Social Security Act places on providing title IV-E maintenance payments to legal guardians. This waiver enables the states to subsidize guardianships using title IV-E funds, thus eliminating the financial disincentive for kinship caregivers to become their foster child’s legal guardian. In its first year, the waiver for California applies only to children 13 years of age or older. In each subsequent year, the minimum eligibility age increases by 1 year. When the waiver period ends in 5 years, all children who were covered by the waiver will have reached the age of 18, so they will no longer require title IV-E foster care payments. Thus, California will not be responsible for any further subsidized guardianship payments for these children once the waiver period has ended. California recently notified HHS that it would like to delay the implementation of this waiver until it has fully analyzed recently passed state legislation that also provides for subsidized guardianship. Illinois has received a title IV-E waiver from HHS enabling it to use title IV-E funds for subsidies to kinship caregivers who agree to assume legal guardianship of their foster children. Unlike California, Illinois’s subsidy is available for children of any age. Thus, when this 5-year waiver expires, Illinois will fund the subsidies for children in this program from state revenues until they reach the age of 18. Although there are no age limits under Illinois’s waiver, to be eligible a child must have been in foster care for 1 year and must have lived with the potential guardian for at least 1 year before that guardian can apply for payments under this waiver. California’s Kinship Support Services Program, described earlier, also provides an incentive for kinship caregivers to adopt or assume legal guardianship of their foster children by continuing to make the program’s support services available to them after their foster children leave the system. Thus, these services are available to relatives, whether or not the child in their care is under the jurisdiction of the juvenile court or in the child welfare system. In 1998, California enacted legislation requiring that a plan be developed for a Kinship Care Program that will be separate and distinct from the existing foster care program and will provide services uniquely suited to the needs of children being cared for by their relatives. The Department of Social Services is currently developing a plan for a separate kinship care program. California also enacted legislation in 1998 that set up the Kinship Guardianship Assistance Payment program known as Kin-GAP. According to California officials, the Kin-GAP program allows children in kinship foster care to leave the foster care system by having their kinship caregivers become their legal guardians. This program allows children who have been assessed as being in a long-term stable home to exit the foster care system. Until they reach the age of 18, children in this program have medical coverage and maintenance payments are made for each child. The law limits this payment to no more than 85 percent of the title IV-E foster care maintenance payment. By July 1, 1999, the Department of Social Services must determine what the dollar amount of the payment will be. In order to reaffirm the priority Illinois places on securing permanent homes for foster children, it has established new permanency goals. It has eliminated “long-term relative care” as a permanency goal. Illinois officials noted that caseworkers will thus be forced to more actively seek permanent homes for children in kinship care and thereby prevent them from remaining indefinitely in the foster care system simply because they are being cared for by relatives. New permanency goals include “return home within 5 months,” “return home within a year,” “substitute care pending termination of parental rights,” “adoption,” “guardianship,” “substitute care pending independence,” and “substitute care due to the child’s disabilities or mental illness.” Despite a number of concerns expressed by some child welfare experts about the quality and outcomes of kinship care (the setting in which about one-quarter of the nation’s foster children are placed), the results of our survey of foster care cases in California and Illinois revealed a positive picture but not without some cautionary notes. Parenting-skill assessments by caseworkers in kinship care cases were comparable to parenting-skill assessments by caseworkers in other foster care cases. This was not true for other dimensions of quality. Information from our survey suggests some areas where improvements in kinship care may be needed. Specifically, there may be cause for concern about health and safety, especially with regard to observance of the need for routine dental and eye exams, and about potentially unsafe visits by abusing parents. While California and Illinois apply less stringent standards or approval criteria for kinship caregivers, both states are taking steps to better ensure good quality kinship care. They are raising standards for kinship caregivers and widening the pool of potential kinship caregivers to increase the chances of locating relatives capable of providing good quality care. Since the ultimate goal for foster children is a safe and permanent home, the permanency plan in foster care cases is of paramount concern. Previous research shows that children in kinship care cases stay longer in the system and are less likely to be adopted. In our survey, in California children in kinship care stayed in the system as long as children in other foster care settings and less often had a goal of adoption or guardianship. In contrast, in Illinois children in kinship care stayed in the system a shorter period of time and more often had a goal of adoption or guardianship than children in other foster care settings. Differences in permanency goals and time in foster care, therefore, may depend more on state policies and practices than on foster care setting. Moreover, both states have taken initiatives either to make homes with relatives a viable permanency option or to facilitate permanency planning. We provided a draft of this report to HHS and state child welfare officials in California and Illinois for their review. HHS generally agreed with the report and also described a number of activities of its Administration for Children and Families that it believes will help inform both policy and the child welfare field. HHS also provided technical comments, which we incorporated where appropriate. HHS’s response is in appendix VI. California did not provide official comments. However, California child welfare officials provided oral comments, limited to technical issues related to information about their programs. We incorporated their comments where appropriate. Illinois generally agreed with our report. However, state officials believed that the standards applied to other foster care cases with respect to (1) frequency of caseworkers’ visits, (2) criteria for becoming a caregiver, and (3) caregivers’ willingness to enforce parental visitation restrictions should not be applied to kinship care cases. We believe that it is valid to apply the same standards in both kinship and other foster care cases as far as the number of caseworker visits and a caregiver’s willingness to enforce restrictions on parental visits are concerned. Regarding the number of caseworker visits, we applied the standards that California and Illinois have already set, which in both states are the same for kinship and other foster care cases. Protecting a child’s safety should be the overriding concern of both kinship and other foster caregivers. Therefore, when a restriction is placed on parental visits in the interest of a child’s safety, it seems reasonable to expect kinship caregivers to be as willing as other foster caregivers to enforce that restriction. Although we report that the states apply less stringent requirements for becoming a kinship caregiver, we have taken no position on whether the criteria for kinship and other foster caregivers should be equal. We have modified the report to clarify this. We will send copies of this report to the Secretary of HHS and program officials in California and Illinois. We will also send copies to child welfare program directors in all other states and make copies available to others upon request. Major contributors to this report are listed in appendix VII. If you or your staff have any questions, please contact me at (202) 512-7215 or Clarita A. Mrena, Assistant Director, at (415) 904-2245 or Ann T. Walker, Evaluator-in-Charge, at (415) 904-2169. This appendix contains a detailed description of our review of existing research, interviews with child welfare experts, and survey of open foster care cases in California and Illinois. We conducted this review from April 1997 to December 1998 in accordance with generally accepted government auditing standards. In order to determine what research had been done on kinship care, we conducted a literature search to identify journal articles, reports, dissertations, and theses written between the beginning of 1990 and the fall of 1998 that addressed at least one of the following two research questions: (1) Does the foster care setting affect the quality of care a child receives? and (2) Does the foster care setting affect time in the system and permanency for the child? We began our search by reviewing the bibliographies of three major publications addressing the subject of kinship care: (1) Child Welfare League of America, Selected References on Kinship Care 1962-1994; (2) the Transamerica Systems, Inc., 1997 draft “Study of Outcomes for Children Placed in Foster Care with Relatives”; and (3) Child Welfare League of America, Kinship Care: A Natural Bridge, issued in 1994. We also conducted a computerized search for articles written about kinship care after 1994, the latest year covered in two of these bibliographies. To ensure that we omitted no major articles on kinship care, we sent copies of the three bibliographies and the results of the computerized search to child welfare experts both inside and outside GAO for their review. These experts suggested several additional articles. To identify recently published articles while drafting the report, we updated our computerized search and sent our bibliography to two additional experts outside GAO for their review. As a result of this process, we identified more than 150 documents for preliminary review. We reviewed these documents to determine whether they met our criteria for inclusion in our study and whether they reported any findings related to our research questions. We excluded a number of documents identified in our preliminary review from our final compilation of the research, most often because they (1) did not contain any research results, (2) did not describe original research but instead summarized others’ research, (3) did not differentiate between kinship and other foster care settings, (4) did not differentiate between children in the child welfare system and children being cared for by relatives outside the child welfare system, (5) did not include new data that had not already been summarized in another document written in whole or part by the same authors, and (6) did not address either of our two research questions. Tables I.1 and I.2 list the subquestions we used in the literature search and the tables in appendix III that show the research results for each subquestion. Does the foster child live with siblings who are in foster care? Does the foster child maintain contact with siblings? Does the foster child maintain contact with parents? Does the foster child remain in the same community or neighborhood he or she lived in before entering foster care? Does the foster child feel that he or she is part of the foster family? What is the foster caregiver’s age? What is the foster caregiver’s marital status? What is the foster caregiver’s education? What is the foster caregiver’s health? What is the foster caregiver’s income? What training or preparation did the foster caregiver receive? What required health services does the foster child receive? How often does the caseworker visit the foster child? To what extent does the foster caregiver receive services? How long did the foster child stay in foster care? How many placements in foster care has the foster child had? How long was the foster child in care before adoption, the goal changed to adoption, the child was placed with an adoptive family, or the child was freed for adoption? How long was the foster child in care before reunification with his or her parents? What permanency goals are pursued? To obtain a broader perspective on the issues surrounding kinship care, we interviewed researchers, public policy advisers, physicians, attorneys, family court judges, social workers, adoption caseworkers, and representatives of organizations that have an interest in foster care or child welfare in general. We asked for their opinions about the strengths and weaknesses of kinship care, the quality of kinship care, additional safeguards needed in the system, if any, and the effect of kinship care on foster care outcomes. We also interviewed state program officials to obtain information about kinship care in their state and their opinions about kinship care in general. We surveyed open foster care cases in California and Illinois to obtain information about the quality of care that children in kinship care receive relative to that of foster children in other foster care settings, as well as information about the effect of kinship care on permanency goals and the time children spend in foster care. Each state selected a simple random sample of open foster care cases for our survey, from all cases that were in its foster care system on June 1, 1997, and had been there continuously since at least March 1, 1997. Each sample was intended to represent the entire population of open foster care cases in the state during that time. The samples allowed us to make statements about the experiences of the foster children who made up the foster care population during that time. Because these samples were not drawn from a population of all children who entered the foster care system in a state, however, they do not represent the experiences of all foster children who entered the system. Foster children who spend a relatively short time in the system may be underrepresented in our samples, while children who spend more time in foster care may be overrepresented. Furthermore, while the survey results based on these samples can be generalized to the population of open foster care cases during the specified time in each state, they do not represent the foster care population nationally or in any other state. The foster care cases in California and Illinois combined account for about one-quarter of the entire foster care population nationwide and about half of all kinship care cases. After our samples were drawn, we learned that 22 of the sampled cases from California and 2 from Illinois had not been in foster care continuously from March 1, 1997, through June 1, 1997, and we excluded them from our study. We excluded an additional 57 cases in the California sample and 17 in the Illinois sample because information provided in the questionnaire indicated that they had not been in the foster care system continuously from June 1, 1997, through September 15, 1997—the date in the questionnaire for which caseworkers were asked to provide information about their cases. We assumed that, if all the questionnaires for the cases in each of the initial samples had been returned to us, additional cases would have fallen into these two categories. We used the proportions of each of these types of cases among respondents to estimate how many nonrespondents would have fallen into these two categories. Thus, we reduced our initial samples by 25 cases in California and 6 cases in Illinois. We also adjusted each state’s initial population size by the same proportions. The initial and adjusted population and sample sizes and survey response rates are shown by state in table I.3. The adjusted populations are our best estimates of the number of foster care cases that were in the system continuously from March 1, 1997, through September 15, 1997. We designed a mail questionnaire that asked caseworkers for information, as of September 15, 1997, about the individual foster care cases they were assigned to. We chose this date because it fell just before the date the questionnaires were scheduled to be mailed out, so when caseworkers received the questionnaire they were likely to still recall the facts in a case as of September 15, 1997. Our survey objectives were to collect (1) data not in other research, (2) data more directly related to and thus a better indication of the quality of foster care than the information in other research, and (3) some of the same data as in other research because the foster care population we surveyed and the time covered by our survey were not the same as those in other research. Examples of information our questionnaire collected that we did not find in existing research include foster children’s knowledge of their foster caregivers before entering foster care; foster caregivers’ history of child abuse or neglect, domestic violence, or drug abuse; foster caregivers’ parenting skills; health services foster children received; and the likelihood that foster caregivers would enforce restrictions on parental visits and thus protect children from abusing parents. We pretested the questionnaire with a number of foster care caseworkers in California and Illinois and revised it on the basis of the pretest results.We mailed a questionnaire for each case in our samples to the manager in the office handling that case, who was instructed to give it to the caseworker assigned to that case. The caseworker was asked to respond to the questionnaire with regard to that case. We conducted multiple follow-ups with office managers and caseworkers, by both mail and telephone, encouraging them to respond. In addition to using a mail questionnaire to collect information about foster care cases in our samples, we received an automated file from each state that contained administrative data on each sampled case from that state. The states rely on these data in managing their foster care programs. We did not evaluate the validity of these databases. Our estimates of the number of foster care cases in each state that would be subject to the requirement in the Adoption and Safe Families Act of 1997 to file a petition to terminate parental rights were based on the number of cases in our samples in which a child had been in foster care for at least 17 months as of September 15, 1997. We used 17 months, rather than 15 months as specified in the law, because the clock for determining whether a case is subject to the termination of parental rights requirement begins running on the date the child was adjudicated abused or neglected or 60 days after the date the child was actually removed from the parents’ custody, whichever came first. Since we did not know the adjudication date of the cases in our surveys, we used 17 months as a conservative estimate of the time the case would be subject to the requirement. Most of the conclusions we drew from this survey were based on a comparison within each state of survey responses for cases in kinship care and cases in other foster care settings. In each state, we placed each case in one of these two groups, depending on the caseworker’s response to a question about the type of foster care setting in that case. We placed cases in the kinship care category only when the caseworkers responded that the foster children were in settings that “your state classifies as kinship or relative care.” We placed all other cases in the “other foster care setting” category. About half the cases fell into the kinship care group in each state. The “other foster care setting” category contained cases in settings such as substitute care, specialized care, institutional care, group homes, and traditional foster family homes. The results of these analyses are contained in appendix V. We examined the relationship between type of setting and other variables in the questionnaire by generating crosstabular tables and statistically testing to determine whether any differences between two variables in a table were significant at the .05 level. We calculated most of the percentage estimates we reported in the body of this report and in appendix V using as the base the number of cases for which there was a response to a variable other than “don’t know.” For analyses that involved a child’s date of entry into foster care, we used the date that was recorded in the state’s administrative data file. Thus, our calculation of the average length of time our cross-section of foster children in each state spent in foster care up until September 15, 1997, was based on administrative rather than survey data. In addition to using crosstabulations to identify the relationship, if any, between two variables, we performed multivariate analyses. These analyses tested for associations, at the .05 significance level, between foster care setting—that is, kinship care versus other foster care setting—and permanency goal, as well as the time children spent in foster care, while taking into account other variables—namely, a foster child’s age at entry into foster care, gender, and race and the parents’ history of drug or alcohol abuse—that might also influence the permanency goal or time in the system. For our multivariate analyses of the relationship between foster care setting and permanency goal, we constructed a permanency goal variable by ranking long-term foster care, guardianship, and adoption according to the extent to which each goal allowed children and their families to be independent of the foster care system. Long-term foster care was considered least independent and assigned a value of “0,” guardianship more independent and assigned a value of “1,” and adoption most independent and assigned a value of “2.” We used linear regression—specifically the ordinary least squares method—to examine the relationship between foster care setting and permanency goal in foster care cases in each state, while taking into account the influence other variables may have had on a permanency goal. We found that there was no significant relationship between a child’s race or gender and his or her permanency goal in either state. Therefore, we excluded race and gender from the additional multivariate analyses we conducted. A regression analysis for cases in California indicated that foster care setting and a child’s age at entry into foster care were both related to permanency goal. Specifically, children in kinship care in California were more likely to have long-term foster care as the goal, and children in other settings were more likely to have guardianship or adoption as the goal. Our analyses also indicated that children who entered foster care in California at an early age were more likely than those who entered at a later age to have guardianship or adoption as the goal. A regression analysis for cases in Illinois indicated that foster care setting, child’s age at entry into foster care, and having a parent with a history of drug or alcohol abuse were all related to permanency goal. Specifically, in Illinois, children in kinship care and children who had entered foster care at an early age were more likely to have guardianship or adoption as the goal than children in other foster care settings. We also found that children who had a parent with a history of drug or alcohol abuse were more likely to have the goal of guardianship or adoption than children who had parents with no history of drug or alcohol abuse. See table I.4 for a summary of the results of our regression analyses related to permanency goals. Variation explained (r contributed) Total variation explained (r) We also performed a regression analysis to determine the relationship, if any, between foster care setting and time in foster care, taking into account the influence of permanency goal, a child’s age at entry into foster care, race, gender, and parents’ history of drug or alcohol abuse. We found that there was no significant relationship between a child’s race, gender, or having a parent with a history of drug or alcohol abuse and time in foster care in either state. Therefore, we excluded these variables from the additional multivariate analyses we conducted regarding time in foster care. Our regression analysis for cases in California indicated that there was no relationship between foster care setting and time in foster care. The goal of adoption and a child’s age at entry into foster care, however, were both related to time in the system. Specifically, adoption as the goal explained more than 12 percent of the variation in the length of time children spent in foster care. Children with adoption as the goal spent 47 fewer months, on average, in foster care than children with some other goal. A child’s age at entry explained almost 6 percent of the variation in the length of time spent in foster care. For each additional year of age, children spent an average of 2.4 fewer months in foster care. Among foster care cases in Illinois, we found that both foster care setting and the goal of adoption were related to the length of time children spent in foster care. Specifically, kinship care and adoption explained 3 percent and 1.4 percent of the variation in the amount of time children spent in foster care, respectively. Children in kinship care spent about 9 fewer months in foster care, on average, than children in other foster care settings. Similarly, children with the goal of adoption spent about 10 fewer months in the system, on average, than children with some other goal. See table I.5 for a summary of the results of our regression analyses related to the length of time in foster care. Total variation explained (r) Because the estimates we reported from our survey were based on samples of foster care cases, a margin of error or imprecision surrounds them. This imprecision is usually expressed as a sampling error at a given confidence level. We calculated sampling errors for estimates based on our survey at the 95-percent confidence level. The sampling errors for percentage estimates we cited in this report varied but did not exceed plus or minus 15 percentage points. This means that if we drew 100 independent samples from each of our populations—samples with the same specifications as those we used in this study—in 95 of these samples the actual value in the population would fall within no more than plus or minus 15 percentage points of our estimate. The sampling error for our estimates of the average number of visits by caseworkers in each state never exceeded plus or minus 1.3 visits. Sampling errors for our estimates of the average length of time foster children in each state spent in the system did not exceed plus or minus 8.7 months. Sampling errors for our estimates of the number of foster care children in each state who spent 17 months or more in the system did not exceed plus or minus 2,650 children. Finally, in appendix V, the sampling error for estimates in each state of the (1) average number of a foster child’s siblings never exceeded plus or minus 0.5 siblings, (2) average age at which a child entered foster care never exceeded plus or minus 0.84 years, and (3) average age of children in foster care never exceeded plus or minus 0.92 years. Because of the relatively small number of responses in some of the tables in appendix V, and the resulting imprecision of any population estimates that would be based on those responses, tables in appendix V with fewer than 41 cases present only the number of sample cases for which each response was given. We made no population estimates concerning those responses. This appendix contains studies we identified that compare kinship care and other foster care. A brief description of study design and methodology follows each item. Appendix I describes how we identified research in this area and our criteria for including a study in this bibliography. Appendix III contains the results of analyses from the studies listed here. Benedict, Mary I., and R.B. White. “Factors Associated with Foster Care Length of Stay.” Child Welfare, Vol. 70, No. 1 (1991), pp. 45-58. This article contains the results of a longitudinal study of children in three urban and suburban jurisdictions in Maryland who entered foster care for the first time between January 1, 1980, and December 31, 1983. Data were obtained from the case records of a random sample of 689 of these children and covered a period that began the month a child entered foster care and ended in June 1986. A number of factors, such as the parents’ ability to care for and raise children and foster care placement with relatives, were examined to identify any relationship between them and the amount of time children spent in foster care. Berrick, J.D., R.P. Barth, and B. Needell. “A Comparison of Kinship Foster Homes and Foster Family Homes: Implications for Kinship Foster Care as Family Preservation.” Children and Youth Services Review, Vol. 16, Nos. 1-2 (1994), pp. 33-63. The researchers described the characteristics of a two-stage, random sample of the 88,000 children in foster care in California between January 1988 and the date when the article was written in 1991. A screening questionnaire was mailed to the foster parents of each of the 4,234 children in the initial sample. This sample was split evenly between traditional and relative foster care placements. For the screening questionnaire, foster parents responded in 1,178 (28 percent) of the cases sampled. In 600 of these cases (246 relative foster care placements and 354 traditional foster care placements), the foster parents completed a second questionnaire by either telephone or mail. If they cared for more than one foster child, they were asked to answer the questions for one child older than 2 who had resided in their home for at least 6 months. They provided information about the child’s physical and mental health, the types of services the child received, and their own perceptions of the child welfare agency and caseworkers. Although the gender, age, and ethnicity of children in the ultimate sample were similar to those of children in the total population, the researchers acknowledged that there was no way to determine the representativeness of the sample of providers. Berrick, J.D., and others. Assessment, Support, and Training for Kinship Care and Foster Care: An Empirically-Based Curriculum. Berkeley, Calif.: University of California at Berkeley, Child Welfare Research Center, 1998. A chapter in this curriculum reported the results of a study in which a sample of 161 kin and 96 nonkin caregivers living in the San Francisco Bay Area were interviewed in their homes. The study compared the two groups of caregivers on demographics, the quality of the relationship between caregiver and child, home safety, neighborhood safety, and other factors related to the quality of care the children received. Courtney, M.E. “Factors Associated with the Reunification of Foster Children with Their Families.” Social Service Review, March 1994, pp. 81-108. This study examined the relationship between factors such as a child’s age, type of foster care placement (kinship or nonkinship), reason for removal, and the probability that the child would return to his or her parents. The results were based on statewide administrative data on a random sample of 8,748 of the approximately 88,000 children who entered the foster care system in California for the first time between January 1988 and May 1991. The author cited as study limitations the short time period covered by the data, the limited amount of data recorded for each case, and the quality of items recorded in the database. Gebel, Timothy J. “Kinship Care and Non-Relative Family Foster Care: A Comparison of Caregiver Attributes and Attitudes.” Child Welfare, Vol. 75, No. 1 (1996), pp. 5-18. This study compared the demographics, attitudes, and perceptions of relative and nonrelative foster parents in one urban county in a southeastern state in 1993. The results were based on responses to a questionnaire mailed to the foster parents in random samples of 140 of the 450 relative foster care cases and 140 of the approximately 300 nonrelative foster care cases in that county at that time. Foster parents were asked about their attitudes toward the use of corporal punishment and their perceptions regarding children in their care, the behavior of these children, and the support they received from child welfare agencies. Foster parents in 111 of the traditional placements and 82 of the placements with relatives responded to the survey. Iglehart, Alfreda P. “Kinship Foster Care: Placement Service and Outcome Issues.” Children and Youth Services Review, Vol. 16, Nos. 1-2 (1994), pp. 107-22. This article described the results of a study that compared selected characteristics of adolescents in kinship care to those of adolescents not in kinship foster care. Between February and July 1988, caseworkers in Los Angeles County extracted this information from the case files of all 1,642 children aged 16 or older who were in foster care during that period. Data for about 990 adolescents—352 in kinship care and 638 in traditional foster care—were analyzed for this study. Among the characteristics compared were gender, race and ethnicity, reason for removal, total number of placements, length of time in current placement, and degree of agency case monitoring. Le Prohn, Nicole S. “Relative Foster Parents: Role Perceptions, Motivation and Agency Satisfaction.” Ph.D. dissertation, University of Washington, Seattle, Washington, 1993. This researcher examined the relationship between relative and nonrelative placement with respect to what foster parents believed their role to be, what motivated them to become foster parents, and how satisfied they were with the foster care agency. Associations between foster placement type and the children’s behavior and amount of contact with their parents were also examined. The foster families selected for the study were families in the Casey Family Program, a long-term foster care program with offices in 13 states for children who are unable to be reunited with their birth parents and are unlikely to be adopted. Results were based on a random sample of about 175 nonrelative foster homes selected from all nonrelative foster homes in the Casey program in 1992. That group was compared with the entire population of about 130 relative foster homes in the Casey program during 1992. Data were collected from foster parents using a mail questionnaire and a telephone interview. Eighty-two relative foster homes and 98 nonrelative homes were included in the analysis. Le Prohn, Nicole S., and Peter J. Pecora. Research Report Series: The Casey Foster Parent Study Research Summary. Seattle, Wash.: Casey Family Program, 1994. Same description as for Le Prohn dissertation above. Magruder, Joseph. “Characteristics of Relative and Non-Relative Adoptions by California Public Adoption Agencies.” Children and Youth Services Review, Vol. 16, Nos. 1-2 (1994), pp. 123-31. The author compared adoptions in California by relatives and nonrelatives with respect to children’s gender, ethnicity, and time in placement before adoption and the characteristics of the adoptive parents and their households. Study results were based on the 3,214 public adoptions that took place during that state’s fiscal year 1992, for which data were available. Needell, B. “Placement Stability and Permanence for Children Entering Foster Care as Infants.” Ph.D. dissertation, University of California at Berkeley, Berkeley, California, 1996. A number of samples were drawn for this study from a longitudinal database containing all cases in the California Foster Care Information System from 1988 through 1994. The primary sample consisted of all 43,066 children in California who entered foster care before their first birthday and between 1988 and 1994. Analysis examined the types of placement, length of stay, reasons for infants’ reentry into foster care after reunification, and factors that may have led to an infant’s adoption or reunification. Needell B., and others. Performance Indicators for Child Welfare Services in California: 1994. Berkeley, Calif.: University of California at Berkeley, School of Social Welfare, Child Welfare Research Center, 1995. The results of this study were based on a longitudinal database of 233,000 cases in the California Foster Care Information System. These children were in foster care during 1988 or had entered care before the beginning of 1995. The percentage of children in different types of placements who exited the system by reunification, adoption, guardianship, and emancipation was reported, as well as the median length of the children’s first stay in foster care by foster care placement type. The authors also examined the effect of ethnicity, age at time of entry, and reasons for removal from the home on the relationships between placement type and foster care outcome and between placement type and length of stay. Needell B., and others. Performance Indicators for Child Welfare Services in California: 1996. Berkeley, Calif.: University of California at Berkeley, School of Social Welfare, Child Welfare Research Center, 1997. In this study, the longitudinal database used in the 1995 Needell and others study cited above was expanded to 300,000 children who were in foster care during 1988 or had entered care before 1997. The analyses were similar to those in the 1995 study. Poindexter, Garthia M. “Services Utilization by Foster Parents and Relatives.” Master of Social Work thesis, California State University, Long Beach, California, 1996. The author reported on the use of social services by relative and nonrelative foster parents in Los Angeles County based on 40 foster care cases selected at random from the population of children who entered foster care in that county during 1994. Of the 40 cases, 22 were relative foster care placements and 18 were nonrelative foster care placements. Scannapieco, Maria, Rebecca L. Hegar, and Catherine McAlpine. “Kinship Care and Foster Care: A Comparison of Characteristics and Outcomes.” Families in Societies, Vol. 78, No. 5 (1997), pp. 480-88. From case file information for a cross-section of children in foster care in Baltimore County on March 23, 1993, the researchers attempted to determine whether there were differences between kinship and other foster care placements in terms of permanency planning goals. Of the 106 children sampled, 47 were in kinship care and 59 were in other types of placements. Testa, Mark F. Home of Relative (HMR) Program in Illinois Interim Report. Chicago, Ill.: University of Chicago, School of Social Service Administration, 1993. The author used a database that included information about all children in foster care in Illinois between fiscal years 1965 and 1992 to establish trends in kinship care placements in Illinois and to describe various characteristics of foster children and their foster care outcomes. Testa, Mark F. “Kinship Care in Illinois.” In J.D. Berrick, R.P. Barth, and N. Gilbert (eds.), Child Welfare Research Review, Vol. 2. New York: Columbia University Press, 1997. Pp. 101-29. Focusing on reunification and discharge rates among children in foster care in Illinois between fiscal years 1976 and 1992, the researcher examined the effect of selected factors such as age, race, and type of foster care placement on the likelihood of reunification or discharge. Testa, Mark F. “Professional Foster Care: A Future Worth Pursuing?” Child Welfare: Special Edition on Family Foster Care in the 21st Century. Forthcoming. This study examined the relationship between children’s placement type and whether or not they (1) remained close to their community of origin, (2) were placed with other siblings in the same household, and (3) achieved permanency or stayed in the same foster care setting. The researcher used administrative data from Cook County, Illinois, for three different foster care recruitment programs and two random samples, one of 995 kinship care and one of 852 traditional foster care placements. The samples included only placements between December 1, 1994, and September 30, 1996. Administrative data through September 30, 1997, were used to determine whether or not the children stayed in one foster care setting or left the foster care system. Thornton, Jesse L. “Permanency Planning for Children in Kinship Foster Homes.” Child Welfare, Vol. 70, No. 5 (1991), pp. 593-601. Three surveys were conducted in this study. Semi-structured interviews were administered to a random sample of 20 kinship caregivers in New York City to determine their attitudes toward adoption. Eighty-six foster care caseworkers in New York City completed questionnaires that asked for their perceptions about kinship caregivers’ willingness to adopt. Finally, to compare permanency goals for children in kinship care to those for children in traditional care, the records from 95 active kinship foster care cases in April 1985 were examined along with statistics from an administrative database. U.S. General Accounting Office. Foster Care: Children’s Experiences Linked to Various Factors; Better Data Needed, GAO/HRD-91-64. Washington, D.C.: Sept. 11, 1991. Data on children who entered or left foster care in 1986 in Georgia, Illinois, New York, Oregon, South Carolina, and Texas and Los Angeles County and New York City were analyzed for the relationship of age, ethnicity, gender, location, reason for entry, and foster care placement type to length of stay. For Georgia, Oregon, South Carolina, and Texas, computerized data files of the case records for all children entering or leaving foster care during 1986 were used. For New York, Illinois, Los Angeles County, and New York City, random samples of children who had been discharged from foster care during 1986 were used; the New York and Illinois samples each contained 1,488 children, the sample for Los Angeles County contained 209 children, and the sample for New York City contained 130 children. U.S. General Accounting Office. Foster Care: Health Needs of Many Young Children Are Unknown and Unmet, GAO/HEHS-95-114. Washington, D.C.: May 26, 1995. A random sample of 137 case records of foster children who had been in either kinship or traditional care exclusively was selected from the case records of all foster children younger than 3 years old in Los Angeles County and New York City during 1991 to examine the relationship between placement type and the receipt of health services by foster children in this age group. U.S. General Accounting Office. Foster Care: Services to Prevent Out-of-Home Placements Are Limited by Funding Barriers, GAO/HRD-93-76. Washington, D.C.: June 29, 1993. In this study of the statutory and fiscal barriers the states faced in delivering child welfare services, the researchers used caseload data for the last day of either calendar or fiscal year 1992 in California, Michigan, and New York to describe trends in foster care and child welfare services. Wulczyn, F.H., and R.M. George. “Foster Care in New York and Illinois: The Challenge of Rapid Change.” Social Service Review, June 1992, pp. 278-94. Aggregated administrative data on all children in New York’s child welfare system and similar data from Illinois were used to compare child welfare trends in these two states from 1983 through 1989. Shifts in total caseload size, average age of children entering foster care, and the number of relative foster care placements were examined. The researchers also determined the proportion of children admitted to foster care during 1988 in each state who were (1) discharged within 12 months, (2) discharged between 12 and 24 months, and (3) still in the system after 24 months. They compared the proportions in kinship care placements with those in nonkinship care placements. This appendix contains the results of analyses from the studies we identified that compared kinship care and other foster care. These results are presented in tables organized by research question. Sources are noted after each table. In some instances, the results in the tables were based on data from entire populations of foster children. When they were based on data from samples of foster children, if the researcher reported that a difference between kinship and other foster care was statistically significant, the significance level is noted in parentheses in the table. Appendix II contains a description of the design and methodology of the studies in this appendix. Table III.1: Did the Foster Child Remain in the Same Community or Neighborhood He or She Lived in Before Entering Foster Care? Of nonemergency first placements in Chicago, percentage located in the same community or neighborhood in which the parents or guardians residedPercentage of cases in which the interviewer thought the foster caregiver’s neighborhood was dangerous(.001) Average number of times foster child visited parents in the past yearMother (.001) Percentage of children who had contact with their mothers (.01) or fathersDid not see parents in past 12 months Saw parents at least once in the past 12 months Parents’ whereabouts were unknown Percentage of foster children who saw their parentsAt least once a month More than four times a month (.01) Percentage of foster children placed with siblings also in foster care (.01) Of the foster families with more than one foster child, percentage in which siblings were placed togetherFour or more siblings (.05) At least two siblings (.001) Percentage of children placed with siblingsAverage number of times foster children visited their siblings in the past year (.001) Table III.6: How Many Placements in Foster Care Did the Foster Child Have? In care less than 30 days In care 30 days or more (.001) Total placements (.01) Percentage of foster children with (.01) Percentage of foster children who entered care between 1988 and 1990 in California and had placements within 4 years after entry(continued) Percentage of foster children who had at least one placement before current placement (.001) Percentage of foster children with different degrees of integration according to foster parents (.001) and social workers (.001) Children who felt that they were very much part of the foster family Children who felt somewhat like a foster child Children who felt very much like a foster child Average age of foster caregivers in years Foster mothers (.01) Male foster caregivers (.05) Female foster caregivers (.05) Percentage of female foster caregivers 55 years of age or older (.01) Percentage of primary female foster caregivers by age (.005) Percentage of married foster caregivers (.05) Percentage of single foster caregivers (.001) Percentage of married foster caregivers by genderFoster mothers (.01) Percentage of foster caregivers who had completed high schoolMean number of years of school completedFoster fathers (.05) Foster mothers (.001) Percentage of foster caregivers who did not have a high school diplomaFemale (.001) Male (.01) Percentage of primary female foster caregivers with education by category (.00001) Percentage of foster caregivers in fair or poor healthMale (.001) Female (.001) Percentage of foster caregivers whose income was less than $15,000 a yearPercentage of foster families with income by category (.01) Average annual gross income, including foster care payments (.001) Average annual income, disregarding money received from either Aid to Families with Dependent Children (AFDC)-Family Grant or AFDC–Foster Care Percentage of primary female caregivers with household income by category (.000005) Percentage of foster caregivers whoHad a fire extinguisher (.001) Had a complete first aid kit (.001) Knew cardiopulmonary resuscitation (.001) Percentage who felt that training adequately prepared them to be a foster parent (.01) Percentage who received training (.001) Percentage of foster caregivers who received servicesSpecialized training (.001) Support group (.001) Respite care (.001) Mean number of services foster caregivers received (.001) Percentage of foster children who were not well known to the caseworker (.0001) Mean number of caseworkers’ visits with foster children during a 6-month period (.05) Mean number of caseworkers’ visits with foster children in past 12 monthsAverage number of hours per month foster children spent with a caseworker (.01) Table III.17: What Required Health Services Did the Foster Child Receive? Percentage of foster children up to 3 years old who received health-related servicesNo services (.10) Mean number of days (.05) 1994 study (.001) Percentage of first admissions in 1988 by length of stayStill in care as of June 1990 Still in care as of June 1990 Percentage of foster children entering care in 1986 in foster care for 1 year or longerPercentage of foster children who were in care as of June 30, 1992, by 2-year fiscal period in which they enteredLikelihood of being in care for 1 year or longer (explained in footnote g) Kinship care associated with longer length of stay when controlling for other factors (.007) Percentage difference between the likelihood that foster children who entered in a 2-year fiscal period would be discharged and the likelihood that children in other foster care settings who entered the system before 1977 would be discharged (explained in footnote i) (continued) For example, in Georgia a child in kinship care is almost three times as likely as a child in other foster care settings to remain in care for 1 year or longer. U.S. General Accounting Office, Foster Care: Children’s Experiences Linked to Various Factors; Better Data Needed, GAO/HRD-91-64 (Washington, D.C.: Sept. 11, 1991). For example, children who entered kinship care in fiscal years 1979 to 1980 were 25-percent less likely to be discharged than children who entered other foster care settings before fiscal year 1977, and children who entered other foster care settings in fiscal years 1979 to 1980 were 14-percent more likely to be discharged than children who entered other foster care settings before fiscal year 1977. Discharge includes return to parental custody, placement in private guardianship, adoption, or staying in the child welfare system until age 18. Mark F. Testa, “Kinship Care in Illinois,” in J.D. Berrick, R.P. Barth, and N. Gilbert (eds.), Child Welfare Research Review, Vol. 2 (New York: Columbia University Press, 1997), pp. 101-29. Percentage who were reunified with their parents within 4 years by year enteredPercentage who were adopted within 4 years by year enteredPercentage who exited within 4 years by year enteredPercentage who were emancipated within 4 years by year enteredCumulative percentage who entered care between January and July 1988 who were reunified with their parents afterPercentage who entered care in a 2-year period who were reunified with their parents withinPercentage attaining a permanency outcome by the end of the study period(continued) Entered subsidized guardianship (.0001) This appendix displays the frequency distributions of responses to questions in our survey of foster care cases in California and Illinois. Means and medians are provided for some items. In addition, selected information from the states’ administrative records is provided about these cases. Appendix I includes a detailed description of our survey methodology, and the questionnaire for this survey is in appendix IV. The percentage given for each response category constitutes our estimate of the proportion of all foster care cases in each state’s system as of September 15, 1997, that had been in the system since at least March 1, 1997. Because of the relatively small number of responses in some of the tables in this appendix and the resulting imprecision of any population estimates that might be based on those responses, tables with fewer than 41 cases present only the number of sample cases for which each response was given. No population estimates are given for those responses. The sampling errors for the percentage estimates vary. No sampling error for any of the percentage estimates exceeds plus or minus 15 percentage points. Table V.1 provides a more specific breakdown of sampling errors for the percentage estimates by number of cases for which there was a response. The sampling error for our estimates of the average number of caseworker visits in each state never exceeds plus or minus 1.3 visits. The sampling error for estimates in each state of the average number of a foster child’s siblings never exceeds plus or minus 0.5 siblings. The sampling error for estimates of the (1) average length of time all foster children in each state had spent in the system up until September 15, 1997, never exceeds plus or minus 8.7 months, (2) average age at which children entered foster care never exceeds plus or minus 0.84 years, and (3) average age of children in foster care never exceeds plus or minus 0.92 years. In tables V.9 through V.12, we provide the results of these three calculations for subpopulations of all foster children. Because some of these calculations are based on a relatively small sample of cases in each subpopulation, they do not constitute very precise estimates of the actual averages in the entire subpopulation in each state. These calculations refer to only the cases in our sample. Each category versus the rest combined (continued) Each category versus the rest combined n=88 No, first 3 n=115 No, first 3 categories combined versus the rest combined categories combined versus the rest combined (continued) While the question allowed answers about each of a pair of caregivers, the table shows the answers for only the younger one. While the question allowed answers about each of a pair of caregivers, the table shows the answers for the one in better health. (continued) Table V.5: Caregiver’s Performance of Parenting Tasks n=88 No, first 2 n=114 No, first 2 categories combined versus the rest combined categories combined versus the rest combined (continued) Yes, first 2 categories combined versus the rest combined n=114 No, first 2 categories combined versus the rest combined n=88 No, first 2 n=115 No, first 2 categories combined versus the rest combined categories combined versus the rest combined (continued) n=88 No, first 2 n=115 No, first 2 categories combined versus the rest combined categories combined versus the rest combined n=88 No, first 2 n=114 No, first 2 categories combined versus the rest combined categories combined versus the rest combined n=87 No, first 2 n=115 No, first 2 categories combined versus the rest combined categories combined versus the rest combined n=82 No, first 2 n=98 No, first 2 categories combined versus the rest combined categories combined versus the rest combined (continued) n=83 No, first 2 n=112 No, first 2 categories combined versus the rest combined categories combined versus the rest combined n=86 No, first 2 n=113 No, first 2 categories combined versus the rest combined categories combined versus the rest combined (continued) Yes, first 2 categories combined versus the rest combined n=87 No, first 2 n=114 No, first 2 categories combined versus the rest combined categories combined versus the rest combined n=87 No, first 2 n=111 No, first 2 categories combined versus the rest combined categories combined versus the rest combined (continued) Yes, first 2 categories combined versus the rest combined (continued) Yes, first category versus the rest combined category versus the rest combined n=50 No, first 3 n=82 No, first 3 categories versus the rest combined categories versus the rest combined n=50 No, first 3 n=82 No, first 3 categories versus the rest combined categories versus the rest combined (continued) Yes, first 3 categories versus the rest combined n=131 No, first 3 categories versus the rest combined category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test (continued) Yes, first 2 categories combined versus rest combined n=99 No, first 2 category is too small to perform the test categories combined versus rest combined n=98 No, first 3 category is too small to perform the test categories combined versus rest combined (continued) category is too small to perform the test category is too small to perform the test (continued) While the question allowed answers about each of a pair of caregivers, the table shows the answers for only the one whom the child knew best. While the questions allow answers about each parent, the table shows answers for the parent whose visitation restrictions are least likely to be enforced. Table V.9: Cases With the Goal of Reunification category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test (continued) Table V.10: Cases With the Goal of Adoption category is too small to perform the test category is too small to perform the test category is too small to perform the test (continued) category is too small to perform the test category versus the rest combined n=50 No, first 2 category is too small to perform the test categories combined versus the rest combined category is too small to perform the test category is too small to perform the test category is too small to perform the test (continued) Table V.11: Cases With the Goal of Guardianship category is too small to perform the test category is too small to perform the test (continued) category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test category is too small to perform the test (continued) Table V.12: Cases With the Goal of Long-Term Foster Care (continued) Juvenile Courts: Reforms Aimed to Better Serve Maltreated Children (GAO/HEHS-99-13, Jan. 11, 1999). Foster Care: Agencies Face Challenges Securing Stable Homes for Children of Substance Abusers (GAO/HEHS-98-182, Sept. 30, 1998). Child Protective Services: Complex Challenges Require New Strategies (GAO/HEHS-97-115, July 21, 1997). Foster Care: State Efforts to Improve the Permanency Planning Process Show Some Promise (GAO/HEHS-97-73, May 7, 1997). Child Welfare: Complex Needs Strain Capacity to Provide Services (GAO/HEHS-95-208, Sept. 26, 1995). Foster Care: Health Needs of Many Young Children Are Unknown and Unmet (GAO/HEHS-95-114, May 26, 1995). Foster Care: Parental Drug Abuse Has Alarming Impact on Young Children (GAO/HEHS-94-89, Apr. 4, 1994). 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. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed how well kinship care is serving foster children, focusing on the: (1) quality of care that children in kinship care receive compared with that received by other foster children, as measured by a caseworker's assessment of a caregiver's parenting skills, the extent to which a foster child is able to maintain contact with familiar people and surroundings, and a caregiver's willingness to enforce court-ordered restrictions on parental visits; (2) frequency with which state child welfare agencies pursue various permanent living arrangements and the time children in kinship care have spent in the system compared with other foster children; and (3) recent state initiatives intended to help ensure that children in kinship care receive good quality foster care and are placed in permanent homes in a timely manner. GAO noted that: (1) GAO's survey of open foster care cases in California and Illinois showed that in most respects the quality of both kinship and other foster care was good and that the experiences of children in kinship care and children in other foster care settings were comparable; (2) GAO found that caregivers both in kinship care and in other foster care settings demonstrated good parenting skills overall; (3) GAO also confirmed the belief that there is more continuity in the lives of children in kinship care before and after they enter foster care than there is in other foster children's lives; (4) in cases in which the courts have restricted parental visits with foster children to ensure the children's safety, the proportion of cases in which the caseworker believed that the caregiver was likely to enforce the restrictions was somewhat smaller among kinship care cases than among other foster care cases; (5) some of the standards that California and Illinois use to ensure good quality foster care and the level of support each state provides to foster caregivers are lower for kinship care than other types of foster care; (6) previous research on children who have left foster care has shown that children who had been in kinship care were less likely to be adopted and stayed longer in foster care than other foster children; (7) between California and Illinois, GAO's survey showed no consistent findings regarding the relationship between kinship care and permanency goals or the time foster children had spent in the system; (8) in Illinois, kinship care cases were more likely to have a permanency goal of adoption or guardianship than other foster care cases; (9) Illinois has found that kinship caregivers are willing to adopt, and Illinois is actively pursuing adoption in kinship care cases; (10) in California, kinship care cases were less likely than other foster care cases to have adoption or guardianship as a goal; (11) according to California officials, this may be because, at the time of GAO's survey, the state had only recently begun to offer adoption and guardianship options specifically designed for a foster child's relatives; (12) in California, there was no significant difference between the average length of time that children in kinship care and children in other settings had spent in the system; (13) in Illinois, children in kinship care had spent significantly less time in the system than other foster children; and (14) both California and Illinois are now taking steps to better ensure the good quality of kinship care and to encourage kinship caregivers to provide permanent homes for foster children who cannot return to their parents. |
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As you know, our country’s transition into the 21st Century is characterized by a number of key trends including global interdependence; diverse, diffuse, and asymmetrical security threats; rapidly evolving science and technologies; dramatic shifts in the age and composition of our population; important quality of life issues; and evolving government structures and concepts. Many of these trends are intertwined, and they call for a reexamination of the role of government in the 21st Century given changing public expectations. Leading public and private organizations here in the United States and abroad have found that for organizations to successfully transform themselves they must often change their culture. Leading organizations also understand that their people, processes, technologies, and environments are the key enablers that drive cultural change. For governmental entities, this evolution generally entails shifts away from process to results; stovepipes to matrixes; hierarchical to flatter and more horizontal structures; an inward focus to an external (citizen, customer, and stakeholder) focus; management control to employee empowerment; reactive behavior to proactive approaches; avoiding new technologies to embracing and leveraging them; hoarding knowledge to sharing knowledge; avoiding risk to managing risk; and protecting turf to forming partnerships. While transformation across government is critically important to successful transition into the 21st century, it is of utmost importance at the FBI. This is the agency at the front line of defending the public and our way of life from a new and lethal threat, that of terrorism against Americans. At the same time the FBI maintains the responsibility for investigations of other serious federal crimes. Every American has a stake in assuring the success of the FBI’s efforts. The FBI is a unique organization comprised of thousands of devoted and capable public servants who live and breathe the agency’s motto of fidelity, bravery, and integrity everyday. The FBI has a long and proud history, and it does many things well. But, times have changed, and the FBI must change with the times in considering what it does and how it does business. At the same time, the motto itself is timeless in nature. Any changes at the FBI must be part of, and consistent with, broader governmentwide transformations that are taking place. This is especially true as the establishment of a Department of Homeland Security is debated and put into place. Moreover, Director Mueller had noted that the FBI reorganization and realignment efforts that we are discussing today are just the second phase in a comprehensive effort that he is planning to address a broad range of management and organizational challenges. This is, in effect, a down payment on a huge undertaking. Director Mueller has taken the first and most important step in successfully undertaking the needed transformation at the FBI—he has demonstrated his personal commitment through his direct involvement in developing and leading the Bureau’s transformation efforts. He has recognized a need to refocus priorities to meet the demands of a changing world and is now taking first steps to realign resources to achieve his objectives. His continued leadership, coupled with the involvement of other senior executives at the FBI, and clear lines of accountability for making needed improvements will be critical if the effort is to succeed. These factors are prerequisites to overcoming the natural resistance to change, marshalling the resources needed to improve the Bureau’s effectiveness, and building and maintaining the FBI-wide commitment to new ways of doing business. The Director is early in his 10-year term. This should prove very helpful because the experiences of leading organizations suggest that given the enormous challenges the FBI faces, successfully completing needed cultural and other transformations may take up to 7 or more years. At the same time, some steps are critical and time sensitive. As a result, the FBI needs to develop a comprehensive transformation plan with key milestones and assessment points to guide its overall transformation efforts. FBI Director Mueller unveiled the second phase of the reorganization at a news conference on May 29 and discussed it further at a hearing before the Senate Judiciary Committee on June 6, 2002. These proposed changes are designed to build on the initial reorganization actions Director Mueller took in December 2001. These earlier actions were to strengthen the FBI’s top-level management structure, enhance accountability, reduce executive span of control, and establish two new divisions for Records Management and Security. The central thrust of this next phase of the reorganization plan is to build an FBI with a national terrorism response capability that is larger and more mobile, agile, and flexible. The key elements of this second installment of the reorganization include a shifting of some resources from long-standing areas of focus, such as drugs, to counterterrorism and intelligence; building analytic capacity; and recruiting to address selected skill gaps. In light of the events of September 11, 2001, this shift is clearly not unexpected and is, in fact, consistent with FBI’s 1998 Strategic Plan as well as the current Department of Justice Strategic Plan. Since September 11, unprecedented levels of FBI resources have been devoted to counterterrorism and intelligence initiatives with widespread public approval. Indeed, the goals of this phase of the reorganization plan are not highly controversial. Enhancement of resources for counterterrorism, greater sharing of information with the Central Intelligence Agency (CIA) and others, improvements in analytic capacity, establishment of a centralized intelligence unit to make sense out of the gathered information, more training, and recruitment of specialists all seem to be rational steps to building agency capacity to fight terrorism. However, some specific aspects of the plan should be highlighted. A key element of the reorganization is to “redirect FBI’s agent workforce to ensure that all available energies and resources are focused on the highest priority threat to the nation, i.e. terrorism.” This shift is intended to move the FBI from a reactive mode of operation to a more proactive orientation. The primary goal is to prevent terrorism rather than investigate and apprehend after an event occurs. The FBI has been involved in proactive counterterrorism work for some time. This reorganization is intended to make a greater commitment. In accordance with the goal, some agents from drug, white collar, and violent crime investigative work will shift their focus to counterterrorism. Specifically, the plan calls for 518 agents to be shifted—400 agents from drug work and 59 each from white collar and violent crime to be reassigned to work on counterterrorism, security improvements, and training. Of the 518 agents being shifted, 480 will be permanently reassigned to counterterrorism work. In the case of drug enforcement, this shift moves about 30 percent of the staff currently assigned to this activity to counterterrorism work. For white collar and violent crime the shift is not as substantial representing about 2.5 percent and 3 percent of their staff years, respectively. Given the massive move of resources to counterterrorism following the events of September 11, this really represents fewer agents returning to their more traditional crime investigative work as opposed to agents moving away from current drug, white collar, and violent crime work. According to FBI data, the number of field agents assigned to terrorism work jumped from 1,057 before September 11 to 6,390 immediately following the tragic events of that day. FBI data show that a shift of 518 agents from drugs, white collar crime, and violent crime seems to do little to change the picture of the overall deployment of FBI special agent resources. Counterterrorism agent resources go from about 15 percent of total agent resources, to just under 20 percent. Thus, it seems that despite a change in priorities, most of the FBI resources will remain devoted to doing the same types of work they have been doing in the past. This realignment actually affects about five percent of the total FBI special agent workforce, and, therefore, represents a relatively modest change in the focus of the Bureau as a whole at least for the present time. Is this the right amount of resources to shift to counterterrorism at this time? Is this too much? Perhaps the more salient question is, is this too little? It is probably unrealistic to ask the FBI or anyone else for the answer to this question at this time, given that the government’s information about the nature and extent of the terrorist threat is still evolving. However, this is a question that must be answered in due course based on a comprehensive threat assessment and analysis, including the role the FBI and other government agencies should play in our future counterterrorism efforts. According to the FBI, the Special Agents in Charge (SACs) of the 56 field offices were asked to indicate how many agents could be redirected into terrorism work in their locations without unduly jeopardizing other investigative work. In fact, SACs generally volunteered more agents to shift to counterterrorism work than were actually shifted. According to the FBI, SACs were given general guidance but not specific guidelines or other directives upon which to base their decisions concerning reallocation of resources. Thus, for good or ill, field offices may have used different criteria for determining how many resources could be reallocated. FBI headquarters made final reallocation decisions based on resource needs requested by the Executive Assistant Director for Counterterrorism/Counterintelligence. Careful monitoring will be needed to ensure that the agents to be devoted to counterterrorism can be appropriately utilized and to what extent additional resources will be needed. Conversely, the impact of having fewer field agents working drug cases needs to be monitored and assessed over time. Prior to September 11, 2001, there was no indication from the FBI that their more traditional crime areas were overstaffed. FBI officials advised us that agents will still participate in as many crime-fighting taskforces as they have in the past, but that the number of agents assigned to each effort will be fewer in order to free resources for counterterrorism work. FBI officials also indicated that agents would be made available to assist state and local law enforcement with short-term needs, such as adding agents when widespread arrests are planned. In the drug area, which is the hardest hit in this reallocation, the Drug Enforcement Administration (DEA) is the major federal player. While DEA’s resources have increased in recent years, at this time we are not aware of any plans by DOJ to request additional resources for DEA to fill any gap that may be left by withdrawal of substantial FBI drug enforcement resources. DEA has announced, though, that it will move some agents from headquarters to the field, which could potentially help fill any gaps in federal-level drug law enforcement. The reorganization plan also calls for a build-up of the FBI headquarters Counterterrorism Division through the transfer of 150 counterterrorism agents from field locations to Washington, D.C. This seems consistent with the Director’s intention of shifting from a reactive to a proactive orientation in addressing terrorism and making counterterrorism a national program with leadership and expertise in headquarters and a response capability that is more mobile, agile, and flexible in terms of assisting the field offices. These 150 positions would then be backfilled in the field through recruitment of new agents. According to the FBI, the enhancement of this headquarters’ unit is intended to build “bench strength” in a single location rather than have expertise dispersed in multiple locations. When additional counterterrorism assistance is needed in field locations, headquarters staff would be deployed to help. Staff assigned to this unit would also be expected, and encouraged through incentives, to stay in counterterrorism work for an extended period of time. Staying in place would help to ensure increasing the depth of skills rather than following the more usual FBI protocol of more frequent rotations through a variety of assignments. An important part of the build-up of the Counterterrorism Division and making headquarters more responsive to the field, according to the FBI, is the establishment of “flying squads” with national level expertise and knowledge to enhance headquarters’ ability to coordinate national and international investigations and support field investigative operations. The flying squads are intended to provide a “surge capacity” for quickly responding to and resolving unfolding situations and developments in locations, both within and outside the United States, where there is a need to augment FBI field resources with specialized personnel or there is no FBI presence. Another important part of the build-up is the establishment of a National Joint Terrorism Task Force to facilitate the flow of information quickly and efficiently between the FBI and other federal, state, and local law enforcement and intelligence agencies. The national task force, which is to be comprised of members of the intelligence community, other federal law enforcement agencies, and two major police departments, is intended to complement and coordinate the already established 51 field office terrorism task forces. Training is also essential to ensuring that resources shifted to counterterrorism work can be used most effectively. There is no doubt that some of the skills needed for criminal investigations and intelligence work overlap with the skills needed for counterterrorism work. There will, however, be a need for specialized training concerning terrorist organizations and tactics. The FBI plans to fill this training need. Director Mueller is planning a number of steps in this phase of the reorganization to align resources with priorities. But, a broader assessment of the organization in relation to priorities may identify other realignment issues. Given the seeming disparity between priorities and resource allocation that will remain after the current realignment, more resource changes may be needed. Reconsideration may also be given to the field office structure. Is the 56 field office configuration the most effective spread of staff in terms of location to achieve results in relation to the priorities of the 21st Century? In December 2001, Director Mueller announced a headquarters reorganization that altered the number of layers of management. But, is more de-layering needed to optimize the functioning of the organization? Director Mueller will also need to address significant succession planning issues. According to a 2001 Arthur Anderson management study on the FBI, about a quarter of the special agent workforce will be eligible to retire between 2001 and 2005. Of perhaps greater concern, 80 percent of the Senior Executive Corps was eligible for retirement at the time of the Arthur Anderson review. While the potential loss of expertise through retirements will be substantial, this turnover also affords Director Mueller the opportunity to change culture, skill mix, deployment locations, and other agency attributes. To build the capacity to prevent future terrorist attacks, the FBI plans to expand its Office of Intelligence with an improved and robust analytical capability. In the past, the FBI has focused on case-specific analysis and on terrorism enterprise intelligence investigations intended to discern the structure, scope, membership, and finances of suspect organizations. Shortcomings in its analytical capabilities were identified by the FBI as far back as its 1998 strategic plan. That plan stated that the FBI lacked sufficient quantities of high-quality analysts, most analysts had little or no training in intelligence analysis, and many lacked academic or other experience in the subject matter for which they were responsible. Furthermore, it stated that the FBI needed strategic analysis capability for spotting trends and assessing U.S. vulnerabilities to terrorist activities. The events of September 11 and subsequent revelations highlight several of these continuing weaknesses. The Office of Intelligence, created in December 2001 as part of the first phase of the reorganization, supports both counterterrorism and counterintelligence. The Office will focus on building a strategic analysis capability and improving the FBI’s capacity to gather, analyze, and share critical national security information. According to the FBI, a new College of Analytical Studies at the FBI Academy will support the new Office by training analysts on the latest tools and techniques for both strategic and tactical analysis. This is a long-term effort that is long overdue, as is the need for technology that can support the analysts’ work. Our May 2000 review of the Justice Department’s Campaign Finance Task Force found that the FBI lacked an adequate information system that could manage and interrelate the evidence that had been gathered in relation to the Task Force’s investigations. It is unclear how the FBI’s proposed analytical efforts will interrelate with the planned analytical capability of the proposed Department of Homeland Security. The National Infrastructure Protection Center (NIPC) at the FBI is the “national focal point” for gathering information on threats and facilitating the federal government’s response to computer-based incidents. Specifically, NIPC is responsible for providing comprehensive analyses on threats, vulnerabilities, and attacks; issuing timely warnings on threats and attacks; and coordinating the government’s response to computer-based incidents. In April 2001, we reported that multiple factors have limited the development of NIPC’s analysis and warning capabilities. These include the lack of a comprehensive governmentwide or national framework for promptly obtaining and analyzing information on imminent attacks, a shortage of skilled staff, the need to ensure that NIPC does not raise undue alarm for insignificant incidents, and the need to ensure that sensitive information is protected. At that time, we recommended that NIPC develop a comprehensive written policy for establishing analysis and warning capabilities. Although the Director of NIPC generally agreed with GAO’s findings and stated that the NIPC considers it of the utmost urgency to address the shortcomings identified, we are not aware of any actions to address this recommendation. The FBI reorganization plan calls for NIPC to be housed in the Cyber Division, which is under the leadership of the Executive Assistant Director for Criminal Investigations. This location seems inconsistent with ensuring that it focuses proactively on early warning as opposed to reactively. The President’s plans for the Department of Homeland Security call for NIPC to be moved out of the FBI and into this new department. Regardless of location, a focus on enhancing its capabilities as outlined in our 2001 report is critical. The plan also calls for the recruitment of additional agents, analysts, translators, and others with certain specialized skills and backgrounds. In total, the FBI is expected to hire 900 agents this year—about 500 to replace agents who are projected to be leaving the agency and 400 to fill newly created positions. FBI officials stated that based on past experience they expect to be able to meet their agent-recruiting target and can accommodate the size of this influx at their training facilities. However, recruitment may become more difficult than in prior years because of the competing demand for qualified candidates, particularly those with specialized skills (e.g., technology, languages, and sciences), from other law enforcement and commercial entities that are also planning to increase their investigative capacity this year. This would include competition for qualified staff with the Transportation Security Administration and with the proposed Department of Homeland Security. In January 2002, we reported on the need for additional translators and interpreters in four federal agencies, including the FBI. We reported that of a total of about 11,400 special agents at the FBI, just under 1,800 have some foreign language proficiency, with fewer than 800 (about 7 percent) having language skills sufficient to easily interact with native speakers. Hiring new agents with foreign language proficiency, especially those with skills in Middle Eastern and Asian languages, is essential but could be difficult given competing market demands for their skills. Obtaining security clearances and basic training will add additional time to the process of enhancing the FBI’s strength in language proficiency. The FBI also uses part-time contract staff to meet translation and interpretation needs and to augment its 446 authorized translator and interpreter positions (55 of which are vacant at this time). However, counterterrorism missions may require flexibility that contract staff working part-time schedules cannot provide, such as traveling on short notice or working extended and unusual hours. While the FBI has shared linguistic resources with other agencies, more opportunities for pooling these scarce resources should be considered. Transformations of organizations are multifaceted undertakings. The recently announced changes at the FBI focus on realignment of existing resources to move in the direction of aligning with the agency’s new priorities. Earlier changes altered the FBI’s top-level management structure, accountability, and span of control. A variety of issues will require the Director’s attention, and that of others, including Attorney General Ashcroft, to successfully move the agency into the 21st Century. major communications and information technology improvements, development of an internal control system that will ensure protection of civil liberties as investigative constraints are loosened, and management of the ripple effect that changes at the FBI will have on other aspects of the law enforcement community. Communications has been a longstanding problem for the FBI. This problem has included antiquated computer hardware and software, including the lack of a fully functional e-mail system. These deficiencies serve to significantly hamper the FBI’s ability to share important and time sensitive information with the rest of the FBI and across other intelligence and law enforcement agencies. Sharing of investigative information is a complex issue that encompasses legal requirements related to law enforcement sensitive and classified information and its protection through methods such as encryption. It is also a cultural issue related to a tradition of agents holding investigative information close so as not to jeopardize evidence in a case. Whereas, in a more proactive investigative environment, the need for more functional communication is of paramount importance and will be essential for partnering with other law enforcement agencies and the intelligence community. Stated differently, we do not believe the FBI will be able to successfully change its mission and effectively transform itself without significantly upgrading its communications and information technology capabilities. This is critical, and it will take time and money to successfully address. In February 2002, as part of a governmentwide assessment of federal agencies, we reported on enterprise architecture management needs at the FBI. Enterprise architecture is a comprehensive and systematically derived description of an organization’s operations, both in logical and technical terms, that has been shown to be essential to successfully building major information technology (IT) systems. Specifically, we reported that the FBI needed to fully establish the management foundation that is necessary to begin successfully developing, implementing, and maintaining an enterprise architecture. While the FBI has implemented most of the core elements associated with establishing the management foundation, it had not yet established a steering committee or group that has responsibility for directing and overseeing the development of the architecture. While establishing the management foundation is an essential first step, important additional steps still need to be taken for the FBI to fully implement the set of practices associated with effective enterprise architecture management. These include, among other things, having a written and approved policy for developing and maintaining the enterprise architecture and requiring that IT investments comply with the architecture. The successful development and implementation of an enterprise architecture, an essential ingredient of an IT transformation effort for any organization and even more important for an organization as complex as the FBI, will require, among other things, sustained commitment by top management, adequate resources, and time. The Director has designated IT as one of the agency’s 10 priorities. Although the FBI wishes to become a more proactive agency, it needs to be cognizant of individuals’ civil liberties. Guidelines created in the 1970’s to stem abuses of civil liberties resulting from the FBI’s domestic intelligence activities have recently been revised to permit agents to be more proactive. For example, these guidelines permit FBI presence at public gatherings, which generally had been inhibited by the prior guidelines. No information obtained from such visits can be retained unless it relates to potential criminal or terrorist activity. To better ensure that these new investigative tools do not infringe on civil liberties, appropriate internal controls, such as training and supervisory review, must be developed, implemented, and monitored. Our central focus today is on the effects of changes at the FBI on the FBI itself, and we have also alluded to a potential impact on DEA of a shift in FBI drug enforcement activity. It is also important to remember that these changes may have a ripple effect on the nature and volume of work of other Justice Department units and their resource needs, including the Office of Intelligence Policy and Review, the U.S. Attorneys Offices, and the Criminal Division’s Terrorism and Violent Crime Section. For example, if the volume of FBI counterterrorism investigations increases substantially and the FBI takes a more proactive investigative focus, one could expect an increased volume of Foreign Intelligence Surveillance Act requests to the Office of Intelligence Policy and Review. Moreover, should those requests be approved and subsequent surveillance or searches indicate criminal activity, U.S. Attorneys Offices and the Terrorism and Violent Crime Section would be brought in to apply their resources to those investigations. In addition, because of the FBI’s more proactive investigations, one could expect more legal challenges to the admissibility of the evidence obtained and to the constitutionality of the surveillance or search. State and local law enforcement are also likely to be affected by a change in FBI focus. Although the major gap that state and local law enforcement may have to help fill as a result of this realignment is in the drug area, if additional FBI resources are needed for counterterrorism, state and local law enforcement may have to take on greater responsibility in other areas of enforcement as well. As the FBI moves forward in its efforts to transform its culture and reexamine its roles, responsibilities, and desired results to effectively meet the realities and challenges of the post-September 11 environment, it should consider employing the major elements of successful transformation efforts that have been utilized by leading organizations both here and abroad. These begin with gaining the commitment and sustained attention of the agency head and all in senior-level leadership. It requires a redefinition and communication of priorities and values and a performance management system that will reinforce agency priorities. It will also require a fundamental reassessment of the organizational layers, levels, units, and locations. Any realignment must support the agency’s strategic plan and desired transformation. Organizations that have successfully undertaken transformation efforts also typically use best practices for strategic planning; strategic human capital management; senior leadership and accountability; realignment of activities, processes, and resources; and internal and external collaboration among others. It has long been understood that in successful organizations strategic planning is used to determine and reach agreement on the fundamental results the organization seeks to achieve, the goals and measures it will set to assess programs, and the resources and strategies needed to achieve its goals. Strategic planning helps an organization to be proactive, anticipate and address emerging threats, and take advantage of opportunities to be reactive to events and crises. Leading organizations, therefore, understand that planning is not a static or occasional event, but a continuous, dynamic, and inclusive process. Moreover, it can guide decision making and day-to-day activities. In addition to contributing to the overall DOJ Strategic Plan, the FBI has developed its own strategic planning document. Issued in 1998, and intended to cover a 5-year period, the plan emphasized the need for many of the changes we are talking about today. It is important to note that the 1998 plan called for a build up of expertise and emphasis in the counterterrorism area and a diminution of activities in enforcement of criminal law, which is consistent with the focus of the Director’s current priorities. These priorities, as presented by the Director on May 29, 2002, lay the groundwork for a new strategic plan that FBI officials have indicated they will be developing. A new strategic plan is essential to guide decision making in the FBI’s transformation. The Director has set agency priorities, but the strategic plan can be the tool to link actions together to achieve success. The first step in developing a strategic plan is the development of a framework. This framework can act as a guide when the plan is being formulated. The FBI’s employees, or human capital, represent its most valuable asset. An organization’s people define its character, affect its capacity to perform, and represent the knowledge base of the organization. We have recently released an exposure draft of a model of strategic human capital management that highlights the kinds of thinking that agencies should apply and steps they can take to manage their human capital more strategically. The model focuses on four cornerstones for effective strategic human capital management—leadership; strategic human capital planning; acquiring, developing, and retaining talent; and results-oriented organizational culture—that the FBI and other federal agencies may find useful in helping to guide their efforts. Director Mueller recognizes that one of the most basic human capital challenges the FBI faces is to ensure that it has staff with the competencies—knowledge, skills, and abilities—needed to address the FBI’s current and evolving mission. The announced plan makes a number of changes related to human capital that should move the FBI toward ensuring that it has the skilled workforce that it needs and that staff are located where they are needed the most. Hiring specialists, developing added strength in intelligence and analytic work, and moving some expertise to headquarters so that it can be more efficiently shared across the agency are all steps in a positive direction toward maximizing the value of this vitally important agency asset. Given the anticipated competition for certain highly skilled resources, some hiring flexibility may be needed. The FBI does not have a comprehensive strategic human capital plan. This plan, flowing out of an updated strategic plan, could guide the FBI as it moves through an era of transformation. A performance management system that encourages staff to focus on achieving agency goals is an important tool for agency transformation and leads to positive staff development. The importance of Director Mueller’s personal commitment to change at the FBI cannot be overstated. His leadership and commitment is essential, but he needs help to be successful. Director Mueller has recently brought on board a Special Assistant to oversee the reorganization and re- engineering initiatives. This individual brings a wide range of expertise to the position and will perform many of the functions of a Chief Operating Officer (COO). The FBI can reinforce its transformation efforts and improve its performance by aligning institutional unit, and individual employee, performance expectations with planned agency goals and objectives. The alignment will help the FBI’s employees see the connection between their daily activities and Bureau’s success. High-performing organizations have recognized that a key element of an effective performance management system is to create a “line of sight” that shows how individual responsibilities and day-to-day activities are intended to contribute to organizational goals. Coupled with this is the need for a performance management system that encourages staff to focus on performing their duties in a manner that helps the FBI achieve its objectives. The FBI currently uses a pass/fail system to rate special agents’ performance. This type of system does not provide enough meaningful information and dispersion in ratings to recognize and reward top performers, help everyone attain their maximum potential, and deal with poor performers. As a result, the FBI needs to review and revise its performance management system in a way that is in line with the agency’s strategic plan, including results, core values, and transformational objectives. An organization’s activities, core processes, and resources must be aligned to support its mission and help it achieve its goals. Leading organizations start by assessing the extent to which their programs and activities contribute to meeting their mission and intended results. They often find, as the FBI’s efforts are suggesting, that their organizational structures are obsolete and inadequate to meet modern demands and that levels of hierarchy or field to headquarters ratios, must be changed. As indicated earlier in this testimony, this FBI reorganization plan deals directly with reallocation of existing resources to more clearly realign with the agency’s revised mission. The Director has taken a major step in relation to this aspect of transforming an organization. However, ultimately the FBI must engage in a fundamental review and reassessment of the level of resources that it needs to accomplish its mission and how it should be organized to help achieve the desired results. This means reviewing and probably revising the number of layers, levels, and units to increase efficiency and enhance flexibility and responsiveness. There is also a growing understanding that all meaningful results that agencies hope to achieve are accomplished through networks of governmental and nongovernmental organizations working together toward a common purpose. In almost no area of government is this truer than it is in the law enforcement arena. Effectiveness in this domain, particularly in relation to counterterrorism, is dependent upon timely information sharing and coordinated actions among the multiple agencies of the federal government, states, localities, the private sector, and, particularly with the FBI, the international community. In his plan, Director Mueller has indicated that he has taken and will take additional steps to enhance communication with the CIA and other outside organizations. It should be noted that the CIA has agreed to detail analysts to the FBI on a short-term basis to augment FBI expertise. In the law enforcement setting, specifically at the FBI, there are certain legal restrictions concerning the sharing of information that set limits on communications. Recently, some of these restrictions have been eased. The USA PATRIOT Act, P.L. 107-56, contains a number of provisions that authorize information sharing and coordination of efforts relating to foreign intelligence investigations. For example, Section 905 of the PATRIOT Act requires the Attorney General to disclose to the Director of the CIA foreign intelligence information acquired by DOJ in the course of a criminal investigation, subject to certain exceptions. Internally, leading organizations seek to provide managers, teams, and employees at all levels the authority they need to accomplish programmatic goals and work collaboratively to achieve organizational outcomes. Communication flows up and down the organization to ensure that line staff has the ability to provide leadership with the perspective and information that the leadership needs to make decisions. Likewise, senior leadership keeps line staff informed of key developments and issues so that the staff can best contribute to achieving the organizations goals. New provisions that provide more authority to FBI field offices to initiate and continue investigations is in keeping with this tenet of leading organizations. Transforming an organization like the FBI with its deep-seated culture and tradition is a massive undertaking that will take considerable effort and time to implement. Specifically, the reorganization and realignment plan are important first steps; the implementation of the plan and the elements relating to a successful organizational transformation will take many years. A strategic plan and human capital plan are essential to keep the FBI on course. Continuous internal, and independent external, monitoring and oversight are essential to help ensure that the implementation of the transformation stays on track and achieves its purpose of making the FBI more proactive in the fight against terrorism without compromising civil rights. It was such oversight of the FBI’s domestic intelligence activities in the 1970’s that helped identify civil liberties abuses and helped lead to the more restrictive Attorney General guidelines for such activities. The DOJ’s Inspector General recently discussed several ongoing, completed, and planned reviews relating to counterterrorism and national security. But, it is equally important for Congress to actively oversee the FBI’s proposed transformation. In its request for our testimony today, the Committee asked us to identify issues relating to the reorganization and realignment for follow-up review and said that it may want us to do further reviews of the implementation of the reorganization plan. We stand ready to assist this and other congressional committees in overseeing the implementation of this landmark transformation. There are, in fact, specific areas relating to the reorganization and realignment that might warrant more in-depth review and scrutiny, including (1) progress in developing a new strategic plan (2) a review of broader human capital issues, (3) FBI uses of the funds appropriated to fight terrorism, (4) measurement of performance and results, (5) the implementation of the Attorney General’s revised guidelines, and (6) the upgrading of information technology and analytic capacity. In closing, I would like to commend the Department of Justice and FBI officials for their cooperation and responsiveness in providing requested documentation and scheduling meetings needed to develop this statement within a tight timeframe. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you and the Subcommittee members may have. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. National Preparedness: Integrating New and Existing Technology and Information Sharing into an Effective Homeland Security Strategy. GAO-02-811T. Washington, D.C.: June 7, 2002. Homeland Security: Responsibility and Accountability for Achieving National Goals. GAO-02-627T. Washington, D.C.: April 11, 2002. National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts is Critical to an Effective National Strategy for Homeland Security. GAO-02-621T. 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Combating Terrorism: Issues to Be Resolved to Improve Counterterrorism Operations. GAO/NSIAD-99-135. Washington, D.C.: May 13, 1999. Combating Terrorism: Observations on Federal Spending to Combat Terrorism. GAO/T-NSIAD/GGD-99-107. Washington, D.C.: March 11, 1999. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency. GAO/NSIAD-99-3. Washington, D.C.: November 12, 1998. Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program. GAO/T-NSIAD-99-16. Washington, D.C.: October 2, 1998. Combating Terrorism: Observations on Crosscutting Issues. GAO/T-NSIAD-98-164. Washington, D.C.: April 23, 1998. Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments. GAO/NSIAD-98-74. Washington, D.C.: April 9, 1998. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination. GAO/NSIAD-98-39. Washington, D.C.: December 1, 1997. Combating Terrorism: Federal Agencies’ Efforts to Implement National Policy and Strategy. GAO/NSIAD-97-254. Washington, D.C.: September 26, 1997. Terrorism and Drug Trafficking: Responsibilities for Developing Explosives and Narcotics Detection Technologies. GAO/NSIAD-97-95. Washington, D.C.: April 15, 1997. FBI Intelligence Investigations: Coordination Within Justice on Counterintelligence Criminal Matters Is Limited. GAO-01-780. Washington, D.C.: July 16, 2001. GAO’s Work at the FBI: Access to Data, Documents, and Personnel. GAO-01-888T. Washington, D.C.: June 20, 2001. Information Security: Software Change Controls at the Department of Justice. GAO/AIMD-00-191R. Washington, D.C.: June 30, 2000. Campaign Finance Task Force: Problems and Disagreements Initially Hampered Justice’s Investigation. GAO/GGD-00-101BR. Washington, D.C.: May 31, 2000. Year 2000 Computing Challenge: Readiness of FBI’s National Instant Criminal Background Check System Can Be Improved. GAO/AIMD/GGD-00-49. Washington, D.C.: December 16, 1999. FBI Accountability for Drugs Used in Special Operations: Deficiencies Identified and Actions Taken. GAO/AIMD-00-34R. Washington, D.C.: December 2, 1999. Year 2000 Computing Challenge: FBI Needs to Complete Business Continuity Plans. GAO/AIMD-00-11. Washington, D.C.: October 22, 1999. Combating Terrorism: FBI’s Use of Federal Funds for Counterterrorism- Related Activities (FY1955-1998). GAO/GGD-99-7. Washington, D.C.: November 20, 1998. FBI: Advanced Communications Technologies Pose Wiretapping Challenges. GAO/IMTEC-92-68BR. Washington, D.C.: July 17, 1992. Justice Management: The Value of Oversight Has Been Demonstrated. GAO/T-GGD-91-51. Washington, D.C.: July 11, 1991. International Terrorism: FBI Investigates Domestic Activities to Identify Terrorists. GAO/GGD-90-112. Washington. D.C.: September 7, 1990. International Terrorism: Status of GAO’s Review of the FBI’s International Terrorism Program. GAO/T-GGD-89-31. Washington, D.C.: June 22, 1989. FBI Domestic Intelligence Operations: An Uncertain Future. GAO/GGD-78-10. Washington, D.C.: November 9, 1977. Controlling the FBI’s Domestic Intelligence Operations. GAO/GGD-76-79. Washington, D.C.: March 29, 1976. FBI Domestic Intelligence Operations — Their Purpose and Scope: Issues that Need to be Resolved. GAO/GGD-76-50. Washington, D.C.: February 24, 1976. Managing for Results: Building on the Momentum for Strategic and Human Capital Reform. GAO-02-528T. Washington, D.C.: March 18, 2002. A Model of Strategic Human Capital Management. GAO-02-373SP. Washington, D.C.: March 15, 2002. Information Technology: Enterprise Architecture Use Across the Federal Government Can Be Improved. GAO-02-6. Washington, D.C.: February 19, 2002. Foreign Languages: Human Capital Approach Needed to Correct Staffing and Proficiency Shortfalls. GAO-02-375. Washington, D.C.: January 31, 2002. Information Security: Advances and Remaining Challenges to Adoption of Public Key Infrastructure Technology. GAO-01-277. Washington, D.C.: February 2001. Management Reform: Elements of Successful Improvement Initiatives. GAO/T-GGD-00-26. Washington, D.C.: October 15, 1999. Agencies’ Annual Performance Plans Under the Results Act: An Assessment Guide to Facilitate Congressional Decisionmaking. GAO/GGD/AIMD-10.1.18. Washington, D.C.: February 1998. Performance-Based Organizations: Lessons From the British Next Steps Initiative. GAO/T-GGD-97-151. Washington, D.C.: July 8, 1997. Performance-Based Organizations: Issues for the Saint Lawrence Seaway Development Corporation Proposal. GAO/GGD-97-74. Washington, D.C.: May 15, 1997. | This testimony discusses the Federal Bureau of Investigation's (FBI) proposed reorganization and realignment plans. The FBI's plans are part of a broader effort to fundamentally transform the federal government in light of recent trends and long-range fiscal challenges. As it moves into the 21st century, the country faces several key trends, including global interdependence; diverse, diffuse, and asymmetrical security threats; rapidly evolving science and technologies; dramatic shifts in the age and composition of the population; important quality of life issues; and evolving government structures and concepts. The second phase of the reorganization focuses on major aspects of FBI's realignment efforts, including realigning staff, building analytical capacity, the National Infrastructure Protection Center, and recruiting. Other issues include (1) major communications and information technology improvements, (2) development of an internal control system that will ensure protection of civil liberties as investigative constraints are loosened, and (3) management of the ripple effect that changes at the FBI will have on other aspects of the law enforcement community. As the FBI moves to effectively meet the realities and challenges since September 11, it should reconsider employing the major elements of successful transformation efforts used by leading organizations. These elements include strategic planning; strategic human capital management; senior leadership and accountability, realignment of activities, processes, and resources; and internal and external collaboration. Continuous internal, and independent external, monitoring and oversight are essential to ensure that the implementation of the transformation stays on track and achieves its purpose of making the FBI more proactive in the fight against terrorism without compromising civil rights. |
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In response to a provision of the Choice Act, on October 1, 2014, VA transferred funds and the responsibility for managing and overseeing the processing of claims for VA care in the community from its Veterans Integrated Service Networks (VISN) and VA medical centers to VHA’s Chief Business Office for Purchased Care. Previously, VISNs and medical facilities were responsible for managing both their own budgets for VA care in the community and the staff who processed these claims. After this transition, VHA’s Chief Business Office for Purchased Care became responsible for overseeing VA’s budget for care in the community programs and more than 2,000 staff working at 95 claims processing locations nationwide. The Choice Act also expressed the sense of Congress that VA shall comply with the Prompt Payment Act’s implementing regulations (or any corresponding similar regulation or ruling) when paying for health care pursuant to contracts entered into with community providers. Generally, these regulations require executive branch agencies to add interest penalties to payments made to vendors after the contractually established payment date, or 30 days after the date the agencies receive a proper invoice, if the contract specifies no due date. VHA has numerous programs through which it purchases VA care in the community services. As described in a recent independent assessment of VHA’s health care system, which was mandated by the Choice Act, these programs offer different types of services, have varying eligibility criteria for veterans and community providers, and establish different rules governing payment rates. In addition, for all types of VA care in the community services except individually authorized outpatient care, community providers must include medical documentation with the claims they submit to VHA or its third party administrators (TPA). (See appendix I for a side-by-side comparison of various features of these VA care in the community programs.) In what follows we describe the primary ways VHA purchases care in the community services, the applicable payment rates, and the extent to which VHA requires community providers to submit medical documentation as a condition of claims payment. Individually authorized care. The primary means by which VHA has traditionally purchased care from community providers is through individual authorizations. When a veteran cannot access a particular specialty care service from a VA medical facility—either because the service is not offered or the veteran would have to travel a long distance to obtain it from a VA medical facility—the veteran’s VA clinician may request an individual authorization for the veteran to obtain the service from a community provider. If this request is approved and the veteran is able to find a community provider who is willing to accept VA payment, VA will pay the provider on a fee-for- service basis. Generally, VA pays Medicare’s applicable rates for these services, unless the community provider has an existing contract and negotiated rates with a VA medical facility. For individually authorized inpatient care, VHA requires community providers to submit discharge summaries, at a minimum, as a condition of payment. For individually authorized outpatient care, the authorization itself states whether the community provider must submit any medical documentation as a condition of payment. Emergency care. When care in the community is not preauthorized, VA may reimburse community providers for two different types of emergency care: 1) emergency care for a condition related to a veteran’s service-connected disability and 2) emergency care for a condition not related to a veteran’s service-connected disability. The latter care is commonly referred to as Millennium Act emergency care. For service-connected emergency care, VA generally pays applicable Medicare rates, unless the community provider has an existing contract and negotiated rates with a VA medical facility. For Millennium Act emergency care, VA generally pays the lesser of the amount for which the veteran is personally liable (if a third party such as motor vehicle insurance or workers’ compensation insurance first paid for some portion of the care) or 70 percent of applicable Medicare rates. For claims for both types of emergency care, community providers are required to submit accompanying medical documentation, so that clinicians at VHA’s claims processing locations can determine whether or not the condition treated is related to the veteran’s service-connected disability and whether it meets the prudent layperson standard of an emergency. (See appendix II for a more detailed description of the criteria that must be met before VHA will pay claims for these two types of emergency care.) Patient-Centered Community Care (PC3). In September 2013, VA awarded contracts to two TPAs to develop regional networks of community providers of specialty care, mental health care, limited emergency care, and maternity and limited newborn care when such care is not feasibly available from a VA medical facility. VA and the TPAs began implementing the PC3 program in October 2013, and it was fully implemented nationwide as of April 2014. In August 2014, VA expanded the PC3 program to allow community providers of primary care to join the networks. PC3 is a program VA created under existing statutory authorities, not a program specifically enacted by law. To be eligible to obtain care from PC3 providers, veterans must meet the same criteria that are required for individually authorized VA care in the community services. When they join the PC3 networks, community providers agree to be reimbursed at rates they negotiate with the TPAs, which are reportedly a percentage of applicable Medicare rates. As a condition of their contracts with VA, the two TPAs are required to collect medical documentation from the community providers and return it to VA in a timely manner. Upon receipt, staff at VA facilities are responsible for scanning the associated medical documentation and entering it into the veteran’s VA electronic health record so that it is available for VA clinicians to view. Veterans Choice Program. The Choice Act provides, among other things, temporary authority and funding for veterans to obtain health care services from community providers to address long wait times, lengthy travel distances, or other challenges accessing care at a VA medical facility. Under this authority, VHA introduced the Veterans Choice Program in November 2014. As stated in VA’s December 2015 guidance, the program currently allows eligible veterans to obtain health care services from community providers if the veteran meets any of the following criteria: the next available medical appointment with a VA provider is more than 30 days from the veteran’s preferred date or the date the veteran’s physician determines he or she should be seen; the veteran lives more than 40 miles driving distance from the nearest VA facility with a full-time primary care physician; the veteran needs to travel by air, boat, or ferry to the VA facility that is closest to his or her home; the veteran faces an unusual or excessive burden in traveling to a VA facility based on geographic challenges, environmental factors, or a medical condition; the veteran’s specific health care needs, including the nature and frequency of care needed, warrants participation in the program; or the veteran lives in a state or territory without a full-service VA medical facility. To administer the Veterans Choice Program, VHA modified its contracts with the two TPAs it selected to administer the PC3 program. These contractors are responsible for enrolling community providers in their networks or establishing Choice Provider Agreements with the providers. Veterans Choice Program providers are generally paid Medicare rates. Community providers who are not part of the PC3 or Veterans Choice Program networks submit claims for preauthorized and emergency care to one of VHA’s 95 claims processing locations. For PC3 and Veterans Choice Program care, community providers submit their claims to the TPAs, and the TPAs process the claims and pay the community providers. Subsequently, the TPAs submit claims to one of VHA’s claims processing locations—either the one that authorized the care, in the case of PC3 claims, or the one that VHA has designated to receive Veterans Choice Program claims. VHA staff at these locations process these claims using the same systems used to process other claims for VA care in the community programs, and VA reimburses the TPAs for the care. To process claims for VA care in the community programs, staff at VHA’s claims processing locations use the Fee Basis Claims System (FBCS). FBCS does not automatically apply relevant criteria and determine whether claims are eligible for payment. Rather, staff at VHA’s claims processing locations must make determinations about which payment authority applies to each claim and which claims meet applicable administrative and clinical criteria for payment. (See table 2 for a description of these steps.) In addition to processing claims for VA care in the community programs, staff at VHA’s claims processing locations are also responsible for responding to telephone inquiries from community providers who call to check the status of their claims or inquire about claims that have been rejected. For an illustration of the steps VHA staff must take to process claims from community providers and the TPAs, including which steps require manual intervention from staff, see appendix III. VHA, CMS, and DHA all have requirements for claims processing timeliness. See table 3. VHA, Medicare, and TRICARE follow similar steps to process claims for care they purchase on behalf of their beneficiaries. For example—even though paper claims account for a relatively small proportion of the overall number of claims submitted by Medicare and TRICARE providers— Medicare’s and TRICARE’s claims processors must scan incoming paper claims and verify that information from the claims was captured accurately when the claims were scanned, just as staff at VHA’s claims processing locations must do. In addition, like VHA, Medicare’s and TRICARE’s claims processors send notifications to providers after claims have been processed, to inform them of whether payments were approved or denied for each service listed on the claim. Even though these three agencies follow similar steps to process claims, the volume of claims that the agencies process varies widely, and the actual systems they use to carry out these steps differ markedly in several key respects. (For a summary of selected similarities and differences between VHA’s, Medicare’s, and TRICARE’s systems for processing health care claims, see appendix IV.) Based on our review of applicable documentation and interviews with officials from CMS, DHA, and two contractors that process Medicare and TRICARE claims, we identified the following key differences between VHA’s claims processing system and those of Medicare and TRICARE. These key differences are described below. Use of contractors. Unlike VHA, which employs its own staff to process claims for VA care in the community services, both Medicare and TRICARE use contractors to process claims for care purchased from community providers. CMS uses contractors called Medicare Administrative Contractors (MAC) to process claims for health care items and services. For TRICARE, DHA contracts with three managed care support contractors (MCSC), which are responsible for establishing regional networks of civilian providers, managing referrals, and providing customer service, among other things. To pay claims submitted by TRICARE’s network providers, the three MCSCs have each subcontracted with a single claims processing contractor. Number of claims processing locations. Contractors responsible for processing Medicare and TRICARE claims operate in fewer locations than do staff at VHA’s claims processing locations. Most Medicare Part A and Part B claims are processed by one of 12 jurisdiction-based MACs or 4 MACs that specialize in processing durable medical equipment claims, and all TRICARE claims are processed by a single contractor. In contrast, VHA employed claims processing staff in 95 different locations as of November 2015, and community providers in a given state may submit claims to multiple VHA claims processing locations depending on the type of VA care in the community and where they render services. As we have reported previously, CMS established its current regional model for MACs in 2006 to improve services to beneficiaries and providers and achieve operational efficiencies and cost savings by better balancing claims processing workloads among fewer contractors than it had used in the past. Prior to that time, there were 51 contractors responsible for processing Medicare claims. Rate of electronic claim submission and the capacity to accept medical documentation electronically. While VHA’s, Medicare’s, and TRICARE’s claims processing systems can all accept claims submitted by providers electronically, the rate of electronic submission is much higher in Medicare and TRICARE. According to CMS and DHA officials, the vast majority of Medicare and TRICARE claims are submitted electronically. The officials said that providers submit about 99 percent of Medicare Part A claims, 98 percent of Medicare Part B claims, and between 91 and 95 percent of TRICARE claims electronically. In contrast, according to VHA officials, about 40 percent of claims from providers participating in VA care in the community are submitted electronically. In addition, Medicare and TRICARE contractors’ systems can accept medical documentation electronically, unlike VHA’s claims processing system. VHA’s inability to accept medical documentation electronically discourages community providers from submitting claims electronically because VHA cannot process many types of VA care in the community claims until medical documentation is received. Given the high rates of electronic submission of claims and medical documentation among Medicare and TRICARE providers, the Medicare and TRICARE contractors do not need to devote as many staff resources to scanning paper claims and medical documentation and verifying that information was captured accurately as do VHA’s claims processing locations. Prior authorization. Unless services delivered by community providers meet the coverage criteria for one of VHA’s two emergency care programs, all VA care in the community services must be authorized in advance of when veterans access the care in order for claims to be paid. Medicare, on the other hand, generally does not require prior authorization for the services it covers, and TRICARE generally only requires prior authorization for specialty care services. Automatic claim adjudication. Compared to VHA’s system, the claims processing systems used in Medicare and TRICARE are more automated. While staff at VHA’s claims processing locations must manually apply administrative and clinical criteria to every claim to determine whether the claims should be paid, officials from the Medicare and TRICARE contractors we interviewed described their organizations’ high degrees of automatic claim adjudication. Medicare officials estimated that the MACs process about 95 percent of claims with no manual intervention, while officials from the contractor responsible for processing TRICARE claims estimated that their organization has automated about 75 percent of the claims adjudication process. Medical documentation as a condition of payment. While VHA requires providers to submit medical documentation for most types of claims for VA care in the community services, Medicare and TRICARE do not. According to CMS and DHA officials, Medicare and TRICARE providers are only required to submit medical documentation for a small percentage of claims, such as those flagged during a prepayment review for an examination of medical necessity. Web-based provider self-service portals. Unlike VHA, Medicare and TRICARE contractors both offer Web-based provider self-service portals. Officials from both of the Medicare and TRICARE contractors we interviewed said that their organizations had established Web- based provider self-service portals, which officials told us have decreased providers’ reliance on telephone-based customer service. With these portals, providers are able to access information about the status of their claims 24 hours a day, 7 days a week. In contrast, VHA’s claims processing locations only offer telephone-based provider customer service. Dedicated customer service staff. Unlike VHA, Medicare and TRICARE have dedicated customer service staff. The two Medicare and TRICARE contractors each maintain units with dedicated customer service staff, while staff in other units focus on claims processing. Officials from the two contractors said that within their customer service units, certain individuals are designated to handle calls from providers with more specialized, complex inquiries, while others focus on calls from providers who are inquiring about more routine issues. In contrast, at VHA’s claims processing locations, staff who process claims are also responsible for delivering telephone- based provider customer service. In fiscal year 2015, VHA’s processing of claims for VA care in the community services was significantly less timely than Medicare’s and TRICARE’s claims processing. VHA officials told us that the agency’s fiscal year 2015 data show that VHA processed about 66 percent of claims within the agency’s required timeframe of 30 days or less. In contrast, CMS and DHA data show that in fiscal year 2015, Medicare’s and TRICARE’s claims processing contractors processed about 99 percent of claims within 30 or fewer days of receipt. According to CMS and DHA officials, the vast majority of Medicare and TRICARE claims are submitted electronically. However, the difference between VHA’s claims processing timeliness and that of Medicare and TRICARE is likely greater than what VHA’s available data indicate. Specifically, VHA’s data likely overstate the agency’s claims processing timeliness because they do not account for delays in scanning paper claims, and VHA officials told us that paper claims account for approximately 60 percent of claims for VA care in the community services. VHA’s policy states that determinations of claims processing timeliness should be based upon the date the claim is received, but VHA’s systems can only calculate timeliness on the basis of the date the claim is entered into FBCS. When community providers submit paper claims, VHA policy requires claims processing staff to manually date- stamp them and scan the paper claims into FBCS on the date of receipt. Because FBCS cannot electronically read the dates that are manually stamped on paper claims, the scan date becomes the date used to calculate claims processing timeliness. To the extent that paper claims are not scanned into FBCS upon receipt, this elapsed time is not reflected in VHA’s timeliness calculations. Our review raises questions about whether staff at VHA’s claims processing locations are following the agency’s policy for scanning paper claims into FBCS upon receipt. We do not know the extent of delays in scanning paper claims at all of VHA’s claims processing locations. However, our analysis of the non-generalizable sample of 156 claims for VA care in the community services from the four VHA claims processing locations we visited suggests that it may have taken about 2 weeks, on average, for staff to scan the paper claims in our sample into FBCS. This estimate is based on the number of days that elapsed between the dates that community providers created 86 of the 94 paper claims in our sample and the dates the claims were scanned into FBCS. Based on this analysis, we found that the number of days between the creation date and the scanned date for the paper claims in our sample ranged from 2 days to 90 days. Our observations at one claims processing location we visited were consistent with our analysis of the sampled claims. For example, we observed about a dozen bins of paper claims and medical documentation waiting to be scanned, and some of these bins were labeled with dates indicating they were received by the claims processing location about a month before our visit. Additionally, this claims processing location was the only one of the four claims processing locations we visited that manually date-stamped all of its paper claims upon receipt. Staff at another claims processing location told us that they only date-stamp paper claims for emergency care upon receipt because these claims are only eligible for payment if they have been received within a certain amount of time after the date of service. However, the staff said they do not date-stamp non-emergency care claims because to do so would be too time-consuming. Staff at the other two claims processing locations told us that they did not date-stamp any claims. These findings from the four claims processing locations we visited for this review are consistent with the claims processing deficiencies we identified in our 2014 report on the implementation of the Millennium Act emergency care benefit. Specifically, we found that the VHA claims processing locations we reviewed for the 2014 report were rarely date- stamping incoming paper claims and were not promptly scanning a significant percentage of the paper claims we reviewed into FBCS. In our report, we recommended that VHA implement measures to ensure that all incoming claims are date-stamped and scanned into FBCS on the date of receipt, and VA agreed with our recommendations. Soon after we issued our 2014 report, VHA reiterated its date-stamping and scanning policies on national calls with managers responsible for claims processing, posted articles in its biweekly bulletin for managers and staff, and conducted online training for staff that communicated the importance of date- stamping and promptly scanning claims. However, the observations from our most recent review of a new sample of claims at four other claims processing locations suggest that VHA had not monitored the operational effectiveness of their corrective actions to address our recommendation. VHA officials said that when they became aware of our more recent findings, they began requiring managers at their claims processing locations to periodically certify in writing that all incoming paper claims have been date-stamped and scanned on the day of receipt. Prior to October 2015, VHA did not pay interest penalties on most late payments to community providers, while Medicare and TRICARE have done so. Specifically, until October 2015, VHA paid no interest on claims it paid late for community care delivered by non-contract providers through individual authorizations. According to VHA officials, the agency had not paid interest penalties on these individually authorized services because VA did not interpret the Prompt Payment Act as applying to these payments. However, in October 2015, VA’s Office of General Counsel issued a new legal opinion specifying that the Prompt Payment Act does apply to claims for VA care in the community services that were (1) individually authorized in advance, or (2) delivered by community providers who have contracted with the TPAs to participate in Veterans Choice Program networks. Since then, from October 2, 2015 through November 21, 2015, VHA paid approximately $409,000 in interest penalties on claims for this care, according to VHA officials. To facilitate interest penalty payments on claims for individually authorized VA care in the community services, VHA established a process to automatically pay the penalties when these claims are paid more than 30 days after receipt. However, as we noted earlier in this report, paper claims that officially meet VHA’s timeliness standard could have been in VHA’s possession weeks before being scanned into FCBS, so VHA may not be paying interest on all claims that are paid more than 30 days after the claims were actually received. This issue will likely persist until VHA ensures that all incoming paper claims are date- stamped and scanned into FBCS on the date of receipt, as we recommended in 2014. While VHA has not historically paid interest penalties on claims that are paid late, Medicare and TRICARE officials said their agencies have for many years considered the care provided under their programs to be subject to the Prompt Payment Act. In fiscal year 2014, CMS reported it paid about $3.3 million in interest penalties to Medicare providers (with overall payments for fee-for-service Medicare services totaling $357.3 billion), and DHA reported it paid about $386,000 in interest penalties to TRICARE providers (with overall payments for TRICARE services totaling about $10.5 billion). For both Medicare and TRICARE, the sum of interest penalties—relative to overall expenditures for services—was relatively low in fiscal year 2014 because these programs generally paid providers in a timely manner. See table 4. During the course of our work, VHA officials and staff at three of the four claims processing locations we visited told us that the limitations of the existing information technology systems VHA uses for claims processing—and related workload challenges—have delayed processing and payment of claims for VA care in the community services. These identified limitations are described in more detail below. VHA cannot accept medical documentation electronically. While VHA has the capacity to accept claims from community providers and the TPAs electronically, it does not have the capacity to accept medical documentation electronically from the providers and TPAs. As a result, this documentation must be scanned into FBCS, which delays claims processing, according to VHA staff. Although VHA policy requires VHA staff to promptly scan paper claims into FBCS when received, delays can occur because staff do not have time to scan the high volume of claims and medical documentation received each day, and the capacity of scanning equipment is limited. For example, VHA staff at one claims processing location we visited told us that on Mondays (their heaviest day for mail since they do not receive mail on weekends), they do not scan any incoming claims with accompanying medical documentation. Instead, they generally scan only claims that do not have accompanying medical documentation on Mondays and then scan claims with accompanying medical documentation into FBCS on Tuesdays and Wednesdays. In some cases, the medical documentation community providers must submit can be extensive, which may further delay its entry into FBCS. Officials from one community health care system told us that the medical documentation they submit with claims can be between 25 to 75 pages for each patient. With most types of claims requiring medical documentation, staff at VHA’s claims processing locations may need to scan a significant number of pages of incoming medical documentation each day. Authorizations for VA care in the community services are not always readily available in FBCS. Staff at three of the four VHA claims processing locations we visited told us that processing and payment can also be delayed when authorizations for VA care in the community services are unavailable in FBCS. Before a veteran obtains services from a community provider, staff at a VA medical facility must indicate in the veteran’s VA electronic health record (a system separate from FBCS) that the services have been authorized, and then these staff must manually create an authorization in FBCS. However, VHA officials and staff told us that these authorizations are sometimes unavailable in FBCS at the time claims are processed, which delays processing and payment. The authorizations are unavailable because either (1) they have been electronically suspended in FBCS, and as a result staff at the VA medical facility that authorized the care must release them before any associated claims can be paid, or (2) the estimated date of service on the authorization does not match the date that services were actually rendered, and new authorizations must be entered by staff at the authorizing VA medical facility before the claims can be paid. In our non-generalizable sample of 156 claims, 25 claims were delayed in being processed because an authorization was not initially available in FBCS, resulting in an average delay of approximately 42 days in claims processing. Additionally, 8 of the 12 community providers we interviewed said they were aware that some of their payments had been delayed because authorizations were not available in FBCS when their claims arrived at the VHA claims processing location. FBCS cannot automatically adjudicate claims. FBCS cannot automatically adjudicate claims, and as a result, VHA staff must do so manually, which VHA staff told us can slow claims processing, make errors more likely, and delay claims payment. After information from claims and supporting medical documentation has been scanned and entered into FBCS, the system cannot fully adjudicate the claims without manual intervention. For example, FBCS lacks the capability to electronically apply relevant administrative and clinical criteria for Millennium Act emergency care claims, such as automatically determining whether a veteran is enrolled in the VHA health care system and whether they had received services from a VA clinician in the 24 months prior to accessing the emergency care. Instead, staff processing these claims perform searches within FBCS and manually select rejection reasons for any claims that do not meet VHA’s administrative or clinical criteria for payment. Among the 156 claims we reviewed at four claims processing locations, it took an average of 47 days for claims processing staff to determine that the claims met the administrative and clinical criteria for payment. In addition, even after claims are approved for payment, they require additional manual intervention before the community providers can be paid. For example, in cases where FBCS cannot automatically determine correct payment rates for VA care in the community services, VHA staff manually calculate VHA’s payment rates and enter this information into FBCS. Staff we interviewed also told us that it usually takes about 2 days for claims to return from VA’s program integrity tool, which is a system outside FBCS where claims are routed for prepayment review of potential improper payments. If corrections must be made after the claims return from this prepayment review, payments can be delayed further. Weaknesses in FBCS and VHA’s financial management systems have also delayed claims payments. According to staff at three of the four claims processing locations we visited, payments on some VA care in the community claims are delayed because FBCS and VHA’s financial management systems do not permit officials to efficiently monitor the availability of funds for VA care in the community services. To centralize its oversight of VA care in the community, the Choice Act directed VA to transfer the authority for processing payments for VA care in the community from its VISNs and VA medical centers to VHA’s Chief Business Office for Purchased Care, a change VA implemented in October 2014. However, according to VHA officials from that office, monitoring the use of funds—at a national level—has remained largely a manual process due to limitations of FBCS and the use of separate systems to track obligations and expenditures. According to VHA officials, VHA uses historical data from FBCS to estimate obligations in VHA’s financial management systems on a monthly basis, and these estimates have been unreasonably low for some services, given the unexpected increase in utilization of VA care in the community services over the course of fiscal year 2015. In addition, these officials said that FBCS does not fully interface with VHA’s financial management systems used to track the availability of funds, which results in staff having to manually record the obligations for outpatient VA care in the community services in these systems on a monthly basis. Together, these two issues have impeded the ability of VHA to ensure that funds are available to pay claims for VA care in the community as they are approved, according to VHA officials responsible for monitoring the use of funds. We found that payments for 5 of the 156 claims we reviewed from four claims processing locations were delayed because of these issues, resulting in payment delays that ranged from 1 to 215 days. Inadequate equipment delays scanning of both paper claims and medical documentation. VHA officials also told us that inadequate scanning equipment delayed claims processing and adversely affected VHA’s claims payment timeliness. At the time of our review, staff responsible for scanning paper claims and medical documentation at one of the four claims processing locations we visited told us that they did not have adequate scanning equipment. At this location, the scanners that staff showed us were small enough to be placed on desktops, while the trays for feeding documents into the scanners could only handle a limited number of pages at one time. With an estimated 60 percent of claims and 100 percent of medical documentation requiring scanning, these staff said that they struggled to keep up with the volume of paper coming in to their claims processing location. Staffing shortages adversely affect claims processing timeliness. In addition to the technological issues described above, VHA officials and staff also told us that staffing shortages have adversely affected VHA’s claims processing timeliness. According to VHA officials, the overall number of authorized positions for claims processing staff did not change after the October 2014 organizational realignment that transferred claims processing management and oversight responsibilities to the Chief Business Office for Purchased Care. However, VHA officials said that VHA’s claims processing workload increased considerably over the course of fiscal years 2014 and 2015. (See figure 1 for an illustration of the increase in VHA’s claims processing workload from fiscal year 2012 through fiscal year 2015.) According to VHA officials and staff, the increase in workload contributed to poor staff morale, attrition, and staff shortages—all of which contributed to delays in processing and impeded VHA’s claims processing timeliness. VHA officials told us that in early fiscal year 2015, there were about 300 vacancies among the estimated 2,000 authorized positions for claims processing staff. The 12 community providers and 12 state hospital association respondents who participated in our review told us about various issues they had experienced with VHA’s claims processing system. These issues are described in more detail below. Administrative burden of submitting claims and medical documentation to VHA. Almost all of the community providers we interviewed (11 out of 12) and all of the state hospital association respondents that participated in our review described the administrative burden of submitting claims and medical documentation to their respective VHA claims processing locations. For example, one community provider told us that VHA claims only accounted for about five percent of their business, but the provider told us it employed one full-time staff member who was dedicated to submitting claims to VHA and following up on unpaid ones. This same provider employed a second full-time staff member to handle Medicaid claims, but these accounted for about 85 percent of the provider’s business. According to many of the community providers that participated in our review, obtaining payment from VHA often requires repeated submission of claims and medical documentation. Officials from one community provider we interviewed said that at one point, they had been hand delivering paper medical documentation with paper copies of the related claims to their VHA claims processing location, but VHA staff at this location still routinely rejected their claims for a lack of medical documentation. Similarly, six state hospital association respondents also reported that their members’ claims were often rejected, even though they always sent medical documentation to their VHA claims processing location by certified mail. Some of the community health care system and hospital officials who participated in our review explained that they often must submit medical documentation to their VHA claims processing location twice—once for the claim related to hospital services and again for claims related to physician services. Lack of notification about claims decisions. Community providers who participated in our review also explained that they rarely received written notifications from VHA about claims decisions. To inform community providers and the TPAs about whether their claims have been approved or rejected, staff at VHA’s claims processing locations print notices, known as preliminary fee remittance advice reports, and mail them to the providers and TPAs. However, community providers who participated in our study stated that they rarely received these paper reports in the mail, and even though they received VA payments electronically, it was not clear without the remittance advice reports which claims the payments applied to or whether VHA denied payment for certain line items on some claims. Unlike Medicare and TRICARE, VHA has no online portal where community providers can electronically check the status of their claims to find out if the claims are awaiting processing or if VHA needs additional information to process them. Several of the community providers who participated in our study told us that they would appreciate VHA establishing such a portal. Issues with telephone-based provider customer service. Almost all of the community providers and state hospital associations that participated in our review (9 out of 12 providers and 11 out of 12 associations) experienced issues with the telephone-based provider customer service at VHA’s claims processing locations. For example, officials from three of the community providers we interviewed reported that they routinely wait on hold for an hour or more while trying to follow up on unpaid claims. Officials from a community health care system that operates 46 hospitals and submits claims to 5 different VHA claims processing locations said that 3 of these locations will not accept any phone calls and instead require providers to fax any questions about claim status. According to officials from another community health care system, their VHA claims processing location has limited them to inquiring about only three claims per VHA staff member, per day. The officials explained that if they call twice on the same day and reach the same individual who has already checked the status of three claims, that person will refuse to check the status of additional claims; however, if they connect with a different VHA staff member, they may be able to inquire about additional claims. In the course of our work, VHA officials reported that they implemented several measures in fiscal year 2015 and early fiscal year 2016 that were intended to improve the timeliness of VHA’s payments to community providers and the TPAs. The following are the key steps that VHA officials have reported taking. Elimination of certain medical documentation requirements. On March 1, 2016, VA announced that it had modified its contracts with the TPAs so that community providers participating in the Choice Program will no longer be required to submit medical documentation before their VA care in the community claims can be paid. VA expects this will expedite the processing of claims from Choice Program providers. VHA’s data indicate that the number of VA care in the community authorizations routed to the Choice Program first exceeded the number of authorizations for other types of VA care in the community in November 2015, and in January 2016 (the most recent month for which data were available) about 56 percent of VA care in the community authorizations were routed to the Choice Program. VHA has not eliminated the medical documentation requirement for all other types of VA care in the community, requiring community providers to submit medical documentation before VHA will pay claims for (1) individually authorized inpatient VA care in the community, (2) PC3 care, (3) Millennium Act emergency care, and (4) service-connected emergency care. As discussed earlier in this report, VHA’s inability to electronically accept medical documentation from most community providers and the administrative burden of scanning a high volume of paper medical documentation have caused delays in VHA’s processing of claims for VA care in the community. Staffing increases. VHA officials said that they have recently filled the approximately 300 staff vacancies that resulted from attrition shortly after the October 2014 realignment of claims processing under VHA’s Chief Business Office for Purchased Care. The officials also told us that they have supplemented the existing workforce at VHA’s claims processing locations by hiring temporary staff and contractors to help address VHA’s backlog of claims awaiting processing. In addition, for 2 months in fiscal year 2015, VHA required its claims processing staff to work mandatory overtime, and according to VHA officials, staff are still working overtime on a voluntary basis. At some locations, VHA added second shifts for claims processing staff. As a result, VHA officials told us that VHA was able to decrease its backlog of unprocessed claims for VA care in the community from an all-time high of 736,000 claims in August 2015 to about 453,000 claims as of October 29, 2015. Deployment of nationwide productivity standards. On October 1, 2015, VHA introduced new performance plans with nationwide productivity standards for its claims processing staff, and officials estimated that these standards would lead staff to process more claims each day, resulting in a 6.53 percent increase in claims processing productivity over the course of fiscal year 2016. Improved access to data needed to monitor claims processing performance. VHA has implemented a new, real-time data tracking system to monitor claims processing productivity and other aspects of performance at its claims processing locations. This tool, which VHA officials refer to as the “command center,” permits VHA officials and managers at VHA’s claims processing locations to view claims data related to the timeliness of payments and other metrics at the national, claims processing location, and the individual staff level. Previously, many data were self-reported by the claims processing locations. The VHA officials we interviewed said that they monitor these data daily. New scanning equipment. VHA recently purchased new scanning equipment for 73 of its 95 claims processing locations, including the claims processing location we visited with the small, desktop scanners. The agency awarded a contract in November 2015, and officials said that VHA had installed this new equipment at almost all sites as of January 15, 2016. They expected that installation would be completed at the few remaining sites by the end of January 2016. Improvement of cost estimation tools. In January 2016, VHA deployed an FBCS enhancement that is intended to improve VHA’s ability to estimate obligations for VA care in the community within FBCS. VHA officials said this should help them better estimate costs to help ensure that adequate funds are available to pay claims for VA care in the community services at the time the claims are processed. However, staff at VA medical facilities still must manually enter estimated obligations into VHA’s systems for tracking the availability of funds on a monthly basis, because this information cannot be automatically transferred from FBCS. VHA officials we interviewed in the course of our work acknowledged that the recent steps they have taken to improve claims processing timeliness—such as hiring temporary staff and contractors and mandating that claims processing staff work overtime—are not sustainable in the long term. The officials said that if the agency is to dramatically improve its claims processing timeliness, comprehensive and technologically advanced solutions must be developed and implemented, such as modernizing and upgrading VHA’s existing claims processing system or contracting out the claims processing function. On October 30, 2015, VHA reported to Congress that it has plans to address these issues as part of a broader effort to consolidate VA care in the community programs. However, the agency estimates that it will take at least 2 years to implement solutions that will fully address all of the challenges now faced by its claims processing staff and by providers of VA care in the community services. According to VHA officials, the success of this long-term modernization plan will also hinge on significant investments in the development and deployment of new technology. In its October 2015 plan, VHA stated that it expects it will significantly increase its reliance on community providers to deliver care to veterans in the coming years. In addition, VHA plans to adopt many features or capabilities for its claims processing system that are similar to Medicare’s and TRICARE’s claims processing systems, including (1) greater automatic adjudication of claims, (2) automating the entry of authorizations, (3) establishing a mechanism by which community providers can electronically submit medical records, (4) creating a Web- based portal for community providers to check the status of their claims, and (5) establishing a nationwide provider customer service system with dedicated staff so that other staff can focus on claims processing. According to this plan, in fiscal year 2016 VHA will examine potential strategies for developing these capabilities—including the possibilities of contracting for (1) the development of the claims processing system only or (2) all claims processing services, so that contractors, rather than VHA staff, would be responsible for processing claims (similar to Medicare and TRICARE). Based on statements made by community providers that participated in our review, it is critical for VA to succeed in achieving its goal of deploying a modernized claims processing system. Without (1) significantly improving the timeliness of its payments and (2) addressing community providers’ concerns about the administrative burden of obtaining VHA payments and the agency’s lack of responsiveness when they inquire about unpaid claims, VHA risks losing the cooperation of these providers as it attempts to transition to a future care delivery model that would heavily rely on them to deliver care to veterans. Since the release of its October 2015 plan for consolidating VA care in the community programs, VHA has done some of the preliminary work needed to modernize its claims processing system. After issuing a request for interested parties to share information, VHA held an industry day in December 2015, where about 80 participants discussed with VHA the extent to which contractors could help support core functions— including claims processing—for the consolidated VA care in the community program VHA plans to establish. VHA officials said they used information gathered from this industry day to inform the development of a draft performance work statement and a draft operations manual for a consolidated VA care in the community program. VA publicly posted these documents in February 2016 and accepted written comments, questions, and other feedback from industry for about two weeks. VA plans to use these responses to help inform any future requests for proposals related to the consolidation of VA care in the community programs and the improvement of claims processing timeliness. VA’s plan for consolidating its care in the community programs outlines its approach to addressing deficiencies in VHA’s claims processing system. VA’s consolidation plan represents a major undertaking that depends, in part, on obtaining congressional approval for legislative changes and budget requests and revamping VA’s information technology systems. Leading practices call for careful planning and for developing an implementation strategy to help ensure that needed changes are made in a timely and cost-effective manner. When facing major challenges similar to the ones VHA faces to modernize its claims processing system, leading practices call for results-oriented organizations to focus on developing robust, comprehensive plans that (1) define the goals the organization is seeking to accomplish, (2) identify specific activities to obtain desired results, and (3) provide tools to help ensure accountability and mitigate risks. In prior work, we have determined that sound plans include the following components (among others): Goals, objectives, activities, and performance measures. This component addresses what the plan is trying to achieve and how it will achieve those results, as well as the priorities, milestones, and performance measures to monitor and gauge results. Resources, investments, and risks. This component addresses what the plan will cost, the sources and types of resources and investments needed, and where resources and investments should be targeted while assessing and managing risks. To date, VHA has not communicated to Congress or other external stakeholders a plan for modernizing its claims processing system that clearly addresses the components of a sound plan identified above. In particular, VHA has not communicated (1) a detailed schedule for developing and implementing each aspect of its new claims processing system; (2) the estimated costs for developing and implementing each aspect of the system; and (3) performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. The communication of such a plan is also consistent with federal internal control standards for information and communication, which call for agencies to internally and externally communicate the necessary quality information to achieve the entity’s objectives. That VHA has not yet communicated a detailed plan but has stated that it expects to deploy a modernized claims processing system as early as fiscal year 2018 is cause for concern, especially given VA’s past failed attempts to modernize key information technology systems. Our prior work has shown that VHA’s past attempts to achieve goals of a similar magnitude—such as modernizing its systems for (1) scheduling outpatient appointments in VA medical facilities, (2) financial management, and (3) inventory and asset management—have been derailed by weaknesses in project management, a lack of effective oversight, and the failure of pilot systems to support agency operations. For example, we found: VA undertook an initiative in 2000 to replace the outpatient scheduling system but terminated the project after spending $127 million over 9 years. VA has been trying for many years to modernize or replace its financial management and inventory and asset management systems but has faced hurdles in carrying out these plans. In 2010, VA canceled a broad information technology improvement effort that would have improved both of these systems and at the time was estimated to cost between $300 million and $400 million. By September 2, 2009 (just before the project’s cancellation) VA had already spent almost $91 million of the $300 million to $400 million that was originally estimated. A previous initiative to modernize these systems was underway between 1998 and 2004, but after reportedly having spent more than $249 million on development of the replacement system, VA discontinued the project because the pilot system failed to support VHA’s operations. According to VHA officials, instead of investing in administrative systems such as the claims processing system, outpatient scheduling system, financial management systems, or the inventory and asset management system, VA has prioritized investments in information technology enhancements that more directly relate to patient care. As such, VHA officials said they have had little success in gaining approval and funding for information technology improvements for these administrative systems. VHA’s average claims processing timeliness in fiscal year 2015 was significantly lower than Medicare’s and TRICARE’s timeliness and far below its own standard of paying 90 percent of claims within 30 days. If this situation persists, it could have very real consequences on veterans’ access to care. Presently, VHA (through its TPAs), is attempting to improve veterans’ access to care by establishing a robust network of community health providers under its VA care in the community programs. However, absent a responsive provider customer service component and timely payment of claims, many community providers may opt not to participate in VA’s network, thereby narrowing the choices veterans have for seeking care from community providers. In turn, this could lead to longer wait times for veterans to receive care and a greater reliance on VA medical centers, some of which have already experienced long wait times for veterans seeking care. Moreover, millions of dollars in interest penalties resulting from the late payment of claims by VHA could dilute the funding available for the direct delivery of care to veterans. To its credit, VHA has implemented several short-term initiatives intended to address ongoing challenges and improve its timeliness in paying community providers. These initiatives include increasing the number of staff processing claims, purchasing new scanning equipment, holding claims processing staff accountable through new productivity standards, and developing a tracking system to monitor claims processing performance. By VHA’s own admission, however, these short-term initiatives will not resolve all challenges that have long impeded its claims processing timeliness, and many of these initiatives are not sustainable over the longer term. VHA plans to address the remaining challenges through its longer term effort to implement a consolidated VA care in the community program in fiscal year 2018 or later. VHA’s sweeping changes are likely to be costly, and to achieve the goals of this initiative it will be important to have a high level of planning and effective project management, and communication with multiple stakeholders. As we have reported in prior work, VHA’s plans to achieve goals of a similar magnitude—such as the modernization of its systems for outpatient appointment scheduling, financial management, and inventory and asset management—have been derailed by weaknesses in project management and a lack of effective oversight. Therefore, if VHA’s current initiative is to be successful, it is essential that VHA develop a sound implementation plan and an effective project management strategy as it proceeds. Otherwise, the agency risks spending valuable resources on new systems and processes that may not significantly improve VHA’s claims processing timeliness. As part of its implementation plan, it is critical that VHA identify implementation steps and develop the ability to measure and externally communicate its progress to the Congress and other stakeholders. It is also important that VHA be held accountable for achieving major components of the initiative and adhering to its timeline, as stated in its 2015 plan for consolidating VA care in the community programs. To help provide reasonable assurance that VHA achieves its long-term goal of modernizing its claims processing system, the Secretary of Veterans Affairs should direct the Under Secretary for Health to ensure that the agency develops a sound written plan that includes the following elements: a detailed schedule for when VHA intends to complete development and implementation of each major aspect of its new claims processing system; the estimated costs for implementing each major aspect of the system; and the performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. We provided a draft of this report to VA, HHS, and DOD for comment. VA provided written comments on the draft report, and we have reprinted these comments in Appendix V. In its comments, VA concurred with our recommendation and said that VHA plans to address it when the agency develops an implementation strategy for the future consolidation of its VA care in the community programs. VA also provided technical comments, which we have incorporated as appropriate. HHS had no general comments on the draft report but provided technical comments, which we have addressed as appropriate. DOD had no general or technical comments on the draft report. We are sending copies of this report to the Secretary of Veterans Affairs, the Secretary of Health and Human Services, the Secretary of Defense, appropriate congressional committees, and other interested parties. This report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Randall B. Williamson at (202) 512-7114 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 VI. Appendix I: Characteristics of Selected Care in the Community Programs of the Department of Veterans Affairs (VA) Individually authorized care VHA was first authorized to grant veterans individual authorizations to receive care in the community in 1945, and the current statutory authority was codified in 1986. This is the primary means by which VHA has traditionally purchased care from community providers. Patient-Centered Community Care (PC3) VA created PC3 in 2013 under existing statutory authority, and fully implemented the program in April 2014. Under PC3, two third party administrators (TPA) developed regional networks of community providers to deliver care to veterans. related to a veteran’s service-connected disability. This program was established by the Veterans Millennium Health Care and Benefits Act in 1999 and is commonly referred to as Millennium Act emergency care. Veterans Choice Program The Veterans Choice Program was created by the Veterans Access, Choice, and Accountability Act of 2014. VHA introduced the program in November 2014 and expanded it in April 2015 and December 2015. To administer this program, VHA modified its contracts with the two TPAs it selected to administer the PC3 program. These contractors are responsible for enrolling community providers in their networks or establishing Choice Provider Agreements with the providers. Individually authorized care A veteran may be individually authorized to receive care when they cannot access a particular specialty care service from a VA medical center (because the service is not offered), they would have to wait too long for an appointment, or they would have to travel a long distance to a VA medical center. Patient-Centered Community Care (PC3) The criteria for a veteran to be eligible to access the PC3 program are the same as those for individually authorized care. Veterans Choice Program A veteran is eligible for this program when they: condition as an emergency, and would have deemed it unreasonable for the veteran to access the care at a VA or other federal facility. In addition to meeting the above criteria, a veteran may access Millennium Act emergency care (for a condition not related to a service-connected disability) if services were rendered before they were stable for transfer to a VA or other federal facility, and when the veteran: was enrolled in and would have to travel by air, boat, or ferry to the VA medical center closest to their home; or face unusual or excessive burden (such as geographic challenges) in traveling to a VA medical center; or have specific health care needs that warrant participation (including the nature and frequency of care); or live in a state or territory without a full- service VA medical center. accessed care from a VA clinician in the 24 months preceding the emergency care, is financially liable to the community provider, has no entitlement under another health plan contract (such as Medicare), and has no recourse against a third party that would wholly extinguish liability to the community provider. Individually authorized care Providers have 6 years after the date of service to submit a claim to VHA. For emergency care related to a veteran’s service-connected disability, providers must submit claims within 2 years of the date of service. For care unrelated to a veteran’s service- connected disability, providers must submit claims within 90 days of the date of service. Patient-Centered Community Care (PC3) Providers must submit claims electronically within 180 business days of the end of the episode of care. Veterans Choice Program Providers must submit claims electronically within 180 business days of the end of the episode of care. Rates are negotiated between community providers and VA’s TPAs. These are reportedly a negotiated percentage of local Medicare rates. For individually authorized outpatient care: the authorization will indicate whether documentation is required. For individually authorized inpatient care: at a minimum, providers must submit the discharge summary to VA. Yes. Community providers must submit medical documentation so that VA clinicians can determine whether the care was related to the veteran’s service-connected disability and whether the condition for which the veteran sought treatment meets the prudent layperson standard of an emergency. Yes. Under their contracts with VA, the TPAs must collect medical documentation from community providers and return it to VA in a timely manner. No. health. The standard would be met if there was an emergency medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain) that a prudent layperson who possesses an average knowledge of health and medicine could reasonably expect the absence of immediate medical attention to result in placing the health of the individual in serious jeopardy, serious impairment to bodily functions, or serious dysfunction of any bodily organ or part. See 38 C.F.R. § 17.1002(b). The prudent layperson standard emphasizes the patient’s presenting symptoms, rather than the final diagnosis, when determining whether to pay emergency medical claims. Service-connected emergency care Claim must be filed within 2 years of the date services were rendered. Nonservice-connected emergency care (Millennium Act care) Claim must be filed within 90 days of the date services were rendered. Condition meets the prudent layperson standard of an emergency A VA or other federal medical facility was not feasibly available to provide the needed care, and an attempt to use either would not have been considered reasonable by a prudent layperson The services were rendered before the veteran was stable enough for transfer to a VA or other federal medical facility and before the VA or other federal medical facility agreed to accept the transfer Veteran was enrolled in the VA health care system Veteran had received care from a VA clinician within the 24 months preceding the emergency care episode Veteran is financially liable to the community provider of the emergency care Veteran has no entitlement under another health plan contract (such as Medicare or a private health insurance plan) Veteran has no recourse against a third party that would wholly extinguish his or her liability to the community provider (e.g., motor vehicle insurance or workers’ compensation) Appendix III: Veterans Health Administration’s (VHA) Steps for Processing Claims for the Department of Veterans Affairs’ (VA) Care in the Community Services as of March 2016 VHA has numerous programs through which it purchases VA care in the community services, and these programs have varying rules governing payment rates and requirements for claims processing. The primary means by which VHA has traditionally purchased care from community providers is through individual authorizations. When a veteran cannot access a particular specialty care service from a VA medical facility, the veteran’s VA clinician may request an individual authorization for the veteran to obtain the service from a community provider. In addition, when care in the community is not preauthorized, VA may purchase two different types of emergency care from community providers: 1) emergency care for a condition that was related to a veteran’s service-connected disability and 2) emergency care for a condition not related to a veteran’s service-connected disability. The latter care is commonly referred to as Millennium Act emergency care. See Veterans Millennium Health Care and Benefits Act, Pub. L. No. 106-117, 113 Stat.1545 (1999) (codified, as amended at 38 U.S.C. § 1725) for emergency care not related to a service-connected disability. See 38 U.S.C. § 1728 for emergency care related to a service-connected disability. Medical documentation may not be in the Fee Basis Claims System (FBCS) because either (1) the community provider has not yet submitted the documentation or because (2) staff at the VHA claims processing location have not yet scanned it into FBCS. According to VHA officials, if a claim has been submitted electronically and a community provider does not submit medical documentation within 45 days of the claim being suspended, FBCS will automatically reject the claim. In these cases, the community provider must resubmit both the claim and medical documentation. Examples of relevant administrative and clinical criteria include whether the claim met VA’s timely filing requirement, whether the veteran has other insurance or legal recourse against a third party, and whether services were rendered beyond the point at which the veteran was stable enough to be transferred to a VA or other federal facility. VHA staff use FBCS to generate notifications for the community provider and veteran about whether the claim was paid or rejected. These notifications are called preliminary fee remittance advice reports and include a listing of claim dates and services, the reasons why payments for any services were rejected, and the payment amounts for approved services. One contractor subcontracted by the three managed care support contractors (MCSC). According to officials from this contractor, they employ about 650 staff in 3 locations who are responsible for processing claims from the 3 MCSCs. Yes. A VHA directive states that 90 percent of all claims must be processed within 30 days of receipt. Yes. By law, 95 percent of clean claims must be processed (either paid or denied) within 30 days of receipt. In accordance with statute, the Centers for Medicare & Medicaid Services’ (CMS) manual for processing Medicare claims states that the remaining claims must be processed within 45 days of receipt. Medicare Yes. TRICARE Yes. CMS monitors two key performance metrics: a. The Defense Health Agency (DHA) monitors two key performance metrics: the percentage of all claims that have been processed—either paid, rejected, or denied—in 30 days or less; the percentage of claims awaiting processing that were received less than 30 days ago; the percentage of claims for individually authorized VA care in the community that were processed in 30 days or less; and the percentage of claims for other-than-individually authorized care that were processed in 45 days or less. b. the percentage of clean claims processed within 30 days of receipt, and the percentage of other- than-clean claims processed within 45 days of receipt. According to CMS officials, the MACs submit monthly reports to CMS, which include data on claims processing timeliness. These reports are generated by a module within CMS’s claims processing software and can be independently verified by CMS. that initially lacked sufficient information to be processed that were processed within 90 days of receipt. According to DHA officials, MCSCs submit monthly reports to DHA that include data on the subcontractor’s timeliness of claims processing. These data can be independently verified by DHA. According to Chief Business Office for Purchased Care officials, they have a real-time data tracking system that allows them to monitor claims processing productivity and other aspects of claims processing performance at a national level, for individual claims processing locations, and for individual claims processing staff members. VHA Officials from VHA’s Chief Business Office for Purchased Care told GAO that they introduced nationwide staff productivity standards on October 1, 2015. Medicare CMS officials said that they previously included financial incentives in the MACs’ contracts to encourage the MACs to meet requirements for claims processing timeliness. After all MACs demonstrated that they were easily meeting these requirements, these financial incentives were removed from the MACs’ contracts and replaced by financial incentives to meet other requirements. Officials from one MAC GAO visited reported that they have productivity standards in place for their claims processing staff. TRICARE DHA officials said that the MCSCs are penalized $1 for every claim that the subcontractor does not process in a timely manner. The subcontractor that processes TRICARE claims reported that it has productivity standards in place for its claims processing staff. Yes, and less than half of claims are submitted electronically. Officials from VHA’s Chief Business Office for Purchased Care reported that community providers submit about 40 percent of claims electronically. Yes, and nearly all claims are submitted electronically. CMS officials said that as of fiscal year 2014, more than 99 percent of institutional providers and more than 98 percent of practitioners and suppliers submitted claims electronically. Yes, and nearly all claims are submitted electronically. DHA officials estimate that between 91 and 95 percent of claims are submitted electronically. Yes, according to VA policy, providers are required to submit medical documentation for some specific types of claims. Individually authorized outpatient care: the authorization will indicate whether documentation is required. Individually authorized inpatient care: at a minimum, providers must submit the discharge summary to VA. No. According to CMS officials, providers only submit medical documentation when requested to do so by a MAC, which would only request the documents if claims were flagged for prepayment review (e.g., a clinical review to determine the medical necessity of the services). No. According to DHA officials, providers are not required to submit medical documentation in order for claims to be processed, unless a claim is flagged for a prepayment review (such as a claim for an experimental treatment). Emergency care: medical documentation must be submitted so that the claim can be clinically reviewed to determine whether it meets eligibility criteria for payment. Patient-Centered Community Care (PC3): As a condition of their contracts, VA’s third party administrators are required to submit medical documentation for all claims. VHA No. According to VA officials, the agency does not have the capacity to receive medical documentation electronically from community providers. Medicare Yes. According to CMS officials, when medical documentation is requested, the MACs can receive the information electronically via a Web-based portal. TRICARE Yes. According to DHA officials, when medical documentation is requested, the TRICARE contractor can receive the information electronically via a Web-based portal. Veterans Health Administration, Timeliness Standards for Processing Non-VA Provider Claims, VHA Directive 2010-005 (Washington, D.C.: Jan. 27, 2010). TRICARE MCSCs are subject to claims processing timeliness requirements outlined in law and in the TRICARE Operations Manual. The requirements listed in the Operations Manual are more stringent than in the law, which states that 95 percent of clean claims must be processed within 30 days of submission to the claims processor and that all clean claims must be processed within 100 days of submission to the claims processor. 10 U.S.C. § 1095c(a). In addition to the contact named above, Marcia A. Mann, Assistant Director; Elizabeth Conklin; Christine Davis; Krister Friday; Jacquelyn Hamilton; Alexis C. MacDonald, and Vikki Porter were major contributors to this report. Veterans’ Health Care: Preliminary Observations on VHA’s Claims Processing Delays and Efforts to Improve the Timeliness of Payments to Community Providers. GAO-16-380T. (Washington, D.C.: Feb. 11, 2016). VA’s Health Care Budget: Preliminary Observations on Efforts to Improve Tracking of Obligations and Projected Utilization, GAO-16-374T (Washington, D.C.: Feb. 10, 2016). VA Health Care: Actions Needed to Improve Monitoring and Oversight of Non-VA and Contract Care. GAO-15-654T. (Washington, D.C.: June 1, 2015). VA Health Care: Further Action Needed to Address Weaknesses in Management and Oversight of Non-VA Medical Care. GAO-14-696T. (Washington, D.C.: June 18, 2014). VA Health Care: Actions Needed to Improve Administration and Oversight of Veterans’ Millennium Act Emergency Care Benefit, GAO-14-175. (Washington, D.C.: March 6, 2014). VA Health Care: Management and Oversight of Fee Basis Care Need Improvement. GAO-13-441. (Washington, D.C.: May 31, 2013). | Due to recent increases in utilization of VA care in the community, VHA has had difficulty processing claims in a timely manner. Congress included a provision in law for GAO to review VHA's payment timeliness and to compare it to that of Medicare and TRICARE. This report examines, among other objectives, (1) VHA's, Medicare's, and TRICARE's claims processing timeliness; (2) factors that have impeded VHA's claims processing timeliness and community providers' experiences; and (3) VHA's recent actions and plans to improve its claims processing timeliness. GAO obtained fiscal year 2015 data on VHA's, Medicare's, and TRICARE's claims processing timeliness. GAO also visited 4 of 95 VHA claims processing locations (selected based on variation in geographic location, performance, and workload); reviewed VHA documents and 156 claims from the 4 locations; and interviewed officials from VHA, Medicare, TRICARE, and selected community providers and state hospital associations. Results from GAO's analysis cannot be generalized to all VHA claims processing locations or community providers. To help ensure that veterans are provided timely and accessible health care services, the Veterans Health Administration (VHA) of the Department of Veterans Affairs (VA) has purchased care from non-VA community providers through its care in the community programs since as early as 1945. VHA's agency-wide data show that in fiscal year 2015, it processed about 66 percent of claims within the agency's required time frame of 30 days or less, whereas data from Medicare and TRICARE (the Department of Defense's health care system) show that their contractors processed about 99 percent of claims within 30 days or less. However, VHA's data likely overstate its performance because they do not account for delays in scanning paper claims, which officials say account for approximately 60 percent of claims. GAO's analysis of 156 claims from four VHA claims processing locations indicated that it took an average of 2 weeks for VHA staff to scan paper claims into VHA's claims processing system, and GAO observed multiple bins of paper claims that had been awaiting scanning at one site for over a month. In a 2014 report, GAO recommended that VHA take action to ensure that all of its claims processing locations comply with its policy of scanning claims into VHA's claims processing system upon receipt. While VHA agreed with this recommendation and attempted to reiterate the policy through various means, GAO's more recent findings suggest that VHA did not monitor the operational effectiveness of these corrective actions. VHA officials said that they have since begun requiring managers at their claims processing locations to periodically certify in writing that all incoming paper claims have been date-stamped and scanned on the day of receipt. VHA officials and claims processing staff from the four locations GAO visited indicated that technology limitations, manual processes, and staffing shortages have delayed VHA's claims processing. For example, VHA's claims processing system lacks the capacity to automatically adjudicate claims. VHA staff instead must rely on manual processes, which they say delay payments to community providers. In addition, community providers and state hospital association respondents who participated in GAO's review said they had experienced various issues with VHA's claims processing system. For example, almost all providers described the administrative burden of submitting claims and related medical documentation to VHA and a lack of responsiveness from VHA's claims processing locations when the providers contacted them to follow up on claims. While VHA has recently implemented interim measures to address challenges that have delayed claims processing—such as eliminating certain medical documentation requirements and filling staff vacancies—the agency does not expect to deploy solutions to address all challenges until fiscal year 2018 or later. VHA is currently examining options for modernizing its claims processing system but has not yet communicated to Congress or other external stakeholders a sound plan that clearly addresses the components identified in past GAO work (such as a detailed schedule, estimated costs, and measures of progress). This is concerning, given VA's past failed attempts to modernize key information technology systems. While the agency expects to significantly increase its reliance on community providers to deliver care to veterans in the future, it risks losing their cooperation if it does not improve its payment timeliness. GAO recommends that VA develop a written plan for modernizing its claims processing system that includes a detailed schedule, costs, and performance measures. VA concurred with this recommendation and plans to address it through the planned consolidation of its VA care in the community programs. |
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The Federal Aviation Administration (FAA) is responsible for developing, administering, enforcing, and revising an effective, enforceable set of aviation safety regulations that enhance aviation safety and security and promote the efficient use of airspace. Generally, a regulation is an agency statement that is designed to implement, interpret, or prescribe law or policy or to describe procedural requirements. The process by which FAA and other federal agencies develop regulations is called rulemaking. FAA’s rulemaking activities encompass all of the agency’s areas of responsibility, including air traffic control, aviation security, and commercial space transportation. FAA must address both long-standing and emerging issues in its rulemaking efforts. For example, questions about the safety of aging aircraft and the adequacy of flight duty rest requirements for airline pilots have been debated for decades. In contrast, the issues of fire safety standards for cargo compartments and the transport of oxygen generators emerged after the Valujet crash outside of Miami in May 1996. Rulemaking can be a complex and time-consuming process, and the Congress expressed its concerns about the speed of FAA’s rulemaking in 1996, when it enacted legislation that established time frames for steps in the process. While some rules may need to be developed quickly to address safety issues or guide the use of new technologies, rules must be carefully considered before being finalized because they can have a significant impact on individuals, industries, the economy, and the environment. Figure 4 provides a case study of FAA’s efforts to address a complex, long- standing aviation safety issue by creating a rule to regulate flight duty and rest requirements for flight crew members. Rulemaking involves three stages of agency activity. First, an agency identifies a need for rulemaking. Second, it initiates the rulemaking process, develops a proposed rule, and publishes it for public comment. After a public comment period, the agency finalizes the rule by considering the comments received and drafting and publishing the final rule. Figure 5 provides an overview of the process as it applies to FAA. A rulemaking issue may be identified internally or externally. For example, FAA staff may find that changes in aviation technology or operations or the emergence of a safety problem warrant rulemaking. Alternatively, the public or the aviation industry may petition the agency to develop a new rule or provide an exemption from existing rules. At the beginning of fiscal year 2001, FAA was responding to 57 petitions for rulemaking and 415 petitions for exemptions while reviewing 84 recommendations by its advisory committee—the Aviation Rulemaking Advisory Committee (ARAC). In addition, the Congress, the President, or the Secretary of the Department of Transportation (DOT) may direct FAA to develop a rule, or the National Transportation Safety Board (NTSB) may issue a safety recommendation. After a rulemaking issue is identified, an agency must consider the issue in light of its resources and other rulemaking issues that may be equally compelling. Some rulemaking issues may require study and analysis before an agency’s management can decide whether to initiate the rulemaking process and devote resources to developing a proposed rule. Once an agency has decided to initiate rulemaking, the basic process for developing and issuing regulations is spelled out in section 553 of the Administrative Procedure Act of 1946 (APA). Most federal agencies, including FAA, use notice and comment rulemaking. Once rulemaking is initiated, agencies generally must develop and publish a proposed rule or “notice of proposed rulemaking” in the Federal Register. A public comment period follows, during which interested persons have the opportunity to provide “written data, views, or arguments.” After the comment period ends, the agency finalizes the rule by reviewing the comments, revising the rule as necessary, and publishing the final rule in the Federal Register at least 30 days before it becomes effective. Most rules are later incorporated into the Code of Federal Regulations (CFR). For the remainder of this report, we will use the term “rulemaking” to refer to the notice and comment process by which FAA’s rules are developed and codified in the CFR. Rules vary in importance, complexity, and impact. Under Executive Order 12866, federal agencies and the Office of Management and Budget (OMB) categorize proposed and final rules in terms of their potential impact on the economy and the industry affected. Executive Order 12866 defines a regulatory action as “significant” if it has an annual impact on the economy of $100 million or more; adversely affects the economy in a material way (in terms of productivity, competition, jobs, environment, public health or safety, or state, local, or tribal governments or communities); creates a serious inconsistency or interferes with another agency’s materially changes the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or raises novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the order. Since 1996, significant rulemaking entries have constituted about half of all of FAA’s rulemaking entries in the Unified Agenda, a semiannual report of federal regulatory activities. Figure 6 shows the total number of FAA’s rulemaking entries and the number of significant rulemaking entries listed in the October Unified Agendas from 1995 through 2000. Significant rules often take longer to issue than nonsignificant rules. They may require extensive regulatory analyses of the potential economic, social, and environmental impacts of one or more alternatives. These analyses may take months to complete and are needed to ensure that the projected economic impact has been correctly quantified and that the costs the rule will impose on the affected industry and individuals are justified. Significant rules typically require more levels of review than nonsignificant rules. Executive Order 12866 requires that OMB review agencies’ proposed and final significant rules before they are published in the Federal Register. Moreover, clearances for proposed and final rules may be required at the departmental level for those agencies that are part of a cabinet-level department. To reduce this burden, the Federal Aviation Reauthorization Act of 1996 grants rulemaking authority directly to the Administrator, except that the Administrator may not issue a proposed or final rule without obtaining the Secretary’s approval if that rule is significant as defined by statute. The Wendell H. Ford Aviation Investment and Reform Act for the 21st Century narrowed the scope of rules that would be considered to be significant, setting the threshold for economic significance to $250,000,000 and eliminating inconsistency and interference with other agencies’ actions and material changes to budgetary impact of entitlements, grants, user fees, or loan programs and recipients’ rights and obligations as criteria. Nevertheless, agencies that report to the Office of the Secretary of Transportation (OST), including FAA, have also been required by the Secretary to submit for review all rules deemed significant under the executive order as well as rules that OST has indicated are to be considered to be “significant” under supplemental guidelines. These additional criteria increase the number of rules for which agencies within DOT are expected to complete regulatory analyses. For example, FAA published a significant rule in April 2000 that limited the number of commercial air tours permitted in the Grand Canyon. While the rule was not considered a significant regulatory action under Executive Order 12866, and would not have been significant under the statute, it was considered significant under the Department’s supplemental guidelines because the rulemaking had a potentially substantial economic impact on Native American tribes. Specifically, the rule was expected to have a significantly adverse impact on the Hualapai Tribe’s economic development and self-sufficiency, since the trive relied on income from air tour operations and tourist dollars brought to the reservation by the air tours. The additional analyses and reviews required for significant rules are incorporated into the basic process that all federal agencies use for rulemaking: developing a proposed rule, releasing the proposed rule for public comment, and developing a final rule. Various offices within FAA conduct the required analyses and reviews of rulemaking documents, as shown in table 1. In the early stages of rulemaking, each rule is the responsibility of a program office with technical expertise in a specific area. This office develops the initial rulemaking documents, as indicated in table 1. Depending on the content of the rule, the program office may be a staff office, like the Office of Chief Counsel, that also has the additional responsibility of reviewing all significant rules. Alternatively, it may be an office with responsibility for a technical area, such as the Office of Civil Aviation Security Policy and Planning. Each of these offices has managers who can become involved in the rulemaking process by reviewing the work of its representatives on a rulemaking team. Generally, FAA’s rulemaking teams consist of representatives from the program office, the Office of Rulemaking, the Office of Aviation Policy and Plans, and the Office of the Chief Counsel. In addition to significant and nonsignificant rulemaking, the staff in these offices also work on other projects, including airworthiness directives, airspace actions, and responses to petitions and exemptions. The ultimate goal of the federal rulemaking process is to develop and issue a quality rule in a timely and efficient manner. Time is of particular importance when safety is at stake or when the pace of technological development exceeds the pace of rulemaking. Many of the problems federal agencies face in developing and publishing rules are long-standing and similar across agencies, and they have been cited in studies and discussions of the process since at least the 1970s. For example, a Senate study in July 1977 cited deficiencies in decisionmaking, planning, and priority-setting by top management as causes of delay in federal rulemaking. In July 2000, DOT’s Office of the Inspector General (OIG) reviewed the Department’s rulemaking process and found that the Department had taken as long as 12 years to issue significant rules. The OIG attributed the lack of timeliness of the Department’s rulemaking partly to a lack of timely decisionmaking and prioritization. Studies specifically targeting the efficiency of FAA’s rulemaking process over almost 40 years have also identified similar problems. Figure 7 provides a list of key studies on FAA’s rulemaking process. The central findings of the most recent study of FAA’s rulemaking process, published in 1997, echoed the findings of past studies. For this report, we grouped the problems identified by the 1997 study into three areas: management involvement, administration of the rulemaking process, and human capital. In terms of management involvement, FAA’s 1997 study of its rulemaking process found that problems related to shifting priorities, the timing of management involvement, and the willingness of management to delegate authority all caused delays. Inconsistent and changing priorities among FAA offices caused false starts, delays in the process, and wasted resources. Inadequate or ill-timed involvement by FAA’s senior management hindered the agency’s ability to make timely decisions. As a result, rule drafters frequently worked without adequate direction or buy-in from policymakers, causing extensive queuing, delays, and rework. The reluctance of FAA’s rulemaking management to delegate authority caused problems in internal coordination and accountability and created extensive layers of review that delayed the rulemaking process. Rulemaking projects were also often delayed because no one was held accountable for keeping projects on schedule. The lack of coordination resulted in “finger-pointing” as to why problems remained unsolved. FAA’s 1997 study identified similar concerns with the timeliness of rulemaking efforts by FAA’s industry advisory committee. For example, the committee had too many projects, some of which were duplicative or overlapping. A lack of coordination and accountability between FAA and the committee also impaired the effectiveness of the advisory committee. In terms of process administration, FAA’s 1997 study found that confusion concerning the roles and responsibilities of rulemaking participants at FAA created difficulties in determining who had responsibility for what actions, led to breakdowns in coordination and communication, and resulted in inadequate supervision. Multiple information systems also hampered coordination and led to inaccurate tracking records and databases, as well as to information that was hard to access (e.g., archives of decisions made). Without reliable records, FAA often could not pinpoint where problems and backlogs occurred. Moreover, even when it did identify weaknesses, it lacked systems with which to evaluate and improve the process. In terms of human capital management, the 1997 study found that FAA had not established systems for selecting and training personnel involved in rulemaking. Rulemaking teams at FAA typically did not observe project schedules, which they regarded as unrealistically optimistic. Measures of timeliness were not consistently used to measure and evaluate the performance of rulemaking participants. FAA’s rulemaking process lacked a system for consistently tying incentives and rewards to specific measures of performance. Responding to concerns about the efficiency of FAA’s rulemaking process and in particular the time required for departmental review by OST, the Congress enacted legislation in 1996 designed to speed FAA’s efforts to develop and publish final rules. The Federal Aviation Reauthorization Act of 1996 amended section 106 of title 49 U.S.C. to establish a 16-month time limit for FAA’s finalization of rules after the close of the public comment period and a 45-day requirement for OST’s review of FAA’s significant proposed and final rules (see ch. 2). (The act also established a 24-month time limit for finalization of rules after publication of an advanced notice of proposed rulemaking, a request for information that FAA may issue in developing a proposed rule. Because this notice is not always issued, we did not use it as a measure in our analysis.) In response, FAA reviewed its rulemaking process, established its own suggested time frames for completing steps in the process (see ch. 3), and identified potential improvements to its process in the general areas of management involvement, process administration, and human capital management. These improvements are discussed in chapter 3. The Chairman of the Subcommittee on Aviation, House Committee on Transportation and Infrastructure, asked us to review FAA’s rulemaking process to determine whether FAA could improve the efficiency of its rulemaking process. Specifically, we addressed three main questions in our review: What are the time frames for FAA’s rulemaking, including the time FAA took to initiate the rulemaking process in response to statutory requirements and safety recommendations and, once begun, to develop and publish significant rules? What were the effects of FAA’s 1998 reforms on its process and on its time frames for completing rulemaking? How effective were FAA’s reform efforts in addressing the factors that affect the pace of the rulemaking process? To determine the time frames for FAA’s rulemaking, we created a database of proposed and final rules that constituted the agency’s significant rulemaking workload from fiscal year 1995 through fiscal year 2000. We focused our analysis on 76 significant rulemaking actions identified by FAA in the semiannual editions of the Unified Agenda or identified in our search of the Federal Register. This consisted of rulemaking actions that had either been published for public comment or were initiated but had not yet been published for public comment. The initiation dates and dates of published actions for the 76 rules are provided in appendix I. These rules constituted most (about 83 percent) of FAA’s significant rule workload and were more likely to be complex and/or the subject of controversy and potential delay. Our database contained data obtained from FAA’s Integrated Rulemaking Management Information System and from our review of proposed and final rules published in the Federal Register. In creating our database, to determine the dates that rulemaking projects were initiated, we used the dates recorded in FAA’s information system. For the dates of the publication of proposed and final rules, we used the dates of publication in the Federal Register. To determine the extent to which FAA’s rulemaking met statutory time frames, we compiled information from our database of rulemaking actions and applied standards established by the Congress in 1996. To determine the effects of FAA’s 1998 reforms on the agency’s rulemaking process, we reviewed the 1997 report on FAA’s rulemaking process and discussed the 1998 reforms with FAA staff and management from the working team that participated in the study. We discussed rulemaking reforms with rulemaking officials from several other federal regulatory agencies the Animal and Plant Health Inspection Service (APHIS), the Environmental Protection Agency (EPA), the Federal Highway Administration (FHWA), the Federal Motor Carrier Safety Administration (FMCSA), the Food and Drug Administration (FDA), the National Highway Transportation Safety Administration (NHTSA), and the Nuclear Regulatory Commission (NRC) to identify what steps they had taken to improve their rulemaking processes and to discuss their efforts to improve rulemaking. We selected these agencies because they had developed significant rules that were potentially technically complex and have an impact on public safety (e.g., regulation of nuclear power, environmental concerns, and food safety). We also compared FAA’s time frames for responding to public comment and finalizing significant rules with that of other federal regulatory agencies by collecting data from the Federal Register on the time spent processing significant rules by APHIS, EPA, FDA, and NHTSA. To determine the extent to which FAA’s rulemaking met FAA’s suggested time frames for steps in the process before and after the reforms, we compiled information from our database of rulemaking actions and applied it to the time frames suggested in FAA’s rulemaking guidance. We also reviewed the number of significant rules FAA published before and after implementing its reforms as a measure of improvement in the rulemaking process. To determine the effectiveness of FAA’s reform efforts in addressing the factors that affect the pace of the rulemaking process management involvement, process administration, and human capital management we considered case studies of specific rules, as well as the views of rulemaking officials and other stakeholders in the rulemaking process, including representatives of NTSB, OST, and OMB . We also surveyed 134 FAA employees who had served as rulemaking team members on significant rules listed in FAA’s Unified Agendas since the beginning of fiscal year 1994. We chose these employees for our survey because these staff had recent experience and were likely to be familiar with changes in the reformed process. We mailed a survey to rulemaking staff to obtain their views on the status of the rulemaking process and the impact of rulemaking reforms. We received 109 responses (a response rate of about 81 percent). A copy of the survey instrument that summarizes the responses we received is provided in appendix II. We supplemented our survey results with semistructured interviews of rulemaking team members involved in four rulemaking projects. For our semistructured interviews, we asked a series of questions designed to elicit staff members’ views on the results of the reform efforts and suggestions for improving the process. We conducted our work from April 2000 through March 2001 in accordance with generally accepted government auditing standards. The time FAA took to formally initiate rulemaking in response to a congressional mandate or a recommendation by the National Transportation Safety Board (NTSB) varied widely. Between fiscal year 1995 and fiscal year 2000, FAA initiated most rulemaking efforts in response to mandates and safety recommendations within 2 years, but some were initiated many years later. Once FAA formally initiates rulemaking, the time it takes to complete the process depends on many factors, including the complexity of the issue. FAA finalized and published in the Federal Register 29 significant rules over the 6-year period from fiscal year 1995 through fiscal year 2000. It took a median of about 2 ½ years to proceed from formal initiation through publication of the final rule, ranging from less than 1 year to almost 15 years. Twenty percent of these final rules took 10 years or more to complete. During this same time period, departmental review, one step in the process for both proposed and final rules, took a median time of about 4 months. FAA’s median pace for finalizing a rule after the close of the public comment period about 15 months was comparable to that of four other federal agencies. However, FAA met the 16-month statutory requirement for finalizing a rule after the close of the public comment period in less than half of the cases since the legislation was passed and other mandated time limits in only 2 of 7 cases. FAA initiated most rulemaking actions in response to safety recommendations from the NTSB and mandates from the Congress within 2 years. Of the 76 significant rulemaking actions we reviewed, 32 rulemaking actions (or about 42 percent) were the subject of a congressional mandate or recommendation by the NTSB. While congressional mandates may require that FAA take rulemaking actions, NTSB’s recommendations do not. However, FAA is required to respond formally to the recommendation and specify what action is or is not being taken and why. As shown in figure 8, FAA formally initiated about 60 percent of mandated rulemaking actions and about one-third of NTSB’s recommendations within 6 months. However, FAA sometimes took many years to respond to a mandate or recommendation. For example, figure 8 also shows that in one-fourth of the mandated cases and one-third of the recommendations we examined, FAA took more than 5 years to initiate rulemaking. Figure 9 provides a case study of a rulemaking issue with safety implications aviation child safety seats—in which more than 7 years passed between NTSB’s recommendation and FAA’s initiation of the rulemaking process. In this case, the delay occurred because of policy-related disagreements between FAA and NTSB. After receiving NTSB’s recommendation to require child safety seats on aircraft, FAA studied the issue. It issued a related technical order and rule but decided not to pursue rulemaking to require child safety seats on aircraft. In part, its decision was based on a study it presented to the Congress that concluded that if child safety seats were required on aircraft, passenger diversion to other transportation modes could cause a net increase in fatalities. FAA eventually changed its policy position and initiated rulemaking after the White House Commission on Aviation Safety recommended that FAA make child-restraint systems mandatory on aircraft. In contrast to the lengthy period of time that sometimes occurs between NTSB’s recommendations and FAA’s initiation of rulemaking, FAA responded within 1 month to an NTSB recommendation in 1999 to require flight data recorders on Boeing 737 aircraft. Figure 10 provides a case study of this rulemaking effort. For significant rules published during the 6-year period from fiscal year 1995 through fiscal year 2000, FAA took a median time of about 2 ½ years to proceed from the formal initiation of the rulemaking process to the publication of the final rule in the Federal Register. This time period ranged from less than 1 year to almost 15 years. Six of the 29 final rules (or 20 percent) took 10 years or more to complete. FAA took a median time of about 20 months to proceed from initiating the process to proposing the rule for public comment. It took a median time of about 15 months to finalize the rule after the close of the public comment period. The time taken for one step of the rulemaking process that occurs in FAA’s development of both proposed and final rules departmental review and approval—has been of particular concern to the Congress. In the Federal Aviation Reauthorization Act of 1996, the Congress addressed its concern by establishing a time frame for this step. The act requires the Secretary of DOT to review proposed and final significant rules and respond to FAA, either by approving them or by returning them to FAA with comments, within 45 days after receiving them. While FAA’s information system tracked the date of OST’s approval of some significant rules, it did not track the date of OST’s response to FAA’s transmittals of significant rules when it sent them back to FAA with comments rather than approving them. We were therefore unable to measure the extent to which the Department had met the 45-day requirement set forth in the 1996 act. FAA rulemaking officials said that they did manually track this information for individual rules and planned to incorporate this capability into the next upgrade of the information system. FAA’s information system did contain the dates that some rules were submitted by FAA to OST and the dates of OST’s final approval. We used these dates to measure the time it took for OST to approve FAA’s significant proposed and final rules from fiscal year 1997, when the legislation went into effect, through fiscal year 2000. Overall, for both proposed and final rules, the median time OST took to approve the rules (including review, comment, and FAA’s response, if any) was 4.1 months (124 days). Measuring proposed and final rules separately, we found that the median time OST took to approve proposed rules was 4.7 months (140 days), while the median time OST took to approve final rules was 2.3 months (69 days). In chapter 4, we discuss the views of departmental and FAA staff on issues that impact the time required for departmental approval. In a more recent effort to reduce delays related to OST’s review, on April 5, 2000, the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century amended title 106 of 49 U.S.C. by raising the dollar threshold required for secretarial approval and eliminating several criteria that triggered departmental review of significant rules. The Congress included this language to, among other things, streamline FAA’s rulemaking process by reducing the number of significant rules that had to be submitted for departmental review and approval. Because the legislation preempts DOT’s Order 2100.5 (which defines what rules FAA and other DOT modal administrations are to submit to OST for review, as discussed in ch. 1), FAA is required to submit to OST only those significant rules that meet the criteria defined in the act. At the time of our review, FAA and OST had not yet implemented the provisions of the act. As a result, the number of FAA’s significant rules that met the criteria for OST review had not been reduced. Although we did not compare the time frame of FAA’s entire rulemaking process to that of other agencies, we did find that the time FAA took to finalize rules after the close of the public comment period was comparable to that of four other federal agencies. We selected four regulatory agencies—APHIS, EPA, FDA, and NHTSA and compared the time they took to finalize rules from fiscal year 1995 through fiscal year 2000. The results are presented in figure 11. The figure shows that, except for APHIS, which finalized all of its significant rules within 2 years of the close of the public comment period, agencies generally finalized between two-thirds and three-fourths of their significant rules within 24 months of the close of the public comment period. The Federal Aviation Reauthorization Act of 1996 established a 16-month time frame for FAA’s finalization of rules after the close of the public comment period. From October 1996 through March 2001, FAA met this deadline in 7 of 18 cases by either publishing a final rule in the Federal Register or taking other final action within 16 months of the close of the public comment period. Figure 12 provides a case study of FAA’s rulemaking to prohibit the transportation of discharged or unfilled oxygen generators in aircraft. This effort exceeded the congressional time frame by about 11 months. (See app. III for a complete list of rules subject to the act’s time frames.) The Congress has also mandated time frames for steps in FAA’s rulemaking on specific issues. The agency did not meet many of these legislated time frames. Specifically, of the 20 congressionally mandated rules that were part of FAA’s workload between fiscal year 1995 and fiscal year 2000, 7 included a time frame for agency action. FAA met the time frame in only 2 cases, both of which called for initiating the rulemaking process by a certain date. Appendix IV provides additional information regarding the current status of the seven rules with congressionally mandated time frames. Figure 13 provides a case study of FAA’s proposed rule to revise procedures for aircraft registry to assist drug enforcement efforts that exceeded a specific legislative mandate by more than 10 years. To respond to congressional concerns about the timeliness of its rulemaking process and address long-standing problems (see ch. 1), FAA began implementing reform initiatives in January 1998 to improve the process in two of the three central areas we have identified: management involvement and process administration. FAA considered but did not implement most initiatives to improve human capital management. Other agencies have also implemented reforms to address similar types of problems. FAA’s median times to proceed from initiation of rulemaking through the release of the proposed rule for public comment and to finalize the rule after the close of the public comment period did not improve after FAA implemented its 1998 reforms. Despite FAA’s reforms, the time taken for departmental review and approval of FAA’s significant rules was not reduced. In addition, fewer rules were published while proposed and final rules remained in the rulemaking process for longer periods of time. FAA began implementing reform initiatives in January 1998 to improve its rulemaking process in two of the three central areas we have identified: management involvement and process administration. FAA considered but did not implement most initiatives to improve human capital management. “With the direct involvement of senior-level management in the rulemaking process, I anticipate a dynamic rulemaking program that more directly meets the safety and technology challenges of a rapidly evolving aviation industry.” In particular, to address long-standing concerns about delays that occurred during departmental review and approval of its significant rules (see ch. 2), FAA included a representative from OST on its rulemaking steering committee and management council, hoping that improved coordination would reduce the time taken for OST’s review. Table 2 shows the members and duties of FAA’s steering committee and management council. To formalize the new process and provide consistent and comprehensive guidance to rulemaking staff and management, FAA also developed a new rulemaking manual. Among other things, this manual suggested time frames for steps in the rulemaking process and established a system for the steering committee to follow in prioritizing rulemaking projects, as shown in table 3. Finally, to maximize the efficient use of employees’ and management’s time, FAA planned to limit reviews to those that added value and to delegate more responsibility for rulemaking decisions to rulemaking teams. Prior to the reforms, both nonsignificant and significant rules went through multiple layers of internal review. This practice stemmed more from agency protocol than from necessary oversight. For example, a team member’s decision could pass through sequential reviews by his or her immediate managers, office directors, associate administrators, and the Office of the Administrator. FAA proposed eliminating intermediate manager and director-level review and approval for both nonsignificant and significant rules so that rules could pass directly from teams to associate administrators. In doing so, FAA hoped to use available resources more efficiently, improve team members’ morale, and reduce delays. However, the agency stopped short of eliminating review and approval of significant rules by associate administrators, as was recommended in studies of FAA’s rulemaking in 1988, 1996, and 1997. According to officials from the Office of Rulemaking, the revised process was designed to enable the management council to delegate coordination and approval of nonsignificant rules to managers below the associate administrator level and the reform was intended to allow teams to act with the full knowledge of their respective associate administrator’s position on important issues. To address problems in administering the rulemaking process, FAA implemented a series of reforms. These reforms were primarily designed to clarify the extent and limitations of each team member’s roles and responsibilities, to improve the monitoring of rules and the management of rulemaking documents throughout the process, and to ensure ongoing evaluation of the process. Given the potential complexity of rulemaking issues, inconsistent and unclear lines of responsibility between policy, technical, legal, and economic reviews have historically slowed the rulemaking process. In its reform, FAA documented in the rulemaking manual the roles and responsibilities for each member of the rulemaking team. Specific appendixes in this manual detail the purpose, intent, and limitations of legal and economic reviews. FAA also created a new system for monitoring rule status and document management, the Integrated Rulemaking Management Information System, which was designed to increase the use of automation in the rulemaking process. According to FAA’s Office of Rulemaking, its new system consolidated the functions of the existing rulemaking tracking and document management systems. The new system was designed to also provide access to a regulatory guidance library and the DOT’s Docket Management System. Finally, FAA developed rulemaking quality standards and established a continuous improvement team and a quality team to ensure ongoing evaluation of the rulemaking process, monitor the quality of rulemaking documents, and provide recommendations on potential improvements to the process. FAA’s rulemaking quality standards are documented in an appendix to its rulemaking manual, Rulemaking Quality Standard and Guide. The guide offers practical tips, provides techniques, and suggests references and examples for rulemaking writers. FAA’s continuous improvement team—envisioned as a staff-level team—was established to review the evaluations from rulemaking teams in order to provide recommendations to the rulemaking management council on improvements to the process to be incorporated into the rulemaking manual. Similarly, the role of the rulemaking quality team—envisioned as a management-level team— was to continually monitor and improve the quality of rulemaking documents and provide recommendations to the rulemaking management council on improvements to the process. These two teams were consolidated in 1999 because FAA management concluded that the two functions were difficult to separate and that both functions would benefit from both staff- and management-level participation. To promote accountability in the rulemaking process, the working team for the 1997 study recommended a number of human capital management strategies to improve the training, evaluation, and rewarding of rulemaking staff. The team recommended that FAA provide orientation training on the new rulemaking process to all staff involved in rulemaking efforts. It also recommended skills assessment and additional ongoing training on functional skill development, conflict resolution, facilitation and consensus-based decisionmaking, project management, and team leader training. To measure efficiency and reward performance more consistently, the team recommended that FAA establish performance measures in the areas of rule-processing times, rule quality, and rulemaking productivity, as well as systems for performance evaluation. It also recommended that FAA develop a guide to clarify to supervisors the conditions to consider when granting rewards for good performance in rulemaking and to specify possible rewards. As discussed in chapter 4, FAA considered but did not take steps to formally implement these recommendations related to performance evaluation and rewards. According to the Office of Rulemaking, the staff resources needed to develop and implement these initiatives were not available because rulemaking staff and management were fully occupied with the day-to-day management of the rulemaking process. As a result, FAA relied on existing training and rewards systems. During our investigation, we also discussed rulemaking reform with rulemaking officials from several other federal regulatory agencies whose rules involved public safety to identify what steps they had taken to improve their rulemaking processes. Although an evaluation of the effectiveness of the reforms undertaken by other regulatory agencies was beyond the scope of this review, the results of our discussions with the other rulemaking officials showed that the reforms other agencies have proposed or implemented are in some cases similar to those proposed by FAA, and they generally address the same types of problems faced by FAA. For example, officials at several agencies we talked with considered management involvement a crucial element of an efficient rulemaking process. They used a variety of ways to improve management involvement, including the use of senior management councils and rulemaking coordinators. For example, EPA told us they established a regulatory policy council of senior management, as well as regulatory coordinators across EPA to manage priorities and resources. Other approaches cited by regulatory agencies we contacted included the use of agency ombudsmen and “senior champions.” Officials at the FMCSA said a regulatory ombudsman outside of agency program offices is responsible for moving rules through the process and tracking rules against established milestones. According to FMCSA officials, the ombudsman has the authority to resolve disagreements affecting timely processing; ensure sufficient staffing to meet statutory and internal deadlines; and represent FMCSA in discussions about individual rulemakings with other organizations, including OST, OMB, and other federal agencies. Rulemaking officials at FDA told us they assign a “senior champion” from the agency’s program offices to be responsible for scheduling rulemaking actions and ensuring that timely actions are taken. FDA officials said that the senior champion concept improves accountability by establishing a single point of responsibility. To reduce layers of internal review, other federal agencies have taken steps to delegate authority by limiting the amount of sequential review that takes place. For example, FDA officials said they limit a program office’s concurrence procedures and sign-off requirements to include only necessary staff. Rulemaking officials of the APHIS said that, in April 1999, they began limiting all staff organizations’ reviews of regulatory packages to 2 weeks. Finally, senior managers at the EPA said they provide flexibility to associate and regional administrators to determine what procedures to follow on a rule-by-rule basis, allowing managers more autonomy to tailor procedures to fit different needs. To better administer the rulemaking process, other federal agencies have developed automated tracking systems to monitor the progress of regulations under development, established evaluation systems for learning about delays in the process, and initiated appropriate actions to overcome internal delays. For example, FDA uses a tracking system to monitor the progress of all regulatory documents, which helps expedite the internal clearance process for regulations under development. FDA officials said that the tracking system has saved FDA time in processing regulations but had not estimated the amount of time saved. In the area of human capital management, other federal agencies cited a number of initiatives for training and performance measurement and evaluation. For example, to provide regulation writers with the training necessary to adequately prepare draft regulations, officials from APHIS encourage rulemaking staff to attend available courses and conferences or advisory committee meetings on the relevant subjects. The officials also encourage staff to seek technical support in drafting regulations and said that agencies could encourage, through incentives, technical staff to provide technical assistance to regulation writers. In addition, FDA officials suggested using a mentor program for new staff or existing staff to encourage them to consult with experienced regulation writers. Other agencies have established quality standards for their rulemaking to measure the performance of their rulemaking processes. For example, EPA measures the quality of regulatory documents and holds senior managers accountable for ensuring that regulatory actions meet the definition of a quality action. When program offices at EPA are unable to demonstrate that they can develop quality actions, fewer rulemaking actions will be assigned to them. According to EPA regulatory officials, this is an incentive for senior managers to develop quality rules. At FMCSA, officials said they had a formal structure of accountability of rulemaking products and dates in performance agreements that involve the head of the agency down to division directors. These performance agreements have specific rulemakings that include dates for which the staff is held accountable. In addition, FMCSA has a supplemental statement to the performance agreement for every staff member for rulemaking work products and dates. The median time FAA took to proceed from formal initiation of rulemaking through publication of the final rule increased from about 30 months in the 3-year period prior to the reform (fiscal years 1995 to 1997) to 38 months in the 3-year period following the reform (fiscal years 1998 to 2000). FAA’s median times for proceeding from initiation through release of the proposed rule for public comment and for proceeding from the close of the public comment period through publication of the final rule both increased by more than 3 months after the reforms. Specifically, the median time FAA took to proceed from initiation through the release of the proposed rule for public comment increased from 16.5 months in the 3-year period prior to the reforms to 20.4 months in the 3-year period following the reforms. The median time FAA took to finalize the rule after the close of the public comment period increased from 14 months to 16.3 months during the same time periods, as shown in figure 14. The time OST took to review and approve rules did not improve after FAA reformed its rulemaking process in 1998. Overall, for both proposed and final rules, the median time OST took to approve rules (including review, comment, and FAA’s response, if any) increased from about 125 days before FAA’s reforms to about 130 days after the reforms, an increase of about 5 days after the reforms. Measuring the proposed and final rules separately, we found that the median time taken for OST’s approval of proposed rules increased by 2 days, while the median time taken for OST’s approval of final rules decreased by 1 day, as shown in figure 15. Since 1998, FAA has published fewer rules. As shown in figure 14, FAA finalized 18 significant final rules in the 3-year period prior to implementing its reform. In the 3-year period following the reform, FAA finalized only 11 significant final rules. FAA rulemaking officials attributed the change in productivity of significant rules to the agency’s efforts to classify more rulemakings as nonsignificant and, thus, to decrease levels of evaluation and review within FAA, as well as to eliminate review by the Department and OMB. However, the number of nonsignificant rules the agency published from 1995 to 2000 do not reflect this. For example, FAA published almost 50 nonsignificant proposed and final rules each year in 1995 and 1996, as compared to less than 30 nonsignificant proposed and final rules each year in 1999 and 2000. In the years since FAA’s reforms, the median time that initiated significant rulemaking projects had remained in the process without being released for public comment (the proposed rule stage) increased by more than 4 years from the end of fiscal year 1997 to the end of the fiscal year 2000. At the same time, the median time that FAA’s unpublished significant final rulemaking projects remained in the process after going through the public comment period also increased, by about 5 months. This is shown in figure 16. As part of its rulemaking reform in January 1998, FAA established its own time frames for developing and publishing proposed and final rules, as shown in figure 17. Although these time frames were established as a part of FAA’s reforms and were, thus, not an applicable standard for rulemaking efforts prior to the reforms, we compared processing times for the 3-year period preceding FAA’s reforms to processing times for the 3-year period following FAA’s reforms to measure the extent of the change. The percentage of FAA’s proposed rules that proceeded from initiation through release for public comment within FAA’s suggested time frames dropped from 47 percent prior to the reforms to 19 percent after the reforms. The percentage of rules that proceeded from the close of the public comment period to publication as a final rule within FAA’s suggested time frames dropped from 39 percent to 36 percent in the same time periods. Overall, FAA did not meet time frames suggested in its rule making guidance for more than half of its proposed and final rules published, as shown in figure 18. Despite the reforms FAA made to its rulemaking process, many of the problems that have historically impeded the efficiency of rulemaking at FAA continued. Our survey of FAA rulemaking staff showed that less than 20 percent agreed that FAA has made the changes necessary to improve the rulemaking process. In addition, only about 20 percent of the staff surveyed agreed that the rulemaking process has become more efficient and effective in the last 2 years. (A copy of the survey is provided in app. II.) Our interviews with FAA rulemaking staff and management and our observations of specific rulemaking projects supported the staff's perception and confirmed that problems in the three central areas of management involvement, the administration of the rulemaking process (process administration), and human capital continued to slow the process. Problems related to three general areas of management involvement continued to slow the process. Multiple, shifting priorities made it difficult to allocate resources effectively and often disrupted the timing of the rulemaking process. Too often, policy issues were not resolved in a timely manner. Finally, multiple layers of review continued to contribute to delays. An excessive number of rulemaking priorities continued to impair the efficiency of the process. The number of projects on FAA's top priority list grew from 35 in February 1998, when FAA established the priority list after implementing its reforms, to 46 in April 2000. At that time, the Associate Administrator for Regulation and Certification said it was critical to shorten that list to a more manageable number. However, the number of top rulemaking priorities continued to increase, to 49 rules by March 2001. According to the Director of the Office of Rulemaking, the maximum number of rulemaking projects that can be effectively managed is about 30 to 35 projects. Rulemaking officials cited external and internal pressures to add rules to its priority list, noting that the agency's priorities change due to external influences such as accidents, NTSB recommendations and congressional actions and mandates. Internally, they attributed the growth in the number of priority rulemaking projects in part to a lack of commitment to the reformed process of some participants and to what they described as “parochial” views of priorities that resulted in efforts to circumvent the decisions of the rulemaking steering committee. For example, officials said that some program offices circumvented the approval process for adding rulemaking projects to the top priority list by adding projects to their own short-term incentive plans, creating pressure on the steering committee to add the rules to the top priority list. Our survey of rulemaking staff showed that less than one-third (29 percent) of the staff agreed that senior managers supported the steering committee's decisions regarding priorities. Not only were too many rules given top priority, but changes in the relative ranking of “top” priorities created problems in managing staffing resources, thereby increasing the processing time for significant rules. Eighty-three percent of the survey respondents agreed that changing priorities in the rulemaking process caused delays in the process. Team members said they were frequently pulled off of top-priority rules to work on other projects that their management considered higher priority. They noted that these disruptions created delays. It is important to note that, while some of the causes of shifting priorities stem from the current rulemaking process and can be changed, others relate to events that FAA cannot control. For example, new safety issues may emerge whenever there is an aviation accident. In addition, rulemaking efforts in progress that are related to issues such as safety threats can be overtaken by new events that then drive the agency's priorities. While the agency can monitor the effects of outside situations, there is little it can do to control them. Figure 19 provides an illustration of the impact of events on FAA's development of a proposed rule on aviation security. Although FAA cannot prevent unexpected events from influencing its rulemaking priorities, FAA's system for prioritizing rules established as part of its 1998 reform lacks explicit criteria to guide rulemaking management in establishing and ranking the priority of projects and assigning available resources. While FAA's rulemaking manual describes factors that must be considered in prioritizing rulemaking projects—such as the legislative time frames established by the Congress and projects initiated in response to special commissions and the NTSB—the policy does not define how these criteria should be ranked in order of importance. Identifying and ranking the agency's top rulemaking priorities is important because FAA's “A” list includes the Administrator's priorities as well as other top priority rules sponsored by different offices. The FAA Administrator's set of rulemaking priorities constitute about half of the “A” list of projects that are actively worked on. For example, in July 2000, 21 of the agency's 45 top priority rules were on the Administrator's list. Yet FAA's policy for determining rulemaking priorities does not establish the relative importance of the different factors that rulemaking managers must consider in determining the priority of rules within the “A” list of top priority projects. Without clear criteria for determining the rules' relative ranking and consensus among all offices involved in rulemaking, rulemaking managers may have difficulty in objectively determining, for example, whether legislated time frames take precedence over the Administrator's priorities or the safety recommendations of the NTSB. Thus, a final ranking is de facto left to the steering committee, which is made up of managers whose priorities are tied to the functions of their individual offices. One result is that managers from different offices may be more likely to allocate their staff resources on an ad-hoc, short-term basis, rather than in a strategic fashion to complete the agency's highest priority rules. During our review, the Office of Rulemaking suggested that one way of allocating staff resources to ensure that top priority rules are completed is to “dedicate” team members to work on rules until they are completed. This approach was recommended in previous reviews of FAA's rulemaking process and is used in FAA's acquisitions of air traffic control equipment. According to the Office of Rulemaking, if this approach was put into place, managers of offices involved in rulemaking activities, including the offices involved in legal, technical, and economic analyses as well as the Office of Rulemaking, would ensure that rulemaking team members worked only on the highest priority rule by dedicating their staffs to that project. FAA successfully used this approach to develop its “commuter rule” in 1995, as shown in figure 20. The Office of Rulemaking, which also cited changing priorities as an ongoing problem, noted that a continuing lack of realism in prioritizing fostered a sense of overload on the part of rulemaking staff. Our survey of rulemaking staff showed that only about 17 percent agreed that the amount of work was reasonable, allowing team members to produce high-quality products and services. Furthermore, less than one-third (about 30 percent) agreed that management from their office provided sufficient staff and resources to support and promote improvement in the rulemaking process. On some rulemaking projects, the time FAA management took to resolve complex policy issues added years to the overall time taken to complete the rule. Based on findings that sequential review and decisionmaking by management late in the process had previously caused problems such as extensive backlogs, rework, and delays, FAA intended in its reform to promote a proactive management approach in which policy decisions would be made early in the process. However, only about 28 percent of the rulemaking staff we surveyed agreed that senior management focused on the prevention of problems rather than on the correction of problems, and only 11 percent of the staff surveyed agreed that sequential processing does not impact the timeliness of the rulemaking process. Figure 21 provides a case study of a rulemaking effort related to Flight Operational Quality Assurance (FOQA) Programs in which management's inability to resolve difficult policy issues early in the process contributed significantly to the overall time the rule has been in the process. This rule has taken years to develop because of complex policy issues that at the time of our review still had not been resolved. The policy issues concern the waiving of enforcement actions for violations discovered through FOQA data voluntarily provided by airlines. Agency officials said that the reason this issue has been so difficult to resolve is that the rule could set a precedent that would affect other regulatory agencies' enforcement efforts, and it therefore has ramifications beyond the Department's efforts to improve aviation safety. As a result, they considered their rulemaking efforts to be a management success. Delays in the process caused by multiple layers of review within the agency continued despite FAA's reform efforts because the reduction in layers of review and the level of employee empowerment envisioned in FAA's reform did not materialize. In reviewing approved project records, we found that delegation of authority beyond the director's office had not been achieved in spite of FAA's plans to do so. (FAA's plans are detailed in ch. 3.) For example, in reviewing projects approved since the reform was implemented in January 1998, we found that in five of six projects not only did the directors of team members' offices review and approve team members' decisions, but so did their immediate managers and other managers. In 1997, FAA had concluded that multiple layers of review fostered a lack of accountability in the rulemaking process and that this, in turn, led to milestones that were unrealistic or not observed because final responsibility for the project was unclear. Our survey of rulemaking team members showed that few (4 percent) agreed that layers of review did not interfere with the timely processing of rules. As noted above, only 11 percent agreed that sequential processing does not impact the time required to complete the rulemaking process. Finally, a minority of the respondents agreed they had the ability to establish realistic schedules; 36 percent of the survey respondents agreed that rulemaking teams set realistic schedules, and 19 percent of rulemaking staff agreed that rulemaking teams have sufficient control over the rulemaking process to set realistic milestones. Senior rulemaking managers at FAA said that there was a fine line between employee empowerment and the need for adequate oversight, particularly for rules that were likely to have a significant economic or other impact on the aviation industry. They said that FAA's reform was not intended to eliminate managers from decisionmaking in the rulemaking process or give rulemaking teams total independence, noting that the primary focus of the rulemaking reform effort was to reduce the levels of review for nonsignificant rules. According to officials from the Office of Rulemaking, review and approval of certain nonsignificant rules that would harmonize certification requirements for passenger aircraft established by the Joint Aviation Authorities (FAA's European counterpart) have already been delegated below the level of associate administrators. Our discussions with rulemaking staff revealed a variety of reasons why they strongly disagreed that rulemaking teams had enough control over the process to set realistic milestones. Staff noted that internal management decisions to change rulemaking priorities before a project was completed and external reviews by OST caused process delays and were beyond their control. Less than 2 percent of the rulemaking team members agreed that departmental reviews improved the timeliness of the rulemaking process, and less than 15 percent agreed that departmental reviews improved the quality of rulemaking. Figure 22 shows the impact of coordination with OST on FAA's time frames in its rulemaking efforts to revise regulations governing the standards for aircraft repair stations. FAA's internal review process reflects the lack of empowerment as well. Officials from OST and the Office of Rulemaking said that the requirement for numerous layers of review reflects FAA's hierarchical management structure and that the lack of empowerment is embodied in FAA's “grid sheet” for signing off on a proposed rule. The grid sheet can involve 20 different signatures, each indicating a different layer of review. Moreover, they said that these extensive reviews can reduce accountability, noting that, because FAA requires a lot of signatures, rulemaking documents are sometimes passed through the process without FAA officials reading them. Figure 23 illustrates the multiple layers of review that occurred in reaching team concurrence for a proposed rule to require that emergency medical equipment be carried aboard certain passenger aircraft. DOT officials said that the time needed for their review and approval of FAA's significant rules can be lengthy if FAA's position is not thoroughly evaluated in terms of departmental policy early in the rulemaking process. DOT officials also cited lack of coordination among FAA's program offices and a lack of empowerment and accountability of rulemaking teams as problems that continued to contribute to delays in the process. They said that departmental review served a valuable role in ensuring that OMB's concerns were adequately addressed and noted, for example, that OST's efforts to coordinate proposed changes were hindered when FAA staff did not have the authority to make the suggested changes. Problems in three central areas related to the administration of the rulemaking process continued to contribute to delays. Significant confusion persisted regarding the roles and responsibilities of rulemaking team members. Information systems lacked complete, accurate, or current data and were inconsistently used. Finally, key elements of a continuous improvement program to identify and correct problems in the process were not in place. Although FAA attempted to address confusion over roles and responsibilities in its reforms, our survey indicated that only about 40 percent of the individuals we surveyed agreed that the “roles and responsibilities are clearly understood.” In addition, less than half (47 percent) of the survey respondents agreed that “roles and responsibilities are clearly established.” The effort by the Office of Rulemaking to define roles and responsibilities for rulemaking participants in its rulemaking manual did not appear to have eliminated confusion. As we indicated in chapter 3, the manual describes the specific roles of legal and economic reviewers. According to FAA's guidance, legal reviews should focus on the legal authority for the action proposed, compliance of the proposal with applicable laws, and whether the requirements being imposed are stated with sufficient clarity and justification to be enforced and defended in court, if need be. Economic reviews should estimate the costs and benefits of a proposed or final rulemaking. However, rulemaking management said that legal reviews continued, in some cases, to focus on nonlegal issues and that the scope of economic reviews could potentially be reduced. Senior legal staff involved in the rulemaking process noted that FAA's Chief Counsel is a political appointee whose role as advisor to the Administrator can result in the office's involvement in policy issues, as well as assessments of the quality of analyses conducted to support rules. In September 2000, we reported on the importance of information technology resources for federal agencies to gather and share information, and FAA officials cited the development of a rulemaking management information system as a major element of its rulemaking reforms. According to FAA's Office of Rulemaking, its new automated system consolidated the functions of the existing project-tracking and document- management systems. FAA's tracking of its 24 “A” list significant rules on this system has established data on rulemaking times for specific steps that should help it to monitor the rulemaking process. However, the small number of rules that it consistently tracks and a lack of agencywide implementation has made the system less useful than it could potentially be. Because FAA used the project-tracking portion of the automated system only for its “A” list of priority projects, including 24 significant rules, the system was missing complete and accurate data for many of the remainder of FAA's significant rulemaking projects. FAA rulemaking officials said that they did not have the resources available to complete, correct, or update records of rules that were not being actively worked on from the agency's “A” list of rules, citing resource limitations. However, since previously initiated rulemaking projects may be shifted onto the “A” list, historical data could be useful for measuring the performance of the rulemaking process over time. FAA rulemaking officials also noted that FAA's rulemaking policy allows teams to select milestones on a case-by-case basis. However, continuing to consider some milestones in the system voluntary may result in a lack of consistent and comparable information on rules. Without complete, accurate, and consistent data on all FAA's rulemaking projects, FAA managers will not be able to use the information system to its fullest capacity—to measure the time elapsed between specific steps in the process to identify where and to what extent delays occur over time. Since the rulemaking process can take years to complete, a longer-term management perspective on the performance of the process is essential. FAA agreed that additional performance and statistical measures should be incorporated into the reporting system to enhance its ability to manage the process and said it had begun making changes to the system. The document management portion of the automated system was limited in its usefulness because it had not been fully implemented across all offices involved in rulemaking. FAA's technology plan called for an “automation champion” to lead the initiative across all of the affected offices. However, according to the Office of Rulemaking, FAA had not designated a champion or developed a plan or goals for an integrated system outside the Office of Rulemaking. As a result, offices outside of the Office of Rulemaking had not fully implemented the new system. Although all rulemaking team members received initial training on the new system, only 26 percent of the respondents to our survey agreed that rulemaking team members were provided with training when new technologies and tools were introduced. After the initial training, we found that the system was not effectively implemented outside of the Office of Rulemaking. We reviewed the rulemaking documents in the system for four significant safety-related rules and found that since FAA's reforms in 1998, only 1 of 27 rulemaking staff outside of the Office of Rulemaking on the 4 rulemaking teams had used the automated system. This staff person used the system only twice, on the same day in February 1998. Although officials from the Office of Rulemaking said that the new system was available to all rulemaking staff, only about 23 percent of the survey respondents agreed that their coworkers used FAA's automated capabilities to record rulemaking actions. Individuals from the Office of the Chief Counsel said that they either did not have access to the automated system or that their computers were not capable of using the rulemaking software. While economists in the Office of Policy and Plans with whom we spoke had access to the system, they said that the software was too cumbersome. One economist said that he preferred to develop rulemaking documents that were inaccessible to change by other team members in order to maintain the integrity of his work product. Despite explicit efforts in the rulemaking reform to establish systems to evaluate the new process and establish quality standards and guidance, FAA had not fully implemented a continuous improvement or quality review program. The concept of continuous improvement is embodied in quality management principles as well as the Government Performance and Results Act. Continuous improvement efforts are essential for identifying problems in the rulemaking process. However, continuous improvement and quality management teams established in FAA's reforms reported problems in attempting to implement review systems. In the fall of 1999, members of the continuous improvement team expressed concerns about the purpose and authority of the team related to management's participation in establishing and supporting the evaluation function. To improve the effectiveness of the system, FAA combined the teams to include both staff and management. Despite the reorganization, little substantive work had been done in the area of process improvement at the time of our review. For example, project teams are to complete a “lessons learned” evaluation after publication of a proposed rule to document practices and procedures that worked well, identify problem areas, and determine opportunities to improve the entire rulemaking process. However, since the process was reformed in January 1998 through fiscal year 1999, we found that FAA had not documented any evaluations. The quality and continuous improvement teams were also expected to review sample rulemaking documents during the progress of a selected project, perform periodic quality assurance reviews with selected rulemaking teams, and make recommendations to the management council regarding their findings. However, none of these quality review functions had been accomplished. No evaluations or recommendations had been documented, and the rulemaking manual had not been updated since its publication in December 1998. In discussing the issue at a steering committee meeting, members of the management council attributed the lack of implementation of process improvement efforts to an inadequate level of organizational commitment to the reformed process. Rulemaking officials said that, although the continuous improvement team met on a regular basis to discuss lessons learned, the team had not documented the results of their discussions. They said they planned to incorporate the ability to document lessons learned in the next version of the management information system and that they were updating the rulemaking manual. They also said that another team, made up of managers from key offices, has met monthly and sometimes weekly to implement and improve the reformed process. Human capital management initiatives focusing on training, performance measurement and evaluation, and rewards for rulemaking efficiency and quality work were generally not implemented at the time of our review. According to the National Performance Review, which made recommendations regarding federal agencies' rulemaking processes in 1993, proper training, performance measurement, and performance incentives are needed to ensure that the agency officials involved in regulatory activities work as effectively as possible. We reported on the importance of training, performance measures, and performance incentives as key elements of an effective human capital strategy in September 2000. In preparing its 1997 report, FAA's working team recommended a series of human capital management initiatives to help rulemaking participants adjust to the revised process and foster change throughout FAA. These areas included training and skills assessment as well as performance measurement, evaluation, and rewards for rulemaking participants. Although FAA's reform plan called for orientation training on the new rulemaking process and ongoing training in a wide range of areas for all staff involved in rulemaking, rulemaking participants outside the Office of Rulemaking generally received training only on the information system software and an introduction to the new process. A formal program for continuing the training of all rulemaking team members in the areas of functional skill development, conflict resolution, facilitation of and consensus-based decisionmaking, project management, and team-leader training was not implemented. About 50 percent of the staff surveyed agreed that they received the training they needed to perform their jobs. Similarly, although FAA's reforms called for the analysis of the skills needed to function in the revised rulemaking process and to establish a mentoring program, the Office of Rulemaking had not conducted a formal analysis, and we found no evidence of such an analysis in the other offices involved in rulemaking. Only the Office of Rulemaking had established a mentoring program. Representatives from the Office of Policy and Plans and the Office of the Chief Counsel said that they had recurring training programs, but they agreed that these programs did not include a formal segment devoted to training to support the rulemaking process, as envisioned by the reform. As we reported in January 2000, a key element of human capital management is the use of performance management systems, including pay and other incentives, to link performance to results. However, in the area of rulemaking, FAA has not consistently done so for rulemaking staff and management. Although FAA's reform effort included recommendations to measure and evaluate team and individual team member performance and to develop an associated rewards system, these human capital management efforts were not implemented on a consistent, agencywide basis. According to rulemaking officials, the staff resources needed to develop and implement these initiatives were not available because rulemaking staff and management were fully occupied with the day-to-day management of the rulemaking process. As noted above, we found evidence that some individual senior managers' performance evaluations included rulemaking projects specific to their program areas. The Government Performance and Results Act of 1993 requires agencies to pursue performance-based management including results-oriented goal setting and performance measurement. Although the act gives agencies the impetus for tailoring their human capital systems to their specific missions and objectives, it is up to agencies, like FAA, to follow through on the opportunity. FAA implemented an agencywide effort to link performance with rewards in April 2000. FAA's new core compensation plan provides for pay increases tied to performance and individual contributions. Despite the opportunities provided by the new compensation system, as well as personnel reforms enacted in 1996 to provide FAA with greater flexibility in human capital management, FAA management has not established systems to measure and reward performance in rulemaking based on the quality or timeliness of the process. One measure of rulemaking performance is the time taken to complete steps in the process to develop and issue a rule. To implement rulemaking reforms, senior managers involved in FAA's rulemaking agreed that process milestones were appropriate measures of rulemaking performance. However, results from our survey of rulemaking staff indicate that, while slightly more than one-half (51 percent) agreed that milestones are used to assess the overall performance of teams, team members did not believe that using milestones is an accepted or acceptable means of measuring performance. For example, less than one half of the respondents (about 48 percent) agreed that senior management holds team members accountable when teams do not meet milestones. Only 20 percent agreed that senior management is held accountable when teams do not meet milestones. Less than 20 percent agreed that rulemaking teams have sufficient control over the rulemaking process to set realistic milestones. Only 36 percent of the staff agreed that teams set realistic schedules. Only 8 percent agreed that their offices provide incentives based on the milestones of the rulemaking process. Officials in the Office of Rulemaking suggested that one method to provide agencywide incentives for timely rulemaking would be to include a goal for the agency's timely rulemaking in the short-term incentive plans for all senior managers involved in rulemaking. The Office of Rulemaking did not develop a separate rulemaking award system as recommended by the working team. They said rulemaking awards were given based on the preexisting agency award system in which individuals and teams are recognized for outstanding performance on various projects. Although about 70 percent of the staff surveyed agreed that management from their offices provides an environment that “supports my involvement, contributions, and teamwork on the rulemaking team,” few rulemaking staff that responded to our survey agreed that teamwork is rewarded. Specifically, only 28 percent of rulemaking staff agreed with the statement “I am appropriately rewarded for teamwork in the rulemaking process (e.g., performance ratings, cash awards, certificates, or public recognition).” FAA's reforms of its rulemaking process have not fully addressed the long- standing problems that can lead to unnecessary delays because the initiatives have either not been fully implemented or their implementation has been impaired by a lack of management commitment and support. Management's attention to factors critical to achieving desired results— establishing baseline data, priorities, a plan for addressing root causes, and an evaluation system to measure the agency's progress—would facilitate effective implementation of the reform initiatives begun in 1998. FAA's management committees that were established as a part of the reform are a step in the right direction in FAA's efforts to improve management involvement, encourage timely resolution of policy issues, and reduce layers of review. Clarifying staff and management's roles in the process and including performance expectations, measures, evaluations, and rewards based on these roles is an essential step in establishing a performance system for rulemaking that emphasizes accountability and results. The system must hold staff and managers accountable for producing timely, quality rules that are needed to improve aviation safety and security. Equally essential are automated information systems to monitor the performance of the individuals and offices in the process and provide information to continually evaluate and improve rulemaking. A performance management system is a key element of an effective human capital strategy that is the best, and perhaps the only, means of obtaining the needed level of commitment and support from FAA management and staff. FAA's new Core Compensation Plan that provides for pay increases tied to performance and individual contributions offers the agency an opportunity to establish new systems for performance measurement, evaluation, and rewards based on timeliness and quality in rulemaking for all offices involved in the process. Finally, the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century provides an as yet unrealized opportunity for FAA to reduce the number of rules that must go through one of the levels of review—the review by the Office of the Secretary of Transportation. Adhering to the provisions of the act could reduce the processing time for selected significant rules that meet the criteria established in the act. To improve the efficiency of its rulemaking process and reap the maximum benefits from its rulemaking reform efforts, we recommend that the Secretary of Transportation direct the FAA Administrator to take steps to improve management involvement in the rulemaking process by reducing the number of top-priority projects to a manageable number over time by limiting the number of projects added until existing projects are completed and establishing criteria for ranking the highest priority rules so that the lowest ranked of these priority rules may be tabled if necessary to allow sufficient resources to be applied to emerging, higher-priority projects; providing resources sufficient for rulemaking teams to meet the agency's suggested time frames. One approach, suggested by the Office of Rulemaking, is to prototype the use of dedicated rulemaking teams by assigning staff for the duration of rulemaking projects. This approach would give the teams the ability to focus their efforts and manage projects to completion; holding managers at the director and associate administrator level accountable for making and supporting policy decisions as early as possible in the rulemaking process; and empowering team members by giving them the authority to coordinate with their associate administrators so that they can represent the associate administrator's policies, thus eliminating the need for the separate step of associate administrator's review and approval; empowering team members by permitting them to set their own schedules and deadlines; and holding staff and management accountable for ensuring that schedules are realistic. In addition, the Secretary of Transportation should direct the FAA Administrator to take steps to improve administration of the rulemaking process by clearly communicating the roles and responsibilities of program and support staff on rulemaking teams and holding team members and their managers accountable for limiting their reviews to established criteria; ensuring that information systems used for rulemaking tracking and coordination contain current, complete, and accurate data on the status of all significant rulemaking projects, including the time elapsed between FAA's transmission of rules to OST and the receipt of OST's comments or approval; and implementing elements of its proposed continuous improvement program and using the resulting information to identify problems in the process and potential solutions. Finally, the Secretary of Transportation should direct the FAA Administrator to take steps to improve human capital management of the rulemaking process by establishing a human capital management strategy for offices involved in rulemaking that includes providing training and support to all participants that promotes use of the agency's automated information system and collaborative, team- based decisionmaking skills, and assessing the skills of rulemaking staff and developing targeted training to better enable them to fulfill their rulemaking roles; and establishing and implementing performance measures based on expectations, evaluations, and incentives that promote timely, quality rules. One approach suggested by the Office of Rulemaking would be to include a goal for the agency's timely rulemaking in the short-term incentive plans for all senior managers involved in rulemaking. In addition, we recommend that the Secretary revise departmental policies to make them consistent with the provisions of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century and reduce the number of FAA's significant rules subject to its review. We provided a draft of this report to the Office of the Secretary of the Department of Transportation and FAA for their review and comment. In following discussions, departmental and FAA officials indicated that they agreed with a number of the draft report's recommendations. For example, they said that FAA will take steps to ensure that the rulemaking tracking system is completely accurate and up-to-date, and includes all appropriate tracking milestones. Furthermore, they agreed that FAA will use its continuous improvement program to identify potential process improvements and will hold senior management accountable for providing policy input as early as possible in the rulemaking process. These officials also indicated that some of the draft report's recommendations will require further consideration, and that a specific response to each of the report's recommendations will be provided in the Department's response to the final report. FAA officials provided technical comments, which we incorporated into the report. The Department also provided written comments on the report, which discussed four main points about the results of the review. The full text of FAA's written comments is provided in appendix V, along with our detailed response to these comments. | The Federal Aviation Administration (FAA) issues regulations to strengthen aviation safety and security and to promote the efficient use of airspace. FAA's rulemaking is a complicated process intended to ensure that all aspects of any regulatory change are fully analyzed before any change goes into effect. During the last 40 years, many reports have documented problems in FAA's rulemaking efforts that have delayed the formulation and finalization of its rules. This report reviews FAA's rulemaking process. GAO reviewed 76 significant rules and found that FAA's rulemaking process varied widely. These rules constituted the majority of FAA's workload of significant rules from fiscal year 1995 through fiscal year 2000. GAO found that FAA had begun about 60 percent of the rulemaking projects by Congress and about a third of the rulemaking projects recommended by the National Transportation Safety Board within six months. For one-fourth of the mandates and one-third of the recommendations however, at least five years passed before FAA began the process. Once the rule was formally initiated, FAA took a median time of two and a half years to proceed from formal initiation of the rulemaking process through publication of the final rule. In 1998, FAA improved the rulemaking process and shortened the time frames for finalizing rules. These reforms included establishing a steering committee and a rulemaking management council to improve management involvement in setting priorities and resolving policy issues. GAO found that after the reforms were implemented, the median time for reviewing and finalizing a rule increased. This suggests that the productivity of FAA's rulemaking process for significant rules decreased after FAA's reforms. |
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U.S. passports are official documents that are used to demonstrate the bearer’s identity and citizenship for international travel and reentry into the United States. Under U.S. law, the Secretary of State has the authority to issue passports, which may be valid for up to 10 years. Only U.S. nationals may obtain a U.S. passport, and evidence of citizenship or nationality is required with every passport application. Federal regulations list disqualifying situations under which U.S. citizens are not eligible for a passport, such as those who are subjects of a federal felony arrest warrant. The security of passports and the ability to prevent and detect their fraudulent use are dependent upon a combination of well-designed security features, solid issuance procedures for the acceptance and adjudication of the application and the production of the document, and inspection procedures that utilize the available security features of the document. A well-designed document has limited utility if it is not well produced or if inspectors do not utilize the security features to verify the authenticity of the document. In 2005, State began issuing e-passports, which introduced an enhanced design and physical security features. GPO manufactures blank e-passport booklets for State using a variety of materials from different suppliers. Currently, GPO has two suppliers—Infineon and Gemalto—under contract for the covers of the e-passports. These covers include the computer chip embedded in the back cover that can communicate using contactless ID technology. Security-minded versions of this technology are employed in contactless smart cards used in applications such as automatic banking and identification. As of February 1, 2009, the State Department had issued over 30 million e-passports. To combat document fraud, security features are used in a wide variety of documents, including currency, identification documents, and bank checks. Security features are used to prevent or deter fraudulent alteration or counterfeiting of such documents. In some cases, an altered or counterfeit document can be detected because it does not have the look and feel of a genuine document. For instance, in U.S. passports, detailed designs and figures are used with specific fonts and colors. While these features are not specifically designed to prevent the use of altered or counterfeit documents, inspectors can often use them to identify nongenuine documents. Security features of travel documents are assessed by their capacity to secure a travel document against the following threats: counterfeiting—unauthorized construction or reproduction of a travel forgery—fraudulent alteration of a travel document, and impostors—use of a legitimate travel document by people falsely representing themselves as legitimate document holders While security features can be assessed by their individual ability to help prevent the fraudulent use of the document, it is more useful to consider the entire document design and how all of the security features help to accomplish this task. Layered security features tend to provide improved security by minimizing the risk that the compromise of any individual feature of the document will allow for unfettered fraudulent use of the document. While most security features in the U.S. e-passport are physical features, the introduction of the computer chip also allows for the use of electronic security features. In general, at ports of entry, travelers seeking admission to the United States must present themselves and a valid travel document, such as a passport, for inspection to a CBP officer. The immigration-related portion of the inspections process requires the officer to confirm the identity and determine the admissibility of the traveler by questioning the individual and inspecting the presented travel documents. In the first part of the inspection process—primary inspection—CBP officers inspect travelers and their travel documents to determine whether they should be admitted or referred for further questioning and document examination. If additional review is necessary, the traveler is referred to secondary inspection—in an area away from the primary inspection area—where another officer makes a final determination to admit the traveler or deny admission for reasons such as the presentation of a fraudulent or counterfeit passport. The chips used in the U.S. e-passports are integrated circuits (IC) that are essentially complete computers that contain a central processing unit, various types of memory, and other components that perform specialized functions such as random number generation and advanced cryptographic processing. The chips contain both hardware and software. The hardware circuitry and the operating system are implanted into the various layers of the chip in a process called photolithography, which employs a technique called masking wherein the chip’s circuitry is defined on a series of glass plates called the photomask. The photomask is used as a template to transfer the pattern of the chip’s electronic components into the various layers of the physical chip. Once implanted, the circuitry is considered permanent and not changeable except through physical attack. While the chip’s operating system is implanted into the chip through the photomask at chip creation time, other software needed on the chip—for example, the traveler data—are written to the chip later, during personalization of the chip. The e-passports are designed as contactless proximity cards, and communication with the embedded chip is only via a radio frequency (RF) link established according to standard methods with a device generally called a reader. To support global acceptance and interoperability of e-passports, ICAO issued standards that define how data are to be stored on and read from e-passports, including the RF communications. According to the ICAO standards, contactless communication with the e-passport is governed by ISO/IEC 14443, an international standard that defines the transmission protocol used to transfer data between the reader and the chip. Higher-level reading from and writing to the chip is implemented through the ISO/IEC 7816-4 command set. ISO 7816-4 is an international standard set of commands used to communicate with the chip and to control all reading from and writing to the chip based on a strict command/ response scheme. The reader initiates all commands to the chip and the chip provides the expected response. The chip itself cannot initiate any communications with the reader. ISO 7816-4 includes controls to limit read and write access to the chip to authorized parties. The United States issues e-passports with both ISO/IEC type A and type B interface connections. Both types use the same transmission protocol, but vary in how communications are established between the chip and the reader and in how information is encoded for transmission. The chip has no onboard power, but instead pulls the energy it needs from the electromagnetic field emitted by the reader. The e-passport antenna receives the electromagnetic energy from the reader and converts it to electric current to power the chip. The chip can be powered and communicate only when it is in close proximity—up to about 10 centimeters—to an appropriate reader. With both types of chips, the antenna is a component external to the chip and separately attached to it as part of the overall book cover manufacturing process. While the communication protocols and command set are standardized, the operating system and other software used on the chips are vendor- specific. As is typical with smart card ICs, the software on the e-passport chips is partitioned into three general areas: the IC dedicated software, the basic embedded software, and the application embedded software. The IC dedicated software contains software used for testing purposes and software to provide other services to facilitate usage of the hardware on the IC. The IC dedicated software is developed by the IC manufacturer and it is part of the photomasks of the chips. The basic embedded software is typically not provided by the chip manufacturer, but is usually developed by a third party and delivered to the chip manufacturer for incorporation into the chip’s photomask. An important component of the basic embedded software is the operating system for the chip. The operating system implements the ISO 7816-4 command set and controls all communication between the chip and the outside world. The third major partition of software on the chip is the application embedded software, which is also typically provided by a third party and provides functionality specific to the particular application for which the chip is intended to be used. In the case of the U.S. e-passports, the application software is data contained in a file layout using an open, ICAO- specified logical data structure used for machine-readable travel documents. In producing e-passport booklets for State, GPO has tapped into the existing global smart card industry, resulting in a wide number of different companies involved in the e-passport chip production and inlay process. Two separate companies were awarded contracts to supply chips for the U.S. e-passports. Infineon, a German company, fabricates its own chips and embeds a commercial operating system from a third-party company on them. Gemalto, a Dutch company, obtains chips from NXP, a Dutch semiconductor manufacturer. Gemalto provides NXP with its own operating system, which NXP embeds within the chip prior to shipping the chip to Gemalto. Although each of these contractors takes a different path to create and provide e-passport covers to GPO, both use a common subcontractor for attachment of the antenna to the chip and the inlaying of the chip into the back cover of the e-passport booklet. GPO itself finishes production of the e-passport booklet by inserting the paper pages into the covers, installing a metal strip down the inside spine for RF shielding, and, in a process termed pre-personalization, preparing the chip for use by the State Department. State personalizes the e-passport by printing bearer data onto the data page and writing digital data onto the chip as part of its issuance procedures. As seen in figure 1, several steps are involved in the production of an e-passport using Gemalto’s e-passport booklet. Gemalto involves several subcontractors to produce the cover before it is delivered to GPO. For instance, while the operating system software is created by Gemalto, it is implanted on the chip when it is fabricated by NXP. Companies overseas are also involved in the production of the chip and its incorporation into the e-passport cover. In pre-personalization, GPO tests and formats the chips, preparing them for personalization by State, and finishes overall construction of the e-passport booklet. GPO then ships the finished, blank e-passport books to the 21 State Department passport issuing offices around the country that then personalize and issue them to U.S. citizens, as needed. Similar to Gemalto’s production process, the production process at Infineon also involves several subcontractors to produce the booklet cover before it is delivered to GPO (see fig. 2). The operating system and other embedded software used on the Infineon chips are developed by a third- party company, and shipped to Infineon for incorporation into the photomask pattern. As with the Gemalto production process, GPO tests and pre-personalizes each chip, finishes the books, and distributes the finished, blank e-passport books to the 21 passport-issuing offices. Since 1997, GAO has identified federal information security as a high-risk area. Malicious code is one of the primary threats to federal information security. NIST defines malicious code—sometimes called malware—as “a program that is inserted into a system, usually covertly, with the intent of compromising the confidentiality, integrity, or availability of the victim’s data, applications, or operating system or of otherwise annoying or disrupting the victim.” Malicious code can be used for many purposes and come in many forms. For example, malicious code might be designed to delete files on a system or repeatedly attempt access to a system service and thus effectively shut it down. The effects of malicious code can range from performance degradation to compromise of mission-critical applications. Some common forms of malicious code include viruses, worms, and Trojan horses. Viruses infect a system by attaching themselves to host programs or data files. Worms are self-contained programs that can self-replicate and do not require human interaction to spread through a system or network. Trojan horses are nonreplicating programs that appear benign but are designed with a malicious purpose. Malicious code often takes advantage of vulnerabilities in a system’s software to either spread or execute. For example, a common vulnerability, known as a buffer overflow, redirects system control to a malicious program through badly designed software. Inadequate controls on a network’s connections or services are another common vulnerability that allows malicious code to spread. Common protections against malicious code include input checking at the boundaries of a system, such as at external interfaces to a system; network controls to lower the possibility that malicious code could spread within a system; and patch management to address vulnerabilities in the system’s software that malicious code can exploit. In general, a successful malicious code attack first requires that the malicious code get into a system. This can occur, for example, by inserting infected media into the computer or through incomplete controls on the system’s network connections. Second, the malicious code needs to spread to those areas of a system to which it wants to cause damage. Malicious code can spread in many ways, including various network protocols and services and also in simple file transfers. Finally, malicious code needs to be executed, often by taking advantage of vulnerabilities in a system’s software. Therefore, in the case of e-passports, a successful malicious code attack from the chip would first require that malicious code get on the chip. Second, that it get transferred from the chip onto agency computers during the e-passport inspection process and then spread to vulnerable areas within those systems. And, finally, the malicious code would have to be executed. Although communication with the chips is designed to be via the contactless ID interface that complies with the ISO 7816-4 standard, which includes an authentication procedure to limit read and write access to the chip to authorized parties, an alternate, illicit way data can be attempted to be read from or written to the chip is through physical tampering techniques. In general, the aim of such an attack is to discover confidential data stored on the chip—such as cryptographic keys—which can be used to open access to the chip via the contactless interface. Common Criteria is an international standard method for evaluating security features of information technology (IT) components. The U.S. portion of this effort is coordinated through a partnership of NIST and the National Security Agency (NSA) called the National Information Assurance Partnership (NIAP). It provides a framework for evaluating security features of IT components. The Common Criteria program evaluates commercial-off-the-shelf information assurance and information assurance-enabled products. These products can be items of hardware, software, or firmware. Evaluations are performed by accredited Common Criteria testing laboratories whose results are then certified by a validation body. A product is considered Common Criteria certified only after it is both evaluated by an accredited laboratory and validated by the validation body. Common Criteria certifications are expressed in a seven-step assurance scale called Evaluation Assurance Levels. The seven ordered levels provide an increasing measure of confidence in a product’s security functions. All evaluated products that receive a Common Criteria certificate appear on a validated products list, which is available on the Common Criteria Web site. To facilitate the efficient use of testing resources, an international agreement was developed under which one country’s Common Criteria certifications would be recognized by the other participating countries. This is intended to eliminate unnecessary duplication of testing efforts. Common Criteria certifications need to be carefully considered. We have reported previously that the fact that a product appears on the validated products list does not by itself mean that it is secure. A product’s listing on any Common Criteria validated products list means that the product was evaluated against its security claims and that it has met those claims. The extent to which vendor-certified claims provide sufficient security for a given application is another question. A complex environment has been established to provide reasonable assurance that the data contained on electronic passports can be used to help determine whether an individual should be admitted to the United States. The overall control environment depends on each party effectively implementing the controls that have been established to govern its operation and utilize the controls implemented by the other agencies. State uses a technology commonly referred to as public key cryptography to generate digital signatures on the data it writes to the computer chips on the e-passport. These digital signatures, when effectively implemented, can help provide reasonable assurance that integrity has been maintained over the data placed on the chip by State. Our review found that DHS has not implemented the capabilities needed to completely validate the digital signatures generated by State before relying on the data, which adversely affects its ability to obtain reasonable assurance that the electronic data provided in a chip were the same data that State wrote in the e-passport. While DHS has some controls that somewhat mitigate this weakness, it does little to ensure that altered or forged electronic data can be detected. Accordingly, until DHS implements this functionality, it will continue to lack reasonable assurance that data found on e-passport computer chips have not been fraudulently altered or counterfeited. ICAO has issued e-passport standards that have been adopted by the United States and other countries. As part of its specifications for e-passports, ICAO requires the use of digital signatures and a public key infrastructure to establish that the data contents of the computer chip are authentic and have not been changed since being written. A PKI—a system of hardware, software, policies, and people—is based on a sophisticated cryptographic technique known as public key cryptography. The use of a PKI for e-passports primarily serves to provide (1) data integrity (the electronic data placed on the passport have not been changed), and (2) authentication (the country issuing the e-passport was the source of the data). In its standards, ICAO specifies only the use of well-known cryptographic algorithms for use in e-passports. As discussed in appendix II, public key cryptography is used to generate and validate digital signatures. In particular, the “public key” is used to validate the digital signature that is used to authenticate the data being signed. However, a means is necessary for the user to reliably associate a particular public key with a document signer. The binding of a public key to a document signer is achieved using a digital certificate, which is an electronic credential that guarantees the association between a public key and a specific entity. In agreement with ICAO standards for e-passports, State generates and writes a digital signature on the chip of each e-passport during the personalization process. As illustrated in figure 3, State stores the following information on the e-passport computer chip: biographical information about the traveler, the traveler’s facial image, and security data. The biographical data and facial image are organized into data groups for storage on the e-passport. Each data group is condensed using a hashing algorithm and the resulting hash values are stored in the security data. A digital signature is generated on these hash values, which represent the data stored on the e-passport computer chip. Hence, the security data on an e-passport consist of three key elements: the data group hash values, the digital signature, and the certificate needed to validate the digital signature. This certificate—known as the document signer certificate—is associated with a digital signature on a U.S. e-passport’s data and is used to validate that the signed data contained in that passport were actually generated by State. The keys and certificates associated with U.S. e-passports are established in a hierarchical manner to establish a “chain of trust” that a third party, such as DHS, can use to obtain reasonable assurance that the data contained in the passport are the data that were actually written on to the e-passport by State. State has developed a comprehensive set of controls to govern the operation and management of the PKI that generates the digital signatures used to help assure the integrity of the passport data written to the chip. These controls include the development of policies and practices that are consistent with best practices described in federal guidelines. For example, State’s policies and procedures for generating and storing digital signatures and certificates from cryptographic modules minimize the risk of compromise or unauthorized disclosure. Further, State’s procedures require the use of cryptographic modules validated against the level 3 criteria of FIPS 140-2, which is consistent with federal best practices and requirements. If properly validated, the digital signatures on State’s e-passports should provide those reading the chip data, including DHS, reasonable assurance that the data stored on the chip were written by State and have not been altered. Proper validation includes verifying that the document signer certificate was issued by the State Department. In July 2007, we reported that DHS was not fully using a key security feature of the U.S. e-passport—namely the data stored on the chip. At that time, DHS had not fully deployed e-passport readers to all primary inspection lanes at all ports of entry and did not have a schedule to do so. We also reported that the implemented e-passport reader solution was not capable of validating e-passport digital signatures, which would help to ensure that the data written to the e-passport chips have not been altered. Since that time, while DHS has begun planning an acquisition for new e-passport readers, DHS has made no further deployments of e-passport readers, nor has it implemented a solution that would allow for the full verification of the digital signatures on e-passport computer chips. In 2006, as a part of the United States Visitor and Immigrant Status Indicator Technology (US-VISIT) system, DHS deployed 237 e-passport readers at 33 air ports of entry—212 are installed in primary inspection lanes and 25 are installed in training areas. No e-passport readers are deployed in secondary inspection areas. While these 33 air ports of entry were chosen because they process the largest volume of travelers—about 97 percent—from Visa Waiver Program countries, the majority of lanes at these airports do not have e-passport readers. Even though the same e-passport readers may be used to read U.S. e-passports, U.S. citizens are primarily processed through lanes at these air ports of entry that are not equipped with e-passport readers. At equipped primary inspection lanes, CBP officers can use e-passport readers to access the biographical information and digitized photograph stored on the e-passport chip. To read e-passports, officers place the biographical page of the e-passport on the reader’s glass plate. The reader then electronically scans the biographical information printed on the page and uses it to access the information stored in the e-passport’s chip. Once the biographical data and photograph from the chip are displayed on the primary inspection computer screen, the officer is to compare the information displayed with the information on the biographical page of the passport and verify that they match. The results of any validation activities conducted on the data by the system are also presented to the officer. Any mismatches could indicate fraud. While a total of 500 e-passport readers were purchased by the US-VISIT program. DHS has made no further deployments of e-passport readers since 2006. Those not deployed are in storage, used for training, or used to support system development activities. Following the deployment at the 33 air ports of entry in 2006, responsibility for deploying the e-passport readers was shifted from the US-VISIT program to CBP. CBP officials partially attributed the lack of progress in deploying e-passport readers to its failure to allocate funding for the activity since it assumed the responsibility from US-VISIT. According to DHS officials, the slower than expected times to read data from e-passport chips also influenced its decisions to not further the deployment of the e-passport readers. In 2008, DHS transferred $11.4 million of no-year funds from US-VISIT to CBP for planning, purchasing, and deploying e-passport readers at all CBP primary processing lanes and secondary inspection areas at the ports of entry. According to CBP officials, it is currently planning an acquisition for new e-passport readers. As a part of the acquisition planning, CBP also expects to determine whether it will replace the 500 currently deployed or stored e-passport readers with new readers that will likely have better performance than the current readers. According to DHS, CBP is planning an e-passport reader procurement that will allow for the full deployment of e-passport readers in fiscal year 2011. In our prior work, we recommended that DHS develop a deployment schedule for providing sufficient e-passport readers to U.S. ports of entry. With the identification of funding for the effort, CBP has initiated planning for further deployment of e-passport readers, but has not yet developed a deployment schedule. Until DHS installs e-passport readers in all inspection lanes, CBP officers will not be able to take advantage of the data stored on e-passport chips. For instance, without e-passport readers, CBP officers are unable to read the photograph and biographic information stored on the e-passport chip, information that would better enable officers to detect many forms of passport fraud, including impostors and the alteration or substitution of the photos and information printed in the passports, and help to determine the traveler’s identity and admissibility into the United States. While DHS’s systems conduct some validation activities to ensure the integrity of the data on the e-passport chip, it does not have adequate assurance that the data stored on the chip have not been changed since they were authored by a legitimate issuing authority—in the case of U.S. e-passports, the State Department. In primary inspection lanes that are equipped with e-passport readers, CBP’s workstations conduct a series of checks using data read from the e-passport computer chip, including the biographical data, the facial image, and the security data. First, the CBP workstation verifies that the biographical data read from the computer chip match that read from the printed biographical page. Second, the CBP workstation calculates the hash values of the data groups read from the computer chip and compares them with the hash values stored in the security data. If available, the CBP workstation will also use the digital certificate to verify the digital signature. The expiration date of the e-passport and the digital certificate are also checked. Finally, if the e-passport has been previously read by CBP, the hash value of the facial image is compared with the value stored by CBP. If this is the first time the e-passport has been encountered, the hash value is stored for future comparisons. Any mismatches are to result in an error being displayed to the CBP officer. Further, in October 2008, DHS began to make U.S. passport data available to CBP officers in primary inspection. DHS is now receiving U.S.-issued passport data through a datashare initiative with the Department of State. CBP has modified its workstations to retrieve this additional information when U.S. passports, including e-passports, are processed. When CBP officers enter U.S. passport data into appropriately configured CBP workstations, the photograph of the traveler, as issued by the State Department, will be displayed to the officer. As e-passports are issued by State, the corresponding information is made available to DHS through the datashare. State worked with DHS to transfer data on all valid historical U.S. passports. As more historical U.S. passport information becomes available, more photographs will be displayed to primary officers upon processing a U.S. citizen through primary inspection. However, the key step that is missing is that the CBP workstation does not validate the legitimacy of the public key used to verify the digital signature. Such a validation would provide assurance that the public key in the document signer certificate was generated by the State Department. Without this verification, CBP does not have reasonable assurance that the e-passport data being protected by the digital signature were written by the State Department because forgers or counterfeiters could simply generate the keys necessary to digitally sign the forged data and include their own certificate in the e-passport for verification purposes. Checking the legitimacy of the certificate containing the public key that is used in the digital signature validation process would effectively mitigate this risk. When generated, the document signer certificates are themselves digitally signed. However, CBP does not have access to the public keys necessary to validate these digital signatures. While DHS tested the functionality of storing and using this information to verify the certificates included by State and other nations on e-passports using the CBP workstation, the functionality was not implemented for operations because the infrastructure to collect and maintain the international certificate database did not exist. According to DHS officials, this function was a US-VISIT requirement, but did not get implemented, in part, because a DHS component that would be responsible for operating the public key database was never identified. DHS officials also stated that the slow performance of reading e-passports diminished the importance of implementing this function. Not being able to check the legitimacy of the document signer certificates affects not only CBP’s ability to verify the integrity and authenticity of the data written to U.S. e-passport computer chips, but also its ability to verify the integrity and authenticity of computer chip data on any country’s e-passport. The United States requires all 35 participants in the Visa Waiver Program to issue e-passports, and ICAO has estimated that over 50 countries issue e-passports. Because CBP does not have the necessary information to fully validate the digital signatures that these countries generate, it does not have reasonable assurance that data signed by those countries were actually generated by the authorized passport issuance agency for that country. Hence, it cannot ensure that the integrity of the data stored on the e-passport’s computer chip has been maintained. Two key issues need to be resolved for CBP to be able to rely on data stored on e-passport computer chips. First, a database needs to be established and populated with the digital certificates needed to fully validate the digital signatures that can be accessed by CBP inspection workstations at the ports of entry. An approach needs to be developed and implemented to populate the database with the needed information, including State Department data for U.S. e-passports, that can be used to fully validate the digital signatures. According to ICAO, this information should be distributed only through secure diplomatic channels. Second, CBP needs to develop and implement functionality on its inspection workstations to access the database when e-passport data are read to verify that the legitimate passport-issuing authority signed the data being relied upon. Until these two key issues are addressed, CBP will continue to lack reasonable assurance that data found on e-passport computer chips have the necessary integrity; hence, the security enhancements that could be provided by e-passport computer chip data against counterfeiting and forgery are not completely realized. Protections designed into the U.S. e-passport computer chip limit the risks of malicious code being resident on the chip, a necessary precondition for a malicious code attack to occur from the chip against computer systems that read them. GPO and State have taken additional actions to decrease the likelihood that malicious code could be introduced onto the chip. While these steps do not provide complete assurance that the chips are free from malicious code, the limited communications between the e-passport chip and agency computers significantly lowers the risk that malicious code—if resident on an e-passport chip—could pose to agency computers. As we previously discussed, the e-passport’s digital signature can provide reasonable identification of unauthorized modification of the user data areas—including modifications resulting from the introduction of malicious code. Finally, given that no protection can be considered foolproof, DHS still needs to address deficiencies noted in our previous work on the US-VISIT computer systems to mitigate the impact of malicious code, should it infect those systems. Security features designed into the e-passport computer chips, including the digital signature, provide protections against the introduction of malicious code onto the chip during the e-passport booklet production process. For example, among other features, the chips include physical tamper protections that aid in sensing or thwarting physical attacks, a cryptographic authentication procedure to lock the contactless interface against unauthorized access, and incorporation of a digital signature that can be used to identify any unauthorized modification of the user data areas. As of 2007, NIST had not been able to identify any known cases of a malicious code attack against a computer network from a contactless chip. Nevertheless, both NIST and DHS agree that it is possible and have generally identified physical tamper attacks as threats to embedded electronic chips in contactless applications such as e-passports. Physical tamper attacks involve stripping away the chip’s outer coverings, exposing the electronic circuitry on the wafer, and analyzing or monitoring chip activity by inserting electronic probes onto components etched into the wafer. In general, the aim of such an attack is to discover confidential data stored on the chip—such as cryptographic keys—which can be used to open access to the chip via the contactless interface. In terms of a malicious code threat, the purpose then would be to write malicious code onto the chip via the RF interface. In its guide to chip-level security for contactless ICs, DHS identifies common methods used in physical tamper attacks on contactless ICs. For example, after removing top layers of plastic or other coverings and uncovering the electrical surfaces of the chip, attackers could probe into the various chip layers in an attempt to understand its processing. Common methods of physical attack are those related to (1) fault introduction, (2) IC monitoring, and (3) reverse engineering. The purpose of each of these attacks is ultimately to uncover secret information—such as cryptographic keys or passwords—that would allow an attacker to open the chip for read/write access via the contactless interface. In fault introduction, attackers attempt to introduce faults randomly, at specific times during the processing, or in specific locations on the IC circuitry, to gain additional information about the chip processing during such faults, which could provide clues to the memory location of secret keys. Similarly, such clues can be uncovered using IC monitoring, where readers or probes placed on the chip’s internal circuitry are used to monitor calculations or flows of data on the chip. Finally, attackers could attempt to reverse engineer the computer chip to decipher its hardware architecture and read the secret information. In its guide, DHS identifies countermeasures for each of these types of attack. For example, protections against fault introduction include implementing sensors that detect when parameters, such as light or temperature, vary outside of expected values. If such variations are sensed, the chip may automatically reset or even disable itself. Protections against IC monitoring might include encrypting the traffic flowing along the internal circuitry so that interpretation would be difficult. Protections against physical analysis include encrypting information stored in memory and scrambling the design of the logic contained in the operating system when laid down in memory during IC creation. Well-designed security microcontrollers, with numerous security features and support for mutual authentication and sophisticated cryptographic functions, can be designed to make it extremely difficult, costly, and time-consuming for attackers to compromise. In its solicitation for the e-passport covers, which included the computer chips, GPO specified several hardware and software requirements to protect against physical attack, including specific features to assist in protection against power and timing attacks. It also included requirements for sensors to monitor, for example, temperature and voltage variations, which might be indicative of a physical tamper attack. The chips used in the U.S. e-passports are considered security microcontrollers designed for applications where security is an important consideration, such as payment, identity, and secure access and, as such, they incorporate several features against physical tamper attacks. Both types of chips used in the e-passports have incorporated some recommended countermeasures for all of the common categories of attack identified by DHS. For example, the chips incorporate temperature and light sensors to monitor when those operating conditions vary from expected values and employ memory encryption against reverse engineering of the chip . While it is not possible to provide complete protection against the more invasive physical attacks, the goal is to make the cost of mounting such an attack prohibitive. While the threat of physical attack to the embedded chips in the e-passport cannot be completely discounted, the security features incorporated into the microcontrollers in U.S. e-passports make a physical tamper attack impractical. During production of the e-passport covers, the manufacturers, their subcontractors, and at GPO and State—or anywhere en route between these sites—the chips are protected from unauthorized access through the contactless interface by authentication procedures based on cryptography. The manufacturing and personalization process for the e-passport booklet is complex and involves many handoffs between different sites, companies, and sometimes different countries. For example, while both e-passport cover contractors originate chip manufacturing in Europe, they also send the chips to various third-party companies in Asia for additional manufacturing steps. The overall process can take almost 2 years from the time the chip leaves the fabrication plant until it is finally issued by the State Department to a bearer as part of an e-passport. During the production life cycle of the e-passport book—from chip creation at the chip manufacturers through to personalization by State— contactless access to the chip is controlled by a symmetric cryptography authentication procedure. Cryptographic algorithms provide different measures of strength, depending on the algorithm and the overall length of the keys involved. According to NIST estimates, the version used on the e-passports can, at best, provide protection from a brute force attack until 2030. This locking mechanism not only controls access to the chip, but differentially allows only certain functions to be performed. Several other design features limit the chance that malicious code could be placed on the chip. For example, according to GPO, an additional step used to protect the e-passport chips from unauthorized access during the manufacturing process takes advantage of standard industry practice to not include customer identification with chips during production runs. During the chip-manufacturing process, an anonymous cataloging scheme is employed that makes it difficult to associate bulk lots of chips with their destined applications. Therefore, on the production floor, it cannot be determined which chips are to be used in U.S. e-passports. In addition, after the chips are manufactured and incorporated into the e-passport cover, steps are taken by GPO and State to protect the user data areas of the chip from tampering. First, as part of its formatting procedures to prepare the chips for personalization, GPO ensures that the user data area is free from any data—including malicious code. During the formatting of the user data area, if any memory cell is found to be defective, then GPO discards the e-passport booklet. Therefore, any malicious code successfully implanted within the user data area after manufacture and through any of the chip’s travels through its production cycle up until it arrived at GPO would be erased from the chip. As we previously discussed, during the e-passport personalization process, a digital signature is applied to the data to help assure the integrity and authenticity of the data written to the chip. One of the benefits of the digital signature is that any insertion of malicious code into, for example, the bearer’s digital image would be caught, provided the digital signature is fully and properly verified. Such a successful check would provide reasonable assurance that malicious code has not been inserted into the user data areas of the chip memory since it was personalized by State. GPO and State have taken steps to gain confidence that their e-passport computer chips are secure. While these steps do not provide complete assurance that the chips are free from malicious code, the limited communications between the e-passport chip and agency computers significantly lowers the risk that malicious code that could be resident on an e-passport chip could pose to agency computers. The chips have been tested for both interoperability and conformance to ICAO specifications and exercised by GPO as part of their formatting process. The chips have undergone a formal, independent process to validate some aspects of their security. GPO and State also periodically conduct security reviews of the chip manufacturer sites. One key feature that mitigates the risk that malicious code on the chip could pose to agency computers is the highly restricted nature of the data exchange between the chip and agency computers during the reading of the e-passport. The e-passport computer chip adheres to ISO 14443 and ISO 7816-4 for communications through the contactless interface. The standards restrict the computer chip to a slave role whereby it responds only to a specific set of commands with known and limited response data. Because the chip cannot independently initiate communication with a reader, the flow of data from the chip to the reader and host computer can be precisely controlled and limited to only what is expected by the host computer. The result is that opportunities for the covert embedding of malicious code within data transferred from the chip to agency computers are correspondingly limited. For example, the passport number, bearer’s name, and date of birth are data sets restricted to a well-defined set of characters and are of fixed length. Consequently, if a reader accepts inputs only within these bounds, it will limit the risk posed by malicious code. The digital image of the bearer is the only data set transferred that is of enough size to provide for opportunities to hide malicious code. The image is formatted according to a standard graphics format that facilitates integrity checking of its contents. According to DHS officials, when e-passports are read, the data from the chip are verified both by the e-passport reader as well as by the agency host computer before the data are processed. Testing Helps to Verify Proper Functioning of E-passport Chip Communications Prior to contract award, and at various points thereafter, the U.S. e-passport chips have undergone testing for a variety of purposes. According to GPO officials, the solicitation for the e-passport covers was based on State Department requirements for specific functionality, security, performance, and availability. For example, it included requirements for the chip to meet ISO 14443 communications and ISO 7816-4 command set standards and other standard specifications. As part of the award selection process, GPO, State, NIST, and NSA conducted testing of sample books from each bidder to determine whether they would meet requirements as specified in the request for proposal. During pre-award testing, for example, GPO ran initial tests to ensure basic functionality as specified by ISO 7816-4, including the ability to initialize, read, write, and lock the chip. GPO also ensured that each e-passport cover was of the correct form and thickness so that it could mechanically pass through its production equipment suite. The sample booklets then went to State, which conducted tests to ensure the books could work with its personalization systems. According to NIST officials, they performed electronic testing that looked at the potential for eavesdropping, jamming, and remote activation (skimming). For eavesdropping, the test was conducted to determine whether the legitimate communication could be intercepted, but no attempt was made to see if the encrypted communication could be understood. For jamming, the purpose was to determine whether legitimate communications with the chip could be prevented. For remote activation, the purpose was to determine the distance from which a reader could elicit a response from the chip, but no attempt was made to test the basic access control or to read the data on the chip. NIST also conducted different types of durability tests including static bend, dynamic bend, climate, chemical resistance, physical protection of the integrated circuit chip, and electromagnetic testing. None of NIST’s tests were designed to test for the presence of malicious code on the chip. While the tests exercised some portions of ISO 14443 and ISO 7816-4, NIST did not conduct any tests to ensure full conformance with these standards. NSA officials stated that they conducted electronic testing of the booklet, but this was confined to radio frequency testing and shielding testing specifically tasked by GPO to evaluate the susceptibility of the booklet to skimming by looking at the distance over which the booklet’s chip could become energized. NSA performed no substantive tests of communication with the chip and no testing at all with regard to malicious code. As part of GPO’s normal pre-personalization processing, GPO exercises and tests each chip’s functionality to verify, among other things, the correct reading and writing of every chip. GPO’s processing does not systematically exercise every chip function or the full ISO 7816-4 command set and associated error handling. GPO officials said that while they test the basic functionality of the chip as they proceed through the pre-personalization processing, full ISO 14443 communications and ISO 7816-4 command set processing—including ensuring that all error handling is performed correctly—is done as part of the international ICAO interoperability and conformance tests held approximately every 2 years. The State Department is the official U.S. representative to these tests, although GPO frequently participates, by request, in support of State. According to ICAO, the interoperability and conformance tests are intended to accomplish two things. First, they ensure that e-passports from different countries can be read by readers provided by multiple vendors. Second, they ensure compliance with various aspects of the ISO 14443 communication and ISO 7816-4 command set standards. The U.S e-passport chips have been part of some of the interoperability and conformance tests that have been run in the last several years. All these tests provide important assurances for their stated purposes by exercising functionality, in particular the limited e-passport chip communications, that helps to protect against the risk of malicious code. In general though, such testing is limited to verifying functionality and cannot provide absolute assurance that malicious code has not been implanted onto the e-passport computer chip. The creation of the computer chip used in U.S. e-passports is a complex process that involves many components created by different entities. Because the U.S. government does not control the entire supply chain for all the components on the chip, it relies on security features provided by the chip component suppliers, the extent to which these suppliers test and certify their products, and the extent to which these suppliers develop and produce the chips in a secure manner. Some Aspects of the Security of the Chips Were Certified Using Common Criteria NIST guidelines state that federal agencies should give substantial consideration in IT procurements to products that have been evaluated and tested by accredited laboratories against appropriate security specifications and requirements. One established mechanism for providing security evaluation and testing services for commercial-off-the- shelf hardware, software, or firmware is Common Criteria. Common Criteria certifications are a well-known international standard mechanism for validating and documenting various security aspects of IT products. Evaluations are performed by accredited Common Criteria testing laboratories whose results are then certified by a validation body. In the case of the chips used in the U.S. e-passports, selected security features of their hardware components were evaluated using Common Criteria by a recognized European laboratory and certified by Germany’s Common Criteria certification body. In its solicitation for the e-passport covers, including the computer chips, GPO specified that preference will be given to computer chips that are certified at Common Criteria EAL 4+ against a Common Criteria-compliant Protection Profile. According to Common Criteria definitions, an EAL 4 rating is intended to provide a moderate to high level of independently assured security. To achieve this rating, the testing lab must conduct a variety of structured activities, including an analysis of the security functions of the product using a complete interface specification and both the high-level and low-level design of the specific features of the product being tested, review and confirmation of any vendor testing that was conducted, and conduct of an independent vulnerability analysis demonstrating resistance to penetration attackers with a low attack potential. The computer chips selected for use in the e-passports each had received an EAL 5+ rating against a compliant Protection Profile. According to Common Criteria, an EAL 5 rating incorporates all of the EAL 4 requirements and, in addition, requires, among other things, semiformal design descriptions, a more structured architecture, covert channel analysis, and improved mechanisms that provide confidence that the particular implementation of the product being evaluated has not been tampered with during development. Specific security features evaluated to achieve the EAL 5 rating include many useful in helping to prevent the introduction of malicious code. Examples of these include support for cryptographic functions, protections against physical manipulation, and features to ensure correct operating conditions for the chip. However, a key software component of the chip—the operating system— was excluded from the evaluation. The operating system on the chip implements and controls, among other functions, the ISO 7816-4 command set that is the primary means of communication between the chip and the outside world—including agency computers. Under Common Criteria, it is not uncommon for critical components of a product to be excluded for particular evaluations. In particular, the exclusion of important software components, such as the operating system, from the Common Criteria evaluation of hardware features is not unusual because the higher-level software embedded on chips is often a third-party product and not designed by the chip manufacturer itself. The chip manufacturer is typically not responsible for undertaking a Common Criteria evaluation of third-party embedded software used on its chips. Typically, it would be up to the software provider to get its product certified using Common Criteria. However, this is an expensive and time- consuming process. Hence, care needs to be taken with Common Criteria certifications that can be meaningfully understood only within the context of the specific subset of security functions included in the evaluation. We have previously noted that one of the challenges in using the National Information Assurance Partnership is the difficulty in matching agencies’ needs with the availability of NIAP-evaluated products. According to Infineon and Gemalto officials, back in 2006 when the request for proposal for the e-passport covers was issued, there was no Protection Profile available that covered the operating systems of such chips. Since that time, however, Common Criteria operating systems suitable for use on smart cards have become available. According to GPO officials, Infineon provides such chips today, and GPO is in the process of transitioning them into production so that, at least for the Infineon line, the e-passports will include a Common Criteria-certified operating system. The user operating system contains arguably most of the software functioning on the chip. Therefore, obtaining assurance as to its secure functioning and freedom from malicious code is an important activity. However, given the highly restricted nature of the current communications between the chip and agency computers, we do not see the lack of Common Criteria certification of the chip operating system as significantly increasing the risk to agency computers from malicious code. While Common Criteria certification confers some assurance regarding the specific security functions included in the evaluation, care must be taken in extending that assurance into confidence in the overall security of the product for its intended use. GAO has previously reported that within its limitations, the Common Criteria process provides benefits. However, the lack of performance measures leaves questions unanswered as to its true effectiveness. The use of commercial products that have been independently tested and evaluated is only a part of a security solution that contributes to the overall information assurance of a product. GPO Has Conducted Reviews of the E-passport Computer Chip Manufacturing Sites Prior to contract award, and periodically thereafter, GPO—sometimes accompanied by the State Department—conducted on-site security reviews of the companies that manufacture the e-passport chips and the covers, and of some of their subcontractors. According to GPO officials, its reviews are concerned with not just security risks, but also with other risks—for example, the extent to which a site performs continuity of operations planning or the risk that a single source of supply for one of the components might pose a risk to the delivery of the components. In conducting the security reviews, GPO officials stated that they make an attempt to visit every vendor involved in the production of the e-passport booklet, including, for example, the security ink suppliers, paper providers, thread providers, and the chip providers. The sites are spread across several countries, and within some countries there may be multiple sites. For example, for both Infineon and Gemalto, production of the chips involves several sites within Europe. These reviews employ an American National Standards Institute (ANSI) standard for security product manufacturing that covers a variety of risk areas, including information, IT, material, supply chain, physical intrusion, personnel, and disaster recovery. For example, the standard addresses such concerns as proper controlled access to restricted areas within a facility. During the security review, GPO generally gets a high-level briefing from the company and talks with staff at the site. According to GPO officials, they have reviewed almost every site twice since March 2006. In recent security reviews of the chip manufacturing sites, both Infineon and NXP were found to be in compliance with their own stated security policies and meeting the Class 1 level of the ANSI standard. From the security reviews, GPO can get some sense of some of the protections in place at the development sites—for example, access control to development areas and security awareness training. GPO learned through its reviews, for example, that Gemalto has an access control policy wherein development premises are divided into secure and nonsecure zones, and the operating system development is in the secured zone. This provides some assurance that since physical access to the software destined for the chips is controlled, opportunities for the inclusion of malicious code can be limited. Given that there can be no guarantees against a malicious code attack originating from the e-passport computer chip, agency systems need to have a strong security posture, in accordance with federal government standards. We have previously reported on weaknesses in DHS’s US-VISIT computer systems, which could increase the ability of malicious code to infect and propagate through agency computers. Weaknesses, such as unpatched software vulnerabilities, can invite a malicious code attack and enhance the ability of the attack to spread across the network by leaving important linkages within the network unprotected. DHS needs to address these deficiencies to ensure that any malicious code resident on the e-passport chip and read onto DHS computers can be contained and its effect minimized. One of the strong recommendations from NIST is that computer systems run antivirus software, which scans systems’ files and memory spaces for known malware. NIST strongly recommends the use of antivirus software to identify and protect against malicious code. Detecting such code prior to its further spread can limit a malicious code infection and protect downstream systems. According to DHS officials, workstations that control the interface with the chip are protected by antivirus software, which includes access protections, buffer overflow protections, and scanning of files as they are accessed. One of the key weaknesses in US-VISIT that we found in 2007—patch management—is of particular concern with respect to malicious code that could be read from an e-passport. Malicious code often attacks systems by exploiting vulnerabilities in operating systems, services, and applications. When software vulnerabilities are discovered, the software vendor may develop and distribute a patch or workaround to mitigate the vulnerability. Patch management is, therefore, an important element in mitigating the risks associated with malicious code and the vulnerabilities they depend on. NIST’s, NSA’s, and DHS’s own policies stress the importance of keeping computer systems up to date with security patches. Outdated and unsupported software is more vulnerable to attacks and exploitation. NIST guidelines state that applying patches is one of the most effective ways of reducing the risk of malware incidents. In our prior report, we noted that while DHS has taken steps to ensure that patches for the workstations’ operating system were kept up to date, some workstations at the ports of entry did not consistently maintain secure configurations. As a result, vulnerabilities left unpatched on those systems increase the chance of malicious code being executed should it get ingested. According to DHS officials, they are in the midst of upgrading workstations to a version of Microsoft Windows that contains features to help prevent the execution of malicious code—for example, special services to detect and prevent the execution of code from the data areas. DHS needs to ensure that it completes the upgrade of the workstations and that such services are enabled on workstations reading data from the e-passport computer chips. Ensuring the integrity of passports requires continual vigilance so that they can continue to be used to support the critical border security mission—facilitating the travel of those who are entitled to enter the United States while preventing the entry of those who are not. A well- designed passport has limited utility if it is not well produced or border officers do not utilize the available security features to detect attempts to fraudulently enter the United States. While U.S. e-passport covers, including the embedded computer chip, are manufactured by foreign companies, State’s public key infrastructure, which is used to generate digital signatures during the personalization process for each issued passport, can provide reasonable assurance that the data written onto the chip were authored by State and have not been altered. However, DHS has not implemented the capabilities needed for CBP officers to fully utilize this security feature. Without e-passport readers at the ports of entry or a system that allows for the full validation of digital signatures on e-passports, CBP officers’ inspection of not only U.S. e-passports, but also of e-passports issued by foreign countries, including those participating in the visa waiver program, is affected. Without these capabilities, the additional security against forgery and counterfeiting that could be provided by the inclusion of computer chips on e-passports issued by the United States and foreign countries, including those participating in the visa waiver program, is not fully realized. While the use of e-passports and radio frequency communications represents another potential attack vector to federal computer systems, the risk posed by the transmission of malicious code on U.S. e-passports is not significant. The U.S. e-passport chips have security features that minimize the threat of tampering during the manufacturing and production process. GPO and State have also taken steps to assure the security of the embedded computer chips in U.S. e-passports. Because the communications between e-passport computer chips and federal computer systems have been designed to be limited, the opportunities for transfer of malicious code are correspondingly limited. Combined, these measures significantly reduce the risks from someone using e-passport computer chips as a conveyance for malicious code to federal computer systems. To ensure that border officers can more fully utilize the security features of electronic passports, we recommend that the Secretary of Homeland Security take the following two actions to provide greater assurance that electronic passport data were written by the issuing nation and have not been altered or forged: Design and implement the systems functionality and databases needed to fully verify electronic passport digital signatures at U.S. ports of entry. In coordination with the Secretary of State, develop and implement an approach to obtain the digital certificates necessary to validate the digital signatures on U.S. and other nations’ electronic passports. We provided draft copies of this report to the Secretaries of State and Homeland Security and to the Public Printer at the Government Printing Office for review and comment. We received formal written comments from the Department of Homeland Security, which are reprinted in appendix III. In its comments, DHS concurred with our recommendations. However, DHS believes that the report incorrectly portrays CBP’s ability to detect the fraudulent use of U.S. passports. DHS cites the ability of CBP’s officers to access U.S. passport application data from State and use it to detect impostors and altered data in U.S. passports. We agree that providing State passport data to CBP officers during the inspection process enhances their ability to detect the fraudulent use of U.S. e-passports. Nevertheless, while State has expended significant resources to produce an e-passport that includes contactless chip technology and public key cryptography to help prevent counterfeiting and forgery, DHS has not implemented the capabilities to fully utilize these security features and is not fully realizing the security benefits of the inclusion of electronic technology on e-passports. We received informal comments from the State Department. State believes that the draft report presents a comprehensive and balanced assessment of the security of the e-passport design. We also received technical comments from State, GPO, and DHS, which we incorporated in the report, as appropriate. As we agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the report date. At that time, we will send copies of this report to the Secretaries of State and Homeland Security and the Public Printer. 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) 512-4499 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To determine whether e-passport chips can be altered or forged so that a traveler could fraudulently enter the United States, we interviewed officials from State’s Bureau of Consular Affairs and reviewed State Department policies, procedures, and guidance documents regarding the public key infrastructure (PKI) used to protect the data on the e-passport computer chip and assessed them against relevant International Civil Aviation Organization (ICAO) and National Institute of Standards and Technology (NIST) standards and guidelines. We interviewed officials at one passport issuance agency and reviewed systems documentation to understand how U.S. e-passports are personalized. We determined the extent to which U.S. e-passport computer chips are inspected at U.S. ports of entry by interviewing Department of Homeland Security (DHS) officials and reviewing documentation regarding the systems and procedures used to inspect e-passports at the ports of entry. Within DHS, we met with officials from the U.S Customs and Border Protection (CBP), the Screening Coordination Office, and the United States Visitor and Immigrant Status Indicator Technology (US-VISIT) program office. To determine whether malicious code on the e-passport chips poses a risk to national security, we determined how U.S. e-passport computer chips are manufactured and incorporated into the production of blank U.S. e-passport booklets based on interviews with the Government Printing Office (GPO) and manufacturer officials and our reviews of GPO documentation. We met with officials from NIST and the National Counterterrorism Center to determine the level of threat that exists to U.S. e-passports. We interviewed GPO and State officials and reviewed documentation that describes the U.S. e-passport computer chip architecture and operations. We reviewed documents governing the manufacturing of the blank e-passport covers, including GPO contracts with the manufacturers and the memorandum of understanding between GPO and State. We determined that for malicious code on the e-passport computer chip to be a risk to agency computers, it must first get on the chip, then get transferred off the chip and onto agency computers, and then subsequently get executed. Therefore, we identified and evaluated protections that have been designed into the e-passport computer chip to reduce the possibility of malicious code being introduced onto the chip, controls in place to limit the transfer of malicious code off of the chip and onto agency computers, and the security posture of the agency computer systems interfacing with the e-passport chip. We also reviewed the results of testing conducted on the e-passport computer chips by GPO, NIST, the National Security Agency, and ICAO, and through the Common Criteria program. We discussed and reviewed the results of security reviews conducted by GPO. We met with GPO, State, and CBP officials to understand how each agency interacts with the e-passport computer chips and the potential risk that malicious code could pose to these agencies. We conducted this performance audit from June 2008 to January 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Cryptography is the transformation of ordinary data (commonly referred to as plaintext) into a code form (ciphertext) and back into plaintext using a special value known as a key and a mathematical process called an algorithm. Cryptography can be used on data to (1) hide their information content, (2) prevent their undetected modification, and/or (3) prevent their unauthorized use. A basic premise in cryptography is that good systems depend only on the secrecy of the key used to perform the operations rather than on any attempt to keep the algorithm secret. The algorithms used to perform most cryptographic operations over the Internet are well known; however, because the keys used by these algorithms are kept secret, the process is considered secure. The basis of PKI’s security assurances is a sophisticated cryptographic technique known as public key cryptography, which employs algorithms designed so that the key that is used to encrypt plaintext cannot be calculated from the key that is used to decrypt the ciphertext. These two keys complement each other in such a way that when one key is used for encryption, only the other key can decrypt the ciphertext. One of these keys is kept private and is known as the private key, while the other key is widely published and is referred to as the public key. When used as shown in figure 4, public key cryptography can help to assure data confidentiality because only the private key can be used to decrypt the information encrypted using the public key. When used as shown in figure 5, public key cryptography can help provide authentication, nonrepudiation, and data integrity because the public key will only work to decrypt the information if it was encrypted using the private key. In both cases, ensuring the security of the private key is vital to providing the necessary security protections. If the private key is compromised, there can be little assurance that data confidentiality, authentication, and data integrity can be provided by the PKI. Cryptographic techniques are used to generate and manage the key pairs (a public key and private key), which are in turn used to create electronic “certificates,” which link an individual or entity, such as State, to its public key. These certificates are then used to verify digital signatures (providing authentication and data integrity). Public key cryptography can be used to create a digital signature for a message or transaction, thereby providing authentication, data integrity, and nonrepudiation. For example, if Bob wishes to digitally sign an electronic document, he can use his private key to encrypt it. His public key is freely available, so anyone with access to his public key can decrypt the document. Although this seems backward because anyone can rea what is encrypted, the fact that Bob’s private key is held only by Bob provides the basis for Bob’s digital signature. If Alice can successfully decrypt the document using Bob’s public key, then she knows that the message came from Bob because only he has access to the corresponding private key. Of course, this assumes that (1) Bob has sole control ov er his private signing key and (2) Alice is sure that the validate Bob’s messages really belongs to Bob. Digital signature systems use a two-step process, as shown in figure 6. First, a hash algorithm is used to condense the data into a message digest. First, a hash algorithm is used to condense the data into a message digest. Second, the message digest is encrypted using Bob’s private signing key to Second, the message digest is encrypted using Bob’s private signing key to create a digital signature. Because the message digest will be different for create a digital signature. Because the message digest will be different for each signature, each signature will also be unique, and using a good hash each signature, each signature will also be unique, and using a good hash algorithm, it is computationally infeasible to find another message that will algorithm, it is computationally infeasible to find another message that will generate the same message digest. generate the same message digest. Alice (or anyone wishing to verify the document) can compute the message digest of the document and decrypt the signature using Bob’s public key, as shown in figure 7. Assuming that the message digests matc Alice then has three kinds of security assurance. First, that Bob actu ally h, signed the document (authentication). Second, the digital signature ensures that Bob in fact sent the message (nonrepudiation). And third, because the message digest would have changed if anything in the message had been modified, Alice knows that no one tampered with the contents of the document after Bob signed it (data integrity). Again, this Again, thisassumes that (1) Bob has sole control over his private signing key and assumes that (1) Bob has sole control over his private signing key and (2) Alice is sure t (2) Alice is sure that the public key used to validate Bob’s messages really belongs to Bob. hat the public key used to validate Bob’s messages really belongs to Bob. A digital certificate is an electronic credential that guarantees the association between a public key and a specific entity. It is created placing the entity’s name, the entity’s public key, and certain other identifying information in a s directory or other database. mall electronic document that is stored in a Directories may be publicly available repositories kept on servers that act like telephone books for users to look up others’ public keys. The digital certificate itself is created by a trusted third party called a certification authority, which digitally signs the certificate, thus providing assurance that the public key contained in the certificate does indeed belong to the individual or organization named in the certificate. A certification authority is responsible for managing digital certificates. The purpos the certification authority is to oversee the generation, distribut ion, renewal, revocation, and suspension of digital certificates. The certification authority may set restrictions on a certificate, such as the starting date for which the certificate is valid as well as its expira It is at times necessary to revoke digital certificates before their established expiration dates, for example, when the private key is compromised. Therefore, the certification authority is also responsible providing certificate status information and may publish a certificat revocation list in a directory or maintain an online status-checking mechanism. The PKI software in the user’s computer can verify that the certificate is valid by first verifying that the certificate has no then by assuring that it has not been revoked or suspended. In addition to the contact named above, William Carrigg, Richard Hung, and John C. Martin made key contributions to this report. | In 2005, the Department of State (State) began issuing electronic passports (e-passports) with embedded computer chips that store information identical to that printed in the passport. By agreement with State, the U.S. Government Printing Office (GPO) produces blank e-passport books. Two foreign companies are used by GPO to produce e-passport covers, including the computer chips embedded in them. At U.S. ports of entry, the Department of Homeland Security (DHS) inspects passports. GAO was asked to examine potential risks to national security posed by using foreign suppliers for U.S. e-passport computer chips. This report specifically examines the following two risks: (1) Can the computer chips used in U.S. e-passports be altered or forged to fraudulently enter the United States? (2) What risk could malicious code on the U.S. e-passport computer chip pose to national security? To conduct this work, GAO reviewed documents and interviewed officials at State, GPO, and DHS relating to the U.S. e-passport design and manufacturing and e-passport inspection systems and procedures. State has developed a comprehensive set of controls to govern the operation and management of a system to generate and write a security feature called a digital signature on the chip of each e-passport it issues. When verified, digital signatures can help provide reasonable assurance that data placed on the chip by State have not been altered or forged. However, DHS does not have the capability to fully verify the digital signatures because it has not deployed e-passport readers to all of its ports of entry and it has not implemented the system functionality necessary to perform the verification. Because the value of security features depends not only on their solid design, but also on an inspection process that uses them, the additional security against forgery and counterfeiting that could be provided by the inclusion of computer chips on e-passports issued by the United States and foreign countries, including those participating in the visa waiver program, is not fully realized. Protections designed into the U.S. e-passport computer chip limit the risks of malicious code being resident on the chip, a necessary precondition for a malicious code attack to occur from the chip against computer systems that read them. GPO and State have taken additional actions to decrease the likelihood that malicious code could be introduced onto the chip. While these steps do not provide complete assurance that the chips are free from malicious code, the limited communications between the e-passport chip and agency computers significantly lowers the risk that malicious code--if resident on an e-passport chip--could pose to agency computers. Finally, given that no protection can be considered foolproof, DHS still needs to address deficiencies noted in our previous work on its computer systems to mitigate the impact of any malicious code that may be read from e-passport computer chips and infect those systems. |
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Foreign nationals who wish to come to the United States on a temporary basis and are not citizens of countries that participate in the Visa Waiver Program must generally obtain an NIV. U.S. law provides for the temporary admission of various categories of foreign nationals, who are known as nonimmigrants. Nonimmigrants include a wide range of visitors, such as tourists, foreign students, diplomats, and temporary workers who are admitted for a designated period of time and a specific purpose. There are dozens of specific types of NIVs that nonimmigrants can obtain for tourism, business, student, temporary worker, and other purposes. State manages the application process for these visas, as well as the consular officer corps and its functions, at over 220 visa-issuing posts overseas. The process for determining who will be issued or refused a visa contains several steps, including documentation reviews; collection of biometrics (fingerprints and full-face photographs); cross-referencing an applicant’s name and biometrics against multiple databases maintained by the U.S. government; and in-person interviews. Personal interviews with consular officers are required by law for most foreign nationals seeking NIVs. For an overview of the visa process, see figure 1. DHS sets visa policy, in consultation with State, and Commerce oversees the creation and implementation of strategies to promote tourism in the United States, such as the National Travel and Tourism Strategy called for in E.O. 13597. We have previously reported on visa delays at overseas posts: In April 2006, we testified that, of nine posts with wait times in excess of 90 days in February 2006, six were in Brazil, India, and Mexico. In July 2007, we reported that 20 posts said they experienced maximum monthly wait times in excess of 90 days at least once over the past year. More recently, State has reported long interview wait times in Brazil and China. For example, in June 2010, NIV interview wait times reached 100 days at the U.S. Embassy in Beijing, China, and in August 2011, interview wait times reached 143 days at the U.S. Consulate in Rio de Janeiro, Brazil. Following the rise of interview wait times at many posts, and especially in Brazil and China, President Obama issued E.O. 13597 in January 2012 to improve visa processing and travel promotion while continuing to protect U.S. national security. E.O. 13597 contained multiple goals for State and DHS for processing visitors to the United States, including the following: Ensure that 80 percent of NIV applicants worldwide are interviewed within 3 weeks of receipt of application. Increase NIV processing capacity in Brazil and China by 40 percent over the next year. In March 2012, State and DHS released an implementation plan for E.O. 13597 that outlined the measures each agency planned to undertake to meet the goals of the Executive Order. Subsequently, in August 2012, State and DHS issued a progress report on E.O. 13597 stating the progress made in meeting the goals of the Executive Order and the plans for continued efforts to improve a foreign visitor’s experience in traveling to the United States. State’s Bureau of Consular Affairs, as well as consular management officials and consular officers at the four posts we visited, reported that increased staffing levels, policy changes, and organizational reforms implemented since 2012 have all contributed to increasing NIV processing capacity, reducing NIV interview wait times worldwide. For calculating NIV interview wait times, we used data from State on applications for visas for tourism and business purposes (B visas) and did not include other NIV categories. According to State’s Bureau of Consular Affairs, the past hiring of additional staff through various authorities and temporary assignments of consular officers during periods of high NIV demand contributed to meeting E.O. 13597’s goals of expanding NIV processing capacity and reducing worldwide wait times, particularly at U.S. posts in Brazil, China, India, and Mexico. Increase in consular officers: According to State officials, from fiscal year 2012 through 2014, State “surged” the number of consular officers deployed worldwide from 1,636 to 1,883 to help address increasing demand for NIVs, an increase of 15 percent over 3 years. In response to E.O. 13597, State increased the number of deployed consular officers between January 19, 2012 (the date of E.O. 13597), and January 19, 2013, from 50 to 111 in Brazil, and 103 to 150 in China, a 122 and 46 percent increase, respectively (see fig. 2 for additional information on consular staffing increases in Brazil and China). As a result, State met its goal of increasing its NIV processing capacity in Brazil and China by 40 percent within a year of the issuance of E.O. 13597. Limited noncareer appointments: In fiscal year 2012, State’s Bureau of Consular Affairs launched the limited noncareer appointment (LNA) pilot program to quickly deploy language-qualified staff to posts facing an increase in NIV demand and workload. The first cohort of LNAs—who are hired on a temporary basis for up to 5 years for specific, time-bound purposes—included 19 Portuguese speakers for Brazil and 24 Mandarin speakers for China who were part of the increased number of consular officers deployed to posts noted above. In fiscal year 2013, State expanded the LNA program to include Spanish speakers. As of August 2015, State had hired 95 LNAs for Brazil, China, Colombia, the Dominican Republic, Ecuador, and Mexico. Temporary assignment of consular officers: State utilizes the temporary redeployment of Foreign Service officers and LNAs to address staffing gaps and increases in NIV demand. Between October 2011 and July 2012, State assigned, on temporary duty, 220 consular officers to Brazil and 48 consular officers to China as part of its effort to reallocate resources to posts experiencing high NIV demand. State continues to use this method to respond to increases in NIV demand. For example, during the first quarter of fiscal year 2015, India experienced a surge in NIV demand that pushed NIV interview wait times over 21 days at three posts. To alleviate the situation, consular managers in India sent officers to the U.S. Consulate in Mumbai, which was experiencing higher wait times, from other posts, allowing the U.S. Mission in India to reduce average wait times to approximately 10 days by the end of December 2014. According to State officials, policy changes have also helped to reduce NIV interview wait times at posts, including the expansion of the Interview Waiver Program (IWP) for NIVs and extending the validity of some NIVs. Expansion of interview waiver program: The IWP allows posts to waive the in-person NIV interview requirements for defined categories of “low-risk” applicants or applicants renewing an NIV for some visa categories. In 2012, the IWP for the U.S. Mission in Brazil was expanded to include first time applicants under the age of 16 or over the age of 66. This expansion allowed the U.S. Mission in Brazil to conduct additional walk-in NIV interviews by diverting first-time NIV applicants that State considers to be low-risk and renewals from presenting themselves at post for an interview. According to State officials, discussions with DHS are underway to further expand the IWP. Extending the validity period of visas: In accordance with federal law, State has extended the validity period of some visas in some countries, reducing the frequency with which a holder of a U.S. NIV would be required to apply for a renewal. (The visa validity period is the length of time the holder of a U.S. NIV is permitted to travel to a port of entry in the United States.) In November 2014, the United States and the People’s Republic of China reciprocally increased the validity periods of multiple-entry business and tourist visas issued to each other’s citizens for up to 10 years. The change in policy was intended to support improved trade, investment, and business by facilitating travel between the two countries. Furthermore, the extension of visa validity periods, according to State officials, is also expected to reduce the number of visas requiring adjudication over the long term at posts in China. State’s Bureau of Consular Affairs has adopted several organizational reforms to improve its NIV processing efficiency. These include contracting out some administrative support duties, establishing leadership and management practices to better guide consular officers, and opening additional consulates to expand NIV processing capacity in certain countries and redesigning consular sections at post. Contracting for administrative support duties: The use of a worldwide support services contract has enabled posts to outsource certain administrative activities related to visa processing that would otherwise be handled by consular personnel. This effort, according to State officials, allows consular officers more time to focus on visa adjudication and therefore improves their productivity. The contract provides support services for visa operations at U.S. embassies and consulates, including NIV interview appointment scheduling and fee collection services. Contractors have opened 29 off-site locations in six countries to collect biometric data of NIV applicants, which are then forwarded to the post for processing and security screening prior to an applicant’s scheduled interview. Before the implementation of the contract in fiscal year 2011, biometric information could be collected at the post only when the applicant appeared for his or her interview. Consular officials we spoke with in Brazil and India stated that off-site biometric collection has added additional efficiencies to the NIV process. Leadership and management changes: In 2012, State’s Bureau of Consular Affairs launched the 1CA office to help further develop a culture of leadership, management, and innovation under budget austerity and increasing NIV demand. In three of the four posts we visited, embassy officials told us that 1CA tools and resources have helped management at post identify and develop solutions to delays in NIV processing, which they said has contributed to the ability of State to reduce NIV interview wait times. For example, the U.S. Embassy in Mexico City is using 1CA to map out NIV processing steps to identify and develop solutions to existing bottlenecks. According to consular managers at post, the process maps allow managers to graphically view the various NIV processing steps and identify where improvements can be implemented. The solutions developed from the 1CA mapping exercise have allowed the post to conduct a larger number of NIV interviews each day. In addition, the 1CA office is in the process of developing meaningful metrics, beyond NIV interview wait times, to provide consular managers with the data to improve performance. Opening additional consulates and redesigning consular sections: Since the issuance of E.O. 13597, State has expanded the number of interview windows at posts in Brazil and China and developed plans to open two additional consulates in Brazil and add visa services to the existing U.S. consulate in Wuhan, China, to help absorb increases in NIV demand. Additionally, at all four posts we visited, State officials told us that they have, to varying degrees, redesigned the responsibilities and location of their consular staff to improve the efficiency of their operations. For example, in China, India, and Mexico, officials reported that they have individualized the tasks that are performed at each interview window to reduce the time an applicant spends at post and streamline NIV processing. Additionally, at the U.S. Embassy in Beijing, each interview window within the consular section is assigned to conduct a discrete task in the NIV adjudication process. These tasks include checking-in and confirming an applicant’s identity, collecting biometric data, and adjudicating NIVs at separate windows (see fig. 3 for a photograph of the NIV applicant area at the U.S. Embassy in Beijing, China). Transfer of NIV adjudications: State has redistributed IWP adjudications within the same country to posts experiencing low NIV demand and has created an IWP adjudication section in the United States to better leverage NIV processing resources. Several missions we visited transfer IWP adjudications from a post experiencing high demand to a post experiencing low demand. For example, from February 2014 to April 2015, consular managers in the U.S. Mission in Mexico electronically transferred 44,240 IWP cases from the U.S. Consulate in Guadalajara to the U.S. Consulates in Ciudad Juarez, Matamoros, and Nogales. According to officials, the electronic transfer of the IWP adjudications allowed the U.S. Consulate in Guadalajara to keep NIV interview wait times under 21 days. Additionally, in May 2015, State’s Bureau of Consular Affairs created an IWP remote processing unit in the United States to support the U.S. Mission in China. According to State officials, the output of the unit is currently over 1,000 IWP cases per day; and when fully staffed with 30 consular officers by December 2015, the unit will be able to process up to 3,000 cases per day. According to State officials, efforts the Bureau of Consular Affairs has implemented since the issuance of E.O. 13597 have reduced NIV interview wait times worldwide, including in Brazil and China. According to State data, even as NIV demand has increased, State has seen NIV interview wait times generally decline. Specifically, as figure 4 shows, since July 2012, at least 80 percent of B visa applicants worldwide have been able to obtain an interview within 3 weeks of their application. This indicates that the goal of E.O. 13597 is, so far, being met. NIV B visa interview wait times have also decreased even as NIV workloads have increased in Brazil and China, two countries that have historically experienced long interview wait times for NIV applicants. For example, B visa interview wait times decreased from an average high of 114 days in August 2011 to 2 days in September 2012 for posts in Brazil, and from an average high of 50 days in June 2011 to 2 days in February 2014 for posts in China (see fig. 5 for additional average wait times at posts in India and Mexico). Between January 2010 and December 2014, State reported that NIV workloads from Brazil and China increased by 161 percent and 88 percent respectively. State projects that the number of NIV applicants will rise worldwide from 12.4 million in fiscal year 2014 to 18.0 million in fiscal year 2019, an increase of 45 percent. Although NIV demand generally fluctuates and undergoes significant increases and decreases from outside factors— such as shifts in the world economy and events like the September 2001 terrorist attacks—the demand is generally trending upwards, and has been for the past 40 years (see fig. 6). According to State’s projections, NIV applications from the East Asia and Pacific region and the South and Central Asia region, will increase by about 98 and 91 percent, respectively, from fiscal year 2014 to fiscal year 2019. The Western Hemisphere region is expected to receive approximately 6.9 million applicants by fiscal year 2019, an increase of approximately 30 percent from fiscal year 2014 (see fig. 7). State has underestimated growth in NIV demand in past projections. In 2005, State contracted with an independent consulting firm to project growth in NIV applicant volume through 2020. As of 2014, 13 of the 18 countries included in this study had exceeded their 2014 NIV demand projections. The study also underestimated the sharp escalation of NIV demand in Brazil and China. By 2014, Brazil’s demand had already exceeded the study’s projection for NIV applicants in 2020 by over 104 percent, and in the same year, China’s demand was over 57 percent higher than the study’s 2020 projection for it. These increases in demand resulted in longer NIV interview wait times between 2006 and 2011 in Brazil and China. As we have previously reported, increases in NIV demand have historically impacted State’s ability to efficiently process visas. Expected increases in NIV demand are further complicated by State’s current NIV process, including proposed staffing levels that are not anticipated to rise significantly through fiscal year 2016. Consular officers in 8 of the 11 focus groups and consular management officials at posts in Beijing, Mexico City, and New Delhi told us that current efforts to reduce NIV interview wait times are not sustainable if demand for NIVs continues to increase at expected rates. A consular management official at one post noted that efforts such as staff increases have been a “temporary fix” but are not a long-term solution to their high volume of NIV applicants. Staffing levels cannot be increased indefinitely due to factors such as hiring restrictions, staffing limitations established by host governments, and physical workspace constraints. For example, according to State officials, State is currently hiring to meet vacancies caused by attrition and is expected to increase the number of consular officers by only 57 in fiscal year 2015, a 3 percent increase, and not increase consular officers in fiscal year 2016. State officials told us that they do not expect significant increases in staffing levels beyond 2016. According to State officials, staffing limitations established by host governments are also a barrier to State’s Bureau of Consular Affairs’ staffing efforts. For example, the Indian government has currently restricted the number of staff the United States can employ at consulates and embassies. Physical capacity limitations, such as insufficient interview windows for visa adjudication, are also a concern for efforts to increase staffing. According to State officials, efforts implemented since E.O. 13597 have collectively reduced NIV interview wait times. However, the effectiveness of each individual effort remains unclear due to a lack of evaluation. According to GAO’s Standards for Internal Control in the Federal Government, internal controls should provide reasonable assurance that the objectives of an agency are being achieved to ensure the effectiveness and efficiency of operations, including the use of the agency’s resources. Furthermore, State’s evaluation policy emphasizes the importance of evaluations for bureaus to improve their programs and management processes to inform decision makers about current and future activities. The evaluation findings, according to State’s policy, are to then be utilized for making decisions about policy and the delivery of services. State officials acknowledged that they had not completed any systematic evaluations of their efforts to reduce NIV interview wait times because they are not currently collecting reliable data. For example, State officials reported that the expansion of the IWP in Brazil has significantly increased their NIV processing capacity and has helped them reach the NIV interview wait times goals of E.O. 13597. However, due to an absence of data, State could not determine how many more cases were adjudicated via the IWP after its expansion and also could not quantify the impact of the expansion on reducing NIV interview wait times in Brazil. Instead, State officials said they relied on the reduction in NIV interview appointment wait times as a general indication that the efforts are working. Furthermore, projected increases in NIV demand and the goals specified in E.O. 13597 heighten the importance and potential impact of State’s efforts to ensure that resources are effectively targeted. A systematic evaluation of efforts by State to reduce NIV interview wait times would provide a clear indication of the efforts that yield the greatest impact on NIV processing efficiency and could assist the agency in continuing to meet the goals of E.O. 13597. Such evaluations would help State allocate resources to those efforts that provide the most impact in efficiently and effectively achieving its objectives. Without such evaluations, State’s ability to direct resources to those activities that offer the greatest likelihood of success for continuing to meet the goals of E.O. 13597 is at risk. State officials acknowledged that an evaluation of their efforts to improve NIV processing capacity would be helpful for future decision making. Consular officers and managers at posts we visited identified current information technology (IT) systems as one of the most significant challenges to the efficient processing of NIVs. Consular officers in all 11 focus groups we conducted across the four posts we visited stated that problems with the Consular Consolidated Database (CCD) and the NIV system create significant obstacles for consular officers in the processing of NIVs. Specifically, consular officers and managers at posts stated that frequent NIV system outages and failures (where the system stops working) at individual posts, worldwide system outages of CCD, and IT systems that are not user friendly, negatively affected their ability to process NIVs. NIV system outages and failures at posts: Consular officers we spoke with in Beijing, Mexico City, New Delhi, and São Paulo explained that the NIV system regularly stops working. This results in a reduced number of adjudications (whether being performed at the interview window or, for an IWP applicant, at an officer’s desk) in a day. Notably, consular officers in 4 of the 11 focus groups reported having to stop work or re-adjudicate NIV applications as a result of these NIV system failures. In fact, during our visit to the U.S. Embassy in New Delhi in March 2015, a local NIV outage occurred, affecting consular officers’ ability to conduct adjudications. In January 2015, officers in Bogotá, Guadalajara, Monterrey, and Moscow—among the top 15 posts with the highest NIV applicant volume in 2014— experienced severe NIV performance issues—specifically an inability to perform background check queries against databases. Worldwide outages and operational issues of CCD: Since July 2014, two worldwide outages of CCD have impaired the ability of posts to process NIV applications. On June 9, 2015, an outage affected the ability of posts to run checks of biometric data, thus halting most visa printing along with other services offered at posts. According to State officials, the outage affected every post worldwide for 10 days. The system was gradually repaired, but it was not fully restored at all posts until June 29, 2015, exacerbating already increased NIV interview wait times at some posts during the summer high demand season. According to State notices, another significant outage of CCD occurred on July 20, 2014, slowing NIV processing worldwide until September 5, 2014, when CCD returned to full operational capacity. State estimated that from the start of operational issues on July 20 through late July, State issued approximately 220,000 NIVs globally— about half of the NIVs State anticipated issuing during that period. According to officials in State’s Bureau of Consular Affairs, Office of Consular Systems and Technology (CST), who are responsible for operating and maintaining CCD and the NIV system, consular officers were still able to collect NIV applicant information during that period; however, processing of applications was significantly delayed with an almost 2-week backlog of NIVs. In the U.S. Consulate in São Paulo, a consular management official reported that due to this outage, the post had a backlog of about 30,000 NIV applications, or approximately 9 days’ worth of NIV interviews during peak season. Consular officers in 8 out of the 11 focus groups we conducted identified a lengthy CCD outage as a challenge to the efficient processing of NIVs. IT systems are not user friendly: In 9 out of 11 focus groups, consular officers described the IT systems for NIV processing as not user friendly. Officers in our focus groups explained that some aspects of the system hinder their ability to quickly and efficiently process NIVs. These aspects include a lack of integration among the databases needed for NIV adjudications, the need for manual scanning of documentation provided by an applicant, and an absence of standard keyboard shortcuts across all IT applications that would allow users to quickly copy information when processing NIV applications for related applicants, to avoid having to enter data multiple times. Some consular officers in our focus groups stated that they could adjudicate more NIVs in a day if the IT systems were less cumbersome and more user friendly. Consular officers in Beijing and Mexico City and consular management at one post indicated that the NIV system appeared to be designed without consideration for the needs of a high volume post, which include efficiently processing a large number of applications per adjudicator each day. According to consular officers, the system is poor at handling today’s high levels of demand because it was originally designed in the mid- 1990s. Consular officers in São Paulo stated that under current IT systems and programs, the post may not be able to process larger volumes that State projects it will have in the future. State, recognizing the limits of its current consular IT systems, initiated the development of a new IT platform. State is developing a new system referred to as “ConsularOne,” to modernize 92 applications that include systems such as CCD and the NIV system. According to State, ConsularOne will be implemented in six phases, starting with passport renewal systems and, in phase five, capabilities associated with adjudicating and issuing visas (referred to as non-citizen services). However, CST officials have yet to formally commit to when the capabilities associated with non-citizen services are to be implemented. According to a preliminary CST schedule, the enhanced capabilities associated with processing NIVs are not scheduled for completion until October 2019. Given this timeline, according to State officials, enhancements to existing IT systems are necessary and are being planned. Although consular officers and managers we spoke with identified CCD and the NIV system as one of the most significant challenges to the efficient processing of NIVs, State does not systematically measure end user (i.e., consular officers) satisfaction. We have previously reported that in order for IT organizations to be successful, they should measure the satisfaction of their users and take steps to improve it. The Software Engineering Institute’s IDEALSM model is a recognized approach for managing efforts to make system improvements. According to this model, user satisfaction should be collected and used to help guide improvement efforts through a written plan. With such an approach, IT improvement resources can be invested in a manner that provides optimal results. Although State is in the process of upgrading and enhancing CCD and the NIV system, State officials told us that they do not systematically measure user satisfaction with their IT systems and do not have a written plan for improving satisfaction. According to CST officials, consular officers may voluntarily submit requests to CST for proposed IT system enhancements. Additionally, State officials noted that an IT stakeholder group comprising officials in State’s Bureau of Consular Affairs regularly meets to identify and prioritize IT resources and can convey end user concerns for the system. However, State has not collected comprehensive data regarding end user satisfaction and developed a plan to help guide its current improvement efforts. Furthermore, consular officers continued to express concerns with the functionality of the IT systems, and some officers noted that enhancements to date have not been sufficient to address the largest problems they encounter with the systems. Given consular officers’ reliance on IT services provided by CST, as well as the feedback we received from focus groups, it is critical that State identify and implement feedback from end users in a disciplined and structured fashion for current and any future IT upgrades. Without a systematic approach to measure end user satisfaction, CST may not be able to adequately ensure that it is investing its resources on improvement efforts that will improve performance of its current and future IT systems for end users. Travel and tourism are important contributors to U.S. economic growth and job creation. According to Commerce, international travelers contributed $220.6 billion to the economy and supported 1.1 million jobs in 2014. Processing visas for such travelers as efficiently and effectively as possible without compromising our national security is critical to maintaining a competitive and secure travel and tourism industry in the United States. Although State has historically struggled with the task of maintaining reasonable wait times for NIV interviews, it has undertaken a number of efforts in recent years that have yielded substantial progress in reducing such waits. Significant projected increases in NIV demand coupled with consular hiring constraints and other challenges could hinder State’s ability to sustain this progress in the future—especially in countries where the demand for visas is expected to rise the highest. These challenges heighten the importance of systematically evaluating the cost and impact of the multiple measures State has taken to reduce interview wait times in recent years and leveraging that knowledge in future decision making. Without this, State’s ability to direct resources to those activities that offer the greatest likelihood of success is limited. Moreover, State’s future capacity to cope with rising NIV demand will be challenged by inefficiencies in its visa processing technology; consular officers and management officials at the posts we visited pointed to cumbersome user procedures and frequent system failures as enormous obstacles to efficient NIV processing. State’s Bureau of Consular Affairs recognizes these problems and plans a number of system enhancements; however, the bureau does not systematically collect input from consular officers to help guide and prioritize these planned upgrades. Without a systematic effort to gain the input of those who employ these systems on a daily basis, State cannot be assured that it is investing its resources in a way that will optimize the performance of these systems for current and future users. To further improve State’s processing of nonimmigrant visas, we recommend that the Secretary of State take the following two actions: 1. Evaluate the relative impact of efforts undertaken to reduce nonimmigrant visa interview wait times to help managers make informed future resource decisions. 2. Document a plan for obtaining end user (i.e., consular officers) input to help improve end user satisfaction and prioritize enhancements to information technology systems. We provided a draft of this report for review and comment to State, Commerce, and DHS. We received written comments from State, which are reprinted in appendix II. State agreed with both of our recommendations and highlighted a number of actions it is taking or plans to take to implement them. Commerce and DHS did not provide written comments on the report. State and DHS provided a number of technical comments, which we have incorporated throughout 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 State, the Secretary of Commerce, the Secretary of Homeland Security, 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) 512-8980 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. This report reviews Department of State’s (State) nonimmigrant visa (NIV) processing operations and provides an update on the status of the goals in Executive Order (E.O.) 13597. Specifically, this report examines (1) the efforts State has undertaken to expand capacity and reduce NIV applicants’ interview wait times and the reported results to date, and (2) the challenges that impact State’s ability to efficiently process NIVs. To accomplish our objectives, we reviewed relevant State and Department of Homeland Security (DHS) documents, and interviewed State, DHS, and Department of Commerce (Commerce) officials. In addition, we observed consular operations and interviewed U.S. government officials at four posts—the U.S. Embassy in Beijing, China; the U.S. Embassy in New Delhi, India; the U.S. Embassy in Mexico City, Mexico; and the U.S. Consulate in São Paulo, Brazil. For our site visits, we selected posts that (1) were in countries specifically mentioned in E.O. 13597, (2) experienced NIV interview wait time problems previously, or (3) were in countries that have the highest levels of U.S. NIV demand in the world. During these visits, we observed visa operations; interviewed consular staff and embassy management about NIV adjudication policies, procedures, and resources; conducted focus groups with consular officers; and reviewed documents and data. Our selection of posts was not intended to provide a generalizable sample but allowed us to observe consular operations at some of the highest NIV demand posts worldwide. To determine the efforts State has undertaken to expand capacity and reduce NIV applicants’ interview wait times, we reviewed relevant documents and interviewed officials from State and DHS. To determine the reported results of those efforts, we collected and analyzed data on NIV processing capacity and NIV interview wait times worldwide from January 2011 until July 2015 and compared them to the goals outlined in E.O. 13597 and reviewed documentation provided by State on their efficiency efforts. For NIV interview wait time data, we focused our analysis on B visas and not on other NIV categories because this is how State measures visa wait times against the goals specified in E.O. 13597, and because B visas represent most NIVs. For example, B visas represent 79 percent of all NIVs processed in fiscal year 2014. To determine the reliability of State’s data on NIV wait times for applicant interviews, we reviewed the department’s procedures for capturing these data, interviewed the officials in Washington, D.C., who monitor and report these data, and examined data that were provided to us electronically. In addition, we interviewed the corresponding officials from our visits to select posts overseas and in Washington, D.C., who input and use the NIV interview wait time data. While some posts occasionally did not update their NIV wait time data on a weekly basis, we found the data to be sufficiently reliable for the purposes of determining the percentage of posts that were below the 3-week NIV interview wait time threshold established by E.O. 13597. To determine the challenges that impact State’s ability to efficiently process NIVs, we reviewed relevant documents, including State planning and NIV demand projections, interviewed State, DHS, and Commerce officials in Washington, D.C., including officials from State’s Office of Inspector General, and conducted focus groups with consular officers. We also reviewed State’s documentation on its information technology systems, including the Consular Consolidated Database, the NIV system, and the development plans for the ConsularOne system. To determine the reliability of State’s NIV applicant projections, we reviewed the department’s projections and interviewed the officials that develop the projections. We found the data to be sufficiently reliable for the purposes of providing a baseline for possible NIV demand through 2019. To balance the views of State management and obtain perspectives of consular officers on State’s NIV processing, we conducted 11 focus group meetings with randomly selected entry-level consular officers that conduct NIV interviews and adjudications at the four posts we visited. These meetings involved structured small-group discussions designed to gain more in-depth information about specific issues that cannot easily be obtained from single or serial interviews. Consistent with typical focus group methodologies, our design included multiple groups with varying characteristics but some similarity in experience and responsibility. Most groups involved 6 to 10 participants. Discussions were structured, guided by a moderator who used a standardized list of questions to encourage participants to share their thoughts and experiences. Our overall objective in using a focus group approach was to obtain the views, insights, and feelings of entry-level consular officers on issues related to their workload, the NIV process, and challenges they face as consular officers conducting NIV applicant interviews and adjudications. We assured participants of the anonymity of their responses, promising that their names would not be directly linked to their responses. We also conducted one pretest focus group and made some revisions to the focus group guide accordingly. Methodologically, focus groups are not designed to (1) demonstrate the extent of a problem or to generalize results to a larger population, (2) develop a consensus to arrive at an agreed-upon plan or make decisions about what actions to take, or (3) provide statistically representative samples or reliable quantitative estimates. Instead, they are intended to generate in-depth information about the reasons for the focus group participants’ attitudes on specific topics and to offer insights into their concerns about and support for an issue. The projectability of the information produced by our focus groups is limited for several reasons. First, the information includes only the responses of entry-level consular officers from the 11 selected groups. Second, participants were asked questions about their specific experiences with the NIV process and challenges they face as consular officers conducting NIV applicant interviews and adjudications. Other entry-level consular officers who did not participate in our focus groups or were located at different posts may have had different experiences. Because of these limitations, we did not rely entirely on focus groups but rather used several different methodologies to corroborate and support our conclusions. We conducted this performance audit from September 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual mentioned above, Godwin Agbara (Assistant Director, International Affairs and Trade), Kathryn Bernet (Assistant Director, Homeland Security and Justice), Nicholas Marinos (Assistant Director, Information Technology), Ashley Alley, Juan P. Avila, Justin Fisher, Kaelin Kuhn, Jill Lacey, Christopher J. Mulkins, and Jasmine Senior made key contributions to this report. Technical assistance was provided by Karen Deans, Katherine Forsyth, Kara Marshall, and Tina Cheng. | International travel and tourism contributed $220 billion to the U.S. economy and supported 1.1 million jobs in 2014, according to the Department of Commerce. A portion of those travelers to the United States were required to obtain an NIV. After a period in which travelers experienced extensive waits in obtaining a required interview for an NIV in 2011, the President issued E.O. 13597 in 2012 to improve visa and foreign visitor processing, while continuing to protect U.S. national security. The E.O. set goals for State to increase NIV processing capacity in Brazil and China and reduce NIV interview wait times for applicants worldwide. This report examines (1) efforts State has undertaken to expand capacity and reduce NIV applicants' interview wait times and the reported results to date and (2) challenges that impact State's ability to efficiently process NIVs. GAO analyzed State's historical and forecast NIV data and interviewed State officials in Washington, D.C., and consular officers and management in Brazil, China, India, and Mexico. These countries represent the four highest demand countries for U.S. NIVs. Since 2012, the Department of State (State) has undertaken several efforts to increase nonimmigrant visa (NIV) processing capacity and decrease applicant interview wait times. Specifically, it has increased consular staffing levels and implemented policy and management changes, such as contracting out administrative support services. According to State officials, these efforts have allowed State to meet the goals of Executive Order (E.O.) 13597 of increasing its NIV processing capacity by 40 percent in Brazil and China within 1 year and ensuring that 80 percent of worldwide NIV applicants are able to schedule an interview within 3 weeks of State receiving their application. Specifically, State increased the number of consular officers in Brazil and China by 122 and 46 percent, respectively, within a year of the issuance of E.O. 13597. Additionally, according to State data, since July 2012, at least 80 percent of worldwide applicants seeking a tourist visa have been able to schedule an interview within 3 weeks. Two key challenges—rising NIV demand and problems with NIV information technology (IT) systems—could affect State's ability to sustain the lower NIV interview wait times. First, State projects the number of NIV applicants to rise worldwide from 12.4 million in fiscal year 2014 to 18.0 million in fiscal year 2019, an increase of 45 percent (see figure). Given this projected NIV demand and budgetary limits on State's ability to hire more consular officers at posts, State must find ways to achieve additional NIV processing efficiencies or risk being unable to meet the goals of E.O. 13597 in the future. Though State's evaluation policy stresses that it is important for bureaus to evaluate management processes to improve their effectiveness and inform planning, State has not evaluated the relative effectiveness of its various efforts to improve NIV processing. Without conducting a systematic evaluation, State cannot determine which of its efforts have had the greatest impact on NIV processing efficiency. Second, consular officers in focus groups expressed concern about their ability to efficiently conduct adjudications given State's current IT systems. While State is currently enhancing its IT systems, it does not systematically collect information on end user (i.e., consular officer) satisfaction to help plan and guide its improvements, as leading practices would recommend. Without this information, it is unclear if these enhancements will address consular officers' concerns, such as having to enter the same data multiple times, and enable them to achieve increased NIV processing efficiency in the future. To improve State's ability to process NIVs, while maintaining a high level of security to protect our borders, GAO is recommending that State (1) evaluate the relative impact of efforts undertaken to improve NIV processing and (2) document a plan for obtaining input from end users (consular officers) to help improve their satisfaction and prioritize enhancements to IT systems. State concurred with both recommendations. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
DOD defines a UAS as “a system whose components include the necessary equipment, networks, and personnel to control an unmanned aircraft”—that is, an aircraft that does not carry a human operator and is capable of flight under remote control or autonomous programming. DOD classifies its UAS into five groups that are based on attributes of weight and capabilities including vehicle airspeed and operating altitude. For example, group 1 UAS weigh 20 pounds or less whereas group 5 UAS weigh more than 1,320 pounds. Servicemembers who operate the larger and more capable UAS, in group 3 or above, are either manned- aircraft pilots or pilots specializing in flying UAS and are to receive 4 or more months of training to prepare them to fly UAS. In contrast, personnel who operate the less capable UAS that are classified in groups 1 and 2 generally operate UAS as an additional duty. Service headquarters officials stated that personnel who operate UAS in group 1 receive about 2 weeks of training and personnel who operate UAS in group 2 receive anywhere from 2 weeks to 3 months of training. Each of the services flies various types of large UAS in groups 3, 4, and 5. The Air Force flies the MQ-1 (Predator), the MQ-9 (Reaper), and the larger RQ-4 (Global Hawk). The Army flies the RQ-7 (Shadow), the MQ-5 (Hunter) and the MQ-1C (Gray Eagle). The Marine Corps flies the RQ-7B (Shadow) and the RQ-21A (Black Jack). Finally, the Navy flies the MQ-4C (Triton) and the MQ-8 (Fire Scout). Each service uses a different term to refer to the UAS pilot position and a different strategy to assign personnel to this position. For example, the Air Force uses the term remotely piloted aircraft (RPA) pilot and assigns officers to this position. Specifically, the Air Force assigns various types of officers to serve in these positions including (1) temporarily re-assigned manned-aircraft pilots, (2) manned-aircraft pilots and other Air Force aviation officers who have converted to this career permanently, (3) graduates of manned-aircraft pilot training on their first assignment, and (4) pilots who specialize in flying UAS with limited manned-aircraft experience. The Army uses the term unmanned aircraft system operator and assigns enlisted personnel to this position, who receive no manned- aircraft flight training. See table 1 for a summary of the terms and the staffing strategies each service uses. The services are responsible for providing three types of individual training to UAS pilots: initial qualification, mission, and continuation training. Each of the services is responsible for providing initial qualification training to UAS pilots in two phases. In the first phase, pilots are taught the fundamentals of aviation and in the second phase pilots learn to fly a particular UAS. Each of the services uses similar but slightly different approaches to train their UAS pilots. Army. The first phase of training consists of an 8-week common core course for all UAS pilots. During this phase, the Army is responsible for teaching its pilots the fundamentals of aerodynamics, flight safety, and navigation. During the second phase of training, the Army is responsible for teaching its UAS pilots to fly one of the Army’s three UAS. This training lasts between 12 and 25 weeks depending on the UAS that is the focus of the course. During this phase, the Army teaches its pilots to launch and recover a UAS, conduct reconnaissance and surveillance, and participate in a field training exercise. In addition, all Army UAS pilots are trained as sensor operators in the aircrew of a UAS. Thus, pilots learn to operate UAS sensors during their initial qualification training. Air Force. During the first phase of training, UAS pilots who specialize in flying a UAS attend 5 months of training called undergraduate UAS training. This training consists of three courses: first, these pilots learn to fly a small manned aircraft for 39 hours; second, they use a simulator to learn to fly a manned aircraft using instruments; and third, they learn about the fundamentals of flying a UAS in a classroom setting. Air Force UAS pilots who the Air Force re-assigns from its manned-aircraft pilot ranks do not attend this first phase of training because they received flight training as manned- aircraft pilots. During the second phase of training, all UAS pilots attend a 4-month course at a formal training unit to learn to fly one of the Air Force’s three UAS platforms. Most active duty Air Force pilots attend the formal training unit at Holloman Air Force Base to learn to fly the Air Force’s MQ-1 Predator or MQ-9 Reaper. Marine Corps. During the first phase of training, UAS pilots who specialize in flying a UAS attend 5 months of training with the Air Force called undergraduate UAS training. This training consists of three courses: First, these pilots learn to fly a small manned aircraft for 39 hours; second, they use a simulator to learn to fly a manned aircraft using instruments; and third, they learn about the fundamentals of flying a UAS in a classroom setting. During the second phase of training, Marine Corps UAS pilots attend the Army’s 8-week UAS pilot common course and 10-week UAS pilot training courses at Fort Huachuca to become familiar with flying the RQ-7 Shadow, which the Marine Corps flies. Navy. In January 2015, the Navy began providing a 7- to 8-week UAS initial qualification course in San Diego, CA to its pilots of the MQ-8 Fire Scout, which is a rotary wing UAS. The Navy assigns manned- helicopter aircraft pilots who receive manned helicopter training and have served, or are serving, in an assignment in a manned-helicopter squadron prior to attending this course. As of March 2015, the Navy is developing plans for its initial qualification course for its MQ-4C Triton, which is a fixed-wing UAS. The services also provide mission and continuation training to their UAS pilots. Mission qualification training includes all training that takes place once a servicemember reaches their operational unit but before that servicemember is designated as being qualified to perform the unit’s missions. Continuation training includes all training that takes place once a servicemember finishes mission qualification training and is designed to maintain and improve UAS piloting skills. A March 2015 Army review showed that pilots in most Army Shadow units did not complete training in their units in fiscal year 2014, which we corroborated through both discussions with pilots in our focus groups and unit responses to our questionnaires. One of the core characteristics of a strategic training and development process calls for agency leaders and managers to consistently demonstrate that they support and value continuous learning. However, the Army’s Training and Doctrine Command conducted a review from January 2015 through March 2015 and found that 61 of the Army’s 65 Shadow units that were not deployed had completed an average of 150 hours of flight training. Further, the Army assessed that these units were at the lowest levels of unit training proficiency in the Army’s readiness reporting system. Army Training and Doctrine Command officials stated that in January 2015, the Chief of Staff of the Army directed the Army Training and Doctrine Command to evaluate unit training for Army UAS units to determine if training was a factor that caused UAS mishaps in combat. These officials stated that in response to the Chief of Staff’s direction they evaluated the total flight hours completed to conduct training by 65 Shadow units that were not deployed, 13 deployed Shadow units, and 2 Shadow units at the UAS initial qualification school at Ft. Huachuca. Training and Doctrine Command assessed the level of unit readiness associated with the amount of training these units completed using the Army’s unit training proficiency system specified in Army Pamphlet 220-1, Defense Readiness Reporting System-Army Procedures. This system includes a four-tiered rating system ranging from T-1 to T-4. In this system a T-1 rating indicates the highest level of unit training proficiency, whereas T-3 and T-4 ratings indicate that the unit is untrained on one or more of the mission essential tasks that the unit was designed to perform in an operational environment. Using this system to assess the 65 Shadow units that were not deployed, Training and Doctrine Command found that 1 unit was rated at T-1, 3 units were rated at T-2, and 61 units were rated at T-3 or T-4. In addition, Training and Doctrine Command found that 11 of the 13 deployed units were rated T-1 and the other 2 deployed Shadow units were rated T-2, and both of the units at the UAS training school were rated at T-1 (see table 2). Army Training and Doctrine Command found a number of factors led to UAS pilots in Army Shadow units not completing training in their units in fiscal year 2014. For example, the review found that UAS units organized under infantry brigades have a particular challenge completing training in their units because the unit commanders and leadership overseeing these brigades may not be fully aware of the UAS units’ training requirements. In addition, the review found that a number of warrant officers were not qualified and current on the units’ aircraft that they were assigned to oversee. The review included recommendations that the Army plans to implement to increase emphasis on training in UAS units, to provide training on UAS training to unit commanders, and to establish a system to report UAS training readiness on periodic unit status reports. However, as of April 2015 the Army had not yet taken actions to implement these recommendations, and Army Training and Doctrine Command officials were unable to provide a timeframe for implementation of the recommendations. Similarly, focus groups we conducted with Army UAS pilots and responses to questionnaires we administered indicated that Army UAS pilots face challenges to complete training in units. In particular, pilots in all eight of the focus groups we conducted with Army UAS pilots stated that they cannot complete training in their units. For example, a pilot in one of our focus groups stated that during his 3 years as a UAS pilot, he had been regularly tasked to complete non-training-related activities, and as a result he completed a total of 36 training flight hours even though the requirement is 24 flight hours per year. Further, we administered a questionnaire to various offices within each military service and five of the six Army UAS units that responded indicated that their units faced challenges completing training in their units. For example, one unit respondent stated that Army UAS units rarely have the time to meet their training requirements. A second unit respondent stated that Army UAS units are taxed trying to maintain proper training in units and have little time to progress into proficient pilots due to training equipment and resource constraints. A third respondent stated that training in units is very limited due to competing priorities, including being consistently tasked by Army Forces Command to train other units, which prevents their unit from training their own UAS operators. In addition, four of the six Army UAS units that responded stated that the Army provides too little funding for the training that takes place in units to help ensure that this training achieves the Army goals for that training. Further, focus groups we conducted with Army UAS pilots and some Army officials indicated that leadership of larger non-aviation units that oversee Army UAS units may not fully understand the training needs for Army UAS pilots. Specifically, pilots in seven of the eight focus groups that we conducted with Army UAS pilots stated that leadership of larger non-aviation units that oversee their UAS units do not understand UAS pilot training. Moreover, four of the six units that responded to our questionnaire indicated that leadership of larger non-aviation units that oversee Army UAS units lacks understanding of UAS unit training needs. For example, a unit official who responded to our questionnaire stated that Army headquarters leadership provides very limited support for UAS continuation training. Another unit official who responded to our questionnaire stated that “unit leadership has a fundamental lack of understanding of our training requirements.” In addition, officials at Army Forces Command and an official who oversees Army UAS assignments at Army Human Resources Command stated that infantry commanders at the battalion and brigade level who oversee UAS units do not understand the aviation training requirements for Army UAS pilots. Further, Army UAS pilots in all of the focus groups we conducted stated that they had difficulty completing UAS pilot training in units because they spend a significant amount of time performing additional duties such as lawn care, janitorial services, and guard duty. While the Army review and our analysis show that most Army UAS pilots are not completing training in their units, the high-level interest expressed by the Chief of Staff of the Army and Army Training and Doctrine Command’s review and associated recommendations, if effectively implemented, could help address the Army’s training shortfalls. The Army does not have visibility over the amount of training that pilots in some Army UAS units have completed. Another one of the core characteristics of a strategic training framework highlights the importance of quality data regarding training. However, in our current review, we found that the Army does not have access to data that would allow it to measure the amount of training that UAS pilots have completed in Army UAS units. The Army’s Unmanned Aircraft System Commander’s Guide and Aircrew Training Manual establishes three readiness levels for Army UAS pilots. Readiness level training begins with the development of proficiency at the individual level at readiness level three and progresses through crew to collective proficiency at readiness levels two and one. The Army assigns readiness level designations to UAS pilots to identify the training that UAS pilots have completed and the training that they need to complete to progress to the next level of readiness. Army Forces Command identifies the Army UAS units that are ready to deploy, according to Army Forces Command officials. Army Forces Command officials stated that they need information about the readiness level of pilots in UAS units to determine if a unit is ready to deploy and perform its mission. These officials stated that currently they review Army unit status reports to determine if a unit is prepared to deploy. These officials stated that Army unit status reports provide information on a variety of factors related to a unit’s readiness to perform its mission including the unit’s materiel, personnel staffing levels, and an assessment of a unit’s training. However, officials from Army headquarters, Army Forces Command, and Army Aviation Center of Excellence stated that these reports do not provide any information on the readiness levels of the UAS pilots in UAS units because the Army does not require these reports to include this information. In addition, the organizational structure of many Army UAS units is an impediment to visibility over training completed in these units. Specifically, the Army’s RQ-7B Shadow units are organized under larger units. According to Forces Command officials, these larger units oversee multiple smaller units, including UAS units and other units that have different functions, such as intelligence. However, these officials also stated that the readiness information for these UAS units is combined with training information from other, non-UAS units in the unit status reports because unit status reports do not provide lower- unit level details. Officials at Forces Command stated that, using these reports, they have designated units as available for deployment and later learned that a significant portion of the pilots in those units had not completed their readiness level training. Without requiring information on the readiness of pilots in UAS units as part of unit status reports, Army Forces Command will continue to lack visibility over the amount of training that UAS pilots have completed in units. Air Force officials stated that Air Force UAS pilots do not complete the majority of their required continuation training, even though an Air Force memorandum allows pilots to credit operational flights towards meeting training requirements. Another one of the core characteristics we found constitutes a strategic training framework is that agency leaders and managers consistently demonstrate that they support and value continuous learning. However, in December 2014, the commanding general of Air Combat Command wrote in a memo to the Chief of Staff of the Air Force that since 2007, Air Force UAS units have conducted “virtually no continuation training” because the Air Force has continuously surged to support combatant command requirements. Additionally, Air Force officials at a number of locations stated that Air Force UAS pilots rarely conduct continuation training for any of their unit’s missions. These locations include headquarters, Air Combat Command, as well as the Vice Wing Commander and multiple squadron commanders at Creech Air Force Base and the Wing and Operations Group Commanders at Holloman Air Force Bases. We found that a nongeneralizable sample of training records for seven Air Force UAS units showed that, on average, 35 percent of the pilots in these units completed the continuation training for all of their seven required missions in fiscal year 2014. The situation occurred despite an Air Combat Command memorandum that allows pilots to credit flights taken on operational missions towards continuation training requirements, provided that the flights meet certain conditions. This memorandum also requires UAS pilots to conduct specified numbers of training flights associated with each of the missions that MQ-1 Predator and MQ-9 Reaper units perform. We found that 91 percent or more of the pilots in the seven units completed continuation training for one of the seven missions, specifically the intelligence, surveillance, and reconnaissance mission, which involves obtaining information about the activities and resources of an enemy. In contrast, an average of 26 percent of pilots in these seven units completed the continuation training for another one of the seven missions, the air interdiction mission, which involves diverting or destroying the enemy’s military potential. Air Force officials stated that operational flights do not provide an ideal environment to conduct training because pilots are not able to perform all of the tasks needed for a training flight during operational missions. Moreover, Creech Air Force Base officials also stated that UAS pilots at Creech Air Force Base conduct continuation training on less than two percent of all the hours that UAS pilots on Creech Air Force Base currently fly. According to Air Force officials, some Air Force UAS pilots have not completed their continuation training because they spend most of their time conducting operational missions due to shortages of UAS pilots and high workloads. In addition, Creech Air Force Base officials stated that UAS pilots perform one to two of their required missions regularly based on operational needs, which also allows them to fulfill training requirements for those missions. However, due to shortages of UAS pilots and high workloads some pilots do not complete training requirements for their other five to six missions. As of March 2015, the Air Force has staffed the UAS pilot career field at 83 percent of the total number of UAS pilots that the Air Force believes are necessary to sustain current UAS operations and training. We conducted focus groups with seven groups of Air Force UAS pilots and pilots in all these groups stated that they could not conduct continuation training because their units were understaffed. In addition, Air Force headquarters officials stated that they think the current number of UAS pilots that the Air Force has approved for its UAS units is not enough to accomplish the workload of UAS units. As a result, workloads for Air Force UAS units are high, and in January 2015, the Secretary of the Air Force stated that on average Air Force UAS pilots fly 6 days in a row and work 13- to 14-hour days. In April 2014, we found that the Air Force had shortages of UAS pilots and we made multiple recommendations to address these shortages. In particular, we found that the Air Force had operated below its optimum crew ratio, which is a metric used to determine the personnel needs for Air Force aviation units, and that the Air Force had not tailored its recruiting and retention strategy to align with the specific needs and challenges of UAS pilots. We made four recommendations related to these findings including that the Air Force update crew ratios for UAS units to help ensure that the Air Force establishes a more accurate understanding of the required number of UAS pilots needed in its units and that the Air Force develop a recruiting and retention strategy that is tailored to the specific needs and challenges of UAS pilots to help ensure that the Air Force can meet and retain required staffing levels to meet its mission. The Air Force concurred with these recommendations and has taken some actions but has not yet fully implemented them. Specifically, a headquarters Air Force official stated that, in February 2015, the Air Force completed the first phase of a three-phase personnel requirements study designed to update the UAS unit crew ratio. The headquarters official also stated that Air Force senior leaders are reviewing the results of the first phase of the study and expect to update the UAS unit crew ratio by summer 2015. In addition, in fiscal year 2014, the Air Force began using a new process that provides the Air Force with greater flexibility to assign cadets who were preparing to join the Air Force. Under this process, the cadets are assigned to various Air Force careers, which enabled the Air Force to meet its quota for the number of cadets who graduate from Air Force officer schools and agree to serve as UAS pilots. Further, in January 2015, the Air Force more than doubled the Assignment Incentive Pay for UAS pilots who are reaching the end of their 6-year service commitment to $1500 a month. As noted above, the Air Force continues to face a shortage of UAS pilots, but fully implementing our April 2014 recommendations would better position the Air Force to address these shortages. See additional information on these recommendations and the Air Force’s actions to date in appendix I. The Army has taken action to increase the number of UAS pilot instructors, but in doing so, it is using less experienced instructors, which could affect the quality of the training provided to UAS pilots. The Army significantly increased the number of UAS units and UAS pilots in recent years, and as a result many lack the experience and proficiency needed to be an instructor, according to officials from the Army Aviation Center of Excellence. To address this shortage and accommodate the need for more instructors, the Army began to waive course prerequisites for the UAS instructor course so that it could enable these less experienced and less proficient UAS pilots to become instructors, according to officials from the Army Aviation Center of Excellence. Army Aviation Center of Excellence officials also stated that the instructor course prerequisites are important because they help ensure that the UAS pilots the Army trains to become instructors are the most experienced and most proficient pilots and can successfully train other UAS pilots. One of the officials also stated that the Army would prefer not to grant waivers to any UAS pilot attending the course so that the pilots who become instructors would be experienced and able to share their experiences with the pilots they train. In contrast, pilots with less experience may not be able to refer to and use more varied experiences during instructional time with UAS pilots and thus may not be as prepared to successfully train other UAS pilots to perform at the highest levels of proficiency. The instructor course prerequisites include a minimum rank, a minimum number of flying hours piloting a UAS, whether a pilot has completed their readiness level training, and whether a pilot has recently completed certain flying tasks—known as currency. For example, the Army course prerequisites specify that pilots attending the course to become an instructor for the MQ-1C Gray Eagle should (1) hold the enlisted rank of sergeant (E-5), (2) have flown a UAS for a minimum of 200 hours, (3) be designated at readiness level one, and (4) be current in their experience, specifically by having flown a UAS within the last 60 days. According to an official from the Aviation Center of Excellence, a pilot’s battalion commander and the commander of the UAS school are responsible for approving requests to waive these course prerequisites. Following their approval, a pilot’s unit commander assesses the pilot’s potential to successfully complete the instructor training and fulfill duties required of instructors. The Army waived the instructor course prerequisites for about 40 percent of the UAS pilots attending the course from the beginning of fiscal year 2013 through February 2015. Specifically, the Army waived one or more of these course prerequisites for 38 percent of the pilots who attended the course in fiscal year 2013, 48 percent of the pilots who attended the course in fiscal year 2014, and 23 percent of the pilots who attended the course from October 2014 through February 2015 (see table 3). The Army has taken some steps to mitigate the potential risks of using less proficient instructors. Specifically, Army Aviation Center of Excellence officials stated that in fiscal year 2015, the Army stopped waiving the instructor course prerequisites that UAS pilots be designated at readiness level one and that pilots be current in their experience flying a UAS. In addition, prior to fiscal year 2015, the Army had provided remedial training to pilots who had not met these two course prerequisites. The Army’s action to stop allowing waivers for these two course prerequisites helps to ensure that the pilots it allows to become instructors meet the minimum UAS flying proficiency course prerequisites. However, the Army has not fully addressed the potential risks of using less proficient and less experienced instructors. Although the Army reduced the number of waivers granted so far in fiscal year 2015 by no longer waiving the course prerequisites related to minimum proficiency, the Army can continue to grant waivers for the course prerequisites related to experience, including that UAS pilots have a minimum number of flying hours in a UAS and hold the minimum enlisted rank of sergeant. In addition, the Army has not provided additional preparation to address the gap in experience for the instructors who have completed the instructor course nor does it have plans to address this gap in experience for those pilots who will attend the course in the future. Within a strategic training and development process, one core practice calls for agencies to provide appropriate resources for their training programs, and that agency leaders should consistently demonstrate that they support and value continuous learning. Army officials have stated that experienced instructors are central to providing successful continuous learning to its UAS pilots, and in that regard are important resources in training programs. However, the Army faces risks that by training with less experienced instructors, Army UAS pilots may not be receiving the highest caliber of training needed to prepare them to be able to successfully perform UAS missions in the future. In addition, though the Army expects to face shortages of experienced and proficient UAS pilots through fiscal year 2019, the Army has not fully addressed the potential risks of training with less experienced pilots, such as by providing additional preparation for current and future instructors who do not meet one or more course prerequisites related to experience to enhance their ability to successfully provide training. The Air Force has taken action to address shortages of instructors at its UAS formal training unit at Holloman Air Force Base. The second major phase of the Air Force’s initial qualification training occurs in the formal training unit, and all of the Air Force’s active duty UAS pilots are to attend this training to learn to operate the UAS that they will fly in their operational units. As we noted earlier, a core characteristic of a strategic training framework is that agencies should provide appropriate resources for its training programs. However, we found that as of March 2015, the Air Force staffed its UAS training squadrons at Holloman Air Force Base at 63 percent of their planned staffing levels. In December 2014, the commanding general of Air Combat Command stated that the Air Force has not fully staffed the formal training unit due to shortages of UAS pilots across the Air Force and as a result “pilot production has been decimated.” An Air Force headquarters official stated that shortages of instructors at the formal training unit are a key reason that the Air Force has shortages of UAS pilots across the Air Force. An Air Force headquarters official stated that the Air Force is taking action to address these shortages. Specifically, the Air Force is studying the personnel requirements for the formal training unit, and expects the Air Force to report the results of this study by spring 2016. The Air Force official also stated that the results of that study will likely show that the Air Force UAS pilot formal training unit should have additional instructor positions. Although the Air Force formal training unit faces a shortage of UAS instructor pilots, fully implementing our April 2014 recommendations should better position the Air Force to address these shortages. The Office of the Deputy Assistant Secretary of Defense (Readiness) and the military services coordinate on UAS pilot training in some distinct areas; however, potential benefits from enhanced coordination efforts on training UAS pilots exist. According to key practices, federal agencies can enhance and sustain their collaborative efforts by defining a common outcome and establishing joint strategies. Collaborating agencies should also assess their relative strengths and limitations to identify opportunities to leverage each others’ resources. Further, agencies should establish compatible standards, policies, procedures and data systems to enable a cohesive working relationship. During our review, in January 2015, the Acting Deputy Assistant Secretary of Defense (Readiness) stated that the services should coordinate and collaborate with one another regarding their efforts to train UAS pilots. He stated that in coordinating with one another the services should share best practices to help the department as a whole train its UAS pilots more effectively and efficiently. Further, the Acting Deputy Assistant Secretary stated that because the services fly similar UAS, they may be able to train their pilots more effectively and efficiently by taking advantage of the lessons learned that they may have acquired as they have trained their pilots separately. He cited similarities between the Air Force’s Predator and the Army’s Gray Eagle and acknowledged similarities between the Air Force’s Global Hawk and the Navy’s Triton (see Fig. 1). In this review of UAS pilot training, we found that the Office of the Deputy Assistant Secretary of Defense (Readiness) and the services have taken some actions to coordinate on UAS training and these actions are consistent with the key practices that can enhance and sustain federal agency coordination. For example, the Air Force and the Army train all Marine Corps UAS pilots, which is consistent with the practice of identifying and addressing needs by leveraging resources to initiate or sustain a collaborative effort. In addition, the Air Force and the Army have published UAS strategies that outline their services’ plans to develop, organize and incorporate the use of UAS into their missions, which is consistent with the practice of reinforcing agency accountability for collaborative efforts with plans and reports. However, the Air Force and Army strategies do not address if or how the services will coordinate with one another on UAS pilot training. Further, we also found that the actions that the Office of the Deputy Assistant Secretary of Defense (Readiness) and the services had taken were not fully consistent with these key practices. See table 4 for a description of these key practices, a description of DOD actions, and our assessment. In addition, officials from three of the four military service headquarters offices who responded to our questionnaire expressed limited support for further coordination with the other services on UAS pilot training. For example, headquarters officials from the Army and the Air Force stated that they did not anticipate any additional benefit to coordinating with the other services on UAS pilot training. Further, headquarters officials from the Army and the Navy stated that they did not foresee any other benefits from coordinating with the other services on UAS pilot training because their services fly different UAS with different missions. Moreover, DOD has not yet issued a UAS training strategy that addresses if and how the services should coordinate with one another to share information on training UAS pilots. In 2010, we found that DOD had commenced initiatives to address training challenges, but had not developed a results-oriented strategy to prioritize and synchronize these efforts. We recommended that DOD establish a UAS training strategy to comprehensively resolve challenges that affect the ability of the Air Force and the Army to train personnel for UAS operations and DOD concurred with our recommendation. The Office of the Deputy Assistant Secretary of Defense (Readiness) engaged the RAND Corporation to draft a UAS training strategy and provided RAND with guidelines about the content and purpose of the strategy. However, these guidelines do not discuss if or how the services should coordinate on UAS pilot training. In September 2014, RAND provided a draft of a UAS training strategy to the Office of the Deputy Assistant Secretary of Defense (Readiness), but the draft also did not discuss coordination on UAS pilot training. As of April 2015, the draft training strategy had not been updated to include this information, and officials from the Office of the Deputy Assistant Secretary of Defense (Readiness) were unable to provide a timeframe for completion of this training strategy. Until DOD issues a UAS training strategy that addresses if and how the services should coordinate with one another to share information on training UAS pilots, the services may miss opportunities to improve the effectiveness and efficiency of this training. In response to our questionnaire, 6 out of the 11 units stated that potential benefits may exist from coordinating with other services on UAS pilot training. For example, 1 Army UAS unit stated that coordinating training with other services could help shorten the amount of time they spend acclimating to other services once deployed and would allow for an easier transition to working together during missions. Additionally, another Army UAS unit stated that they were unable to train because of a poorly written certificate of authorization, which is the document that requires approval by the Federal Aviation Administration before the services can fly their UAS in the National Airspace System. Further, the unit stated that they could have avoided a temporary halt in training and benefited from reaching out to the Air Force for guidance on this process rather than the unit spending time developing their own system. Without taking steps to address coordination among the services, the Office of the Deputy Assistant Secretary of Defense (Readiness) and the services may waste scarce funds on training UAS pilots and may limit the efficiency and effectiveness of these training efforts. DOD’s UAS portfolio has grown over the years to rival the traditional manned systems. In its Unmanned Systems Integrated Roadmap FY2013-2038 report, DOD highlighted the importance of developing a comprehensive UAS training strategy to guide the myriad DOD UAS training efforts across all systems, and to help ensure effective and efficient training of UAS pilots. However, without amending unit status reports to require information on the readiness level of pilots in UAS units, Army Forces Command will continue to lack visibility over the amount of training that UAS pilots have completed in units and will not be able to ensure that all Army UAS units being considered for deployment have completed their required training. In addition, without taking additional steps to mitigate the potential risks of using less experienced instructors, the Army may be unable to ensure that the training these instructors provide will result in highly skilled future UAS pilots. Finally, it is important that DOD identify ways to achieve its missions more efficiently and effectively. It is encouraging that the Office of the Deputy Assistant Secretary of Defense (Readiness) and the services coordinate on UAS pilot training in some areas such as the Air Force and the Army training all Marine Corps UAS pilots and the Air Force and the Army publishing UAS strategies. However, without addressing how the services can enhance their coordination efforts on training UAS pilots in DOD’s forthcoming UAS training strategy, the services may not be able to achieve additional benefits to the efficiency and effectiveness of UAS pilot training across the department. We are making three recommendations to the Secretary of Defense: To provide greater visibility over the extent to which Army UAS units have completed required training to leaders responsible for deployment decisions, we recommend that the Secretary of Defense direct the Secretary of the Army to require unit status reports to include information on the readiness levels of UAS pilots in UAS units. To help ensure that Army UAS pilots receive the highest caliber of training to prepare them to successfully accomplish UAS missions, we recommend that the Secretary of Defense direct the Secretary of the Army to take additional steps to mitigate potential risks posed by its waiver of course prerequisites for less experienced UAS pilots attending the course to become instructors, such as by providing additional preparation for current and future instructors who do not meet one or more course prerequisites to enhance their ability to successfully provide training. To increase opportunities to improve the effectiveness and efficiency of UAS pilot training across DOD, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to address how the services should coordinate with one another in the strategy on UAS pilot training that the Office of the Under Secretary of Defense for Personnel and Readiness is current drafting. We provided a draft of this report to DOD for comment. In written comments, DOD concurred with each of our three recommendations. DOD stated that it will review the implementation status of each of the recommendations within six months. DOD’s comments are reprinted in their entirety in appendix III. DOD also provided technical comments that we have incorporated into this report where applicable. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Secretaries of the Air Force, the Army, and the Navy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In April 2014, we found that the Air Force had shortages of pilots of unmanned aircraft systems (UAS). In particular, we found that the Air Force (1) has operated below its optimum crew ratio, which is a metric used to determine the personnel needs for Air Force aviation units; (2) has not developed a minimum crew ratio; (3) has not tailored its recruiting and retention strategy to align with the specific needs and challenges of UAS pilots; and (4) has not considered the viability of using personnel other than officers such as enlisted or civilians as UAS pilots. We made four recommendations related to these findings. Since we issued our report in April 2014, the Air Force has taken some actions, but has not yet fully implemented them. In the committee report accompanying a bill for the National Defense Authorization Act for Fiscal Year 2015, the Senate Committee on Armed Services directed that the Air Force report to the committee by September 30, 2014, on its efforts to implement three recommendations from our 2014 report related to staffing levels of Air Force UAS pilots. On September 22, 2014, the Air Force reported on the status of their efforts to implement these recommendations. We focused on three types of individual training that the services provide to pilots of unmanned aerial systems (UAS) pilots: initial qualification, mission, and continuation training. In addition, we focused our review on initial qualification instructors and instructors within the units. We focused our review on Army and Air Force UAS pilot training programs in our first two objectives assessing the extent to which the Army and the Air Force face challenges in ensuring that their UAS pilots complete their required training and have a sufficient number of UAS pilot instructors. We focused this part of our review on the Army and the Air Force because these services have significantly more UAS pilots than the Navy and the Marine Corps. However, for our third objective, we assessed the coordination that occurs among the Office of the Deputy Assistant Secretary of Defense (Readiness) and all four of the military services because we determined that there may be benefits to collaboration among the Office of the Deputy Assistant Secretary of Defense (Readiness) and all of the services regardless of the maturity and size of their current UAS training programs. We assessed the reliability of the data we used to support findings in this report by reviewing documentation of the data and interviewing agency officials knowledgeable about the data and the way they are maintained. Specifically, we assessed the reliability of the Air Force’s data on fiscal year 2014 continuation training flights completed by seven UAS units at Creech Air Force Base to fulfill requirements laid out in the Air Combat Command Ready Aircrew Program Tasking Memorandum; the Army’s fiscal year 2013 to February 2015 data on waivers granted to UAS pilots attending the UAS school to become instructors; and March 2015 data on the Air Force’s UAS pilot staffing levels and staffing levels at the formal training unit. We selected these dates, because they are the most recent years for which the data were available. We determined that these data were sufficiently reliable for the purposes of this report, such as the discussion of the percentage of Army UAS pilots that required a waiver to become a UAS instructor by fiscal year; the overall staffing levels of Air Force UAS pilots; the staffing levels of Air Force UAS instructor pilots at the formal training unit; and the completion of continuation training by a nongeneralizeable sample of seven UAS units at Creech Air Force Base. To evaluate the extent to which the Army and the Air Force face challenges, if any, in ensuring that their UAS pilots complete their required training, we reviewed documents that outline training requirements for UAS pilots in the Army and the Air Force including the Army’s UAS Commander’s Guide and Aircrew Training Manual and the Air Force Air Combat Command Ready Aircrew Program Tasking Memorandum. We also reviewed reports that we previously issued that address topics related to UAS pilot training including a 2014 report on the personnel challenges that Air Force UAS pilots face and a 2010 report on challenges that the Air Force and the Army faced training personnel for UAS operations. We assessed the services’ UAS pilot training programs using a set of core characteristics that we previously developed in 2004. In 2004, we found that agencies must continue to build their fundamental management capabilities in order to effectively address the nation’s most pressing priorities. To help agencies build their management capabilities, we developed a framework that includes principles and key questions that federal agencies can use to ensure that their training investments are targeted strategically. In developing this framework, we concluded that there is a set of certain core characteristics that constitute a strategic training and development process. These characteristics include leadership commitment and communication; effective resource allocation; and continuous performance improvement. To develop these characteristics in 2004, we consulted government officials and experts in the private sector, academia, and nonprofit organizations; examined laws and regulations related to training and development in the federal government; and reviewed the sizeable body of literature on training and development issues, including previous GAO products on a range of human capital topics. To identify the extent to which the military services applied these principles in their training programs, we developed a questionnaire based on these characteristics and on the services’ UAS training programs. We adapted these core characteristics by modifying the language of some of the criteria that we used in our questionnaire, to more appropriately apply to UAS pilot training. We reviewed our adaptation with officials from the Office of the Deputy Assistant Secretary of Defense for Readiness as well as officials from the headquarters of each of the military services. These officials agreed that the framework was relevant to our review and provided feedback on the questions we included in our questionnaire. We distributed the questionnaire to each of the service’s headquarters, training commands, and operational commands. To include diverse UAS unit perspectives, we also randomly selected a nongeneralizable sample of 14 UAS units in each of the services based on factors including aircraft types flown in the UAS unit and geographical location of the unit. We distributed the questionnaire to the commanders of the selected units. We attained an 85 percent response rate for the questionnaires. We analyzed responses we obtained from each of the questionnaires, and compared the perspectives and documentation we collected to the GAO criteria. We reviewed a March 2015 Army Training and Doctrine Command review that evaluated continuation training for Army UAS units. The results of this review are not generalizable. We also reviewed continuation training requirements included in the Air Force’s 2014 Ready Aircrew Program Tasking Memorandum. We compared these requirements to fiscal year 2014 training data for all seven of Creech Air Force Base’s MQ-1 Predator and MQ-9 Reaper units that have the same mission requirements outlined in this memorandum. Fiscal year 2014 is the most recent year for which the data were available. The results from these units of this data are not generalizable to other UAS units or fiscal years. We also interviewed Air Force officials at Headquarters, Air Combat Command, Air Education and Training Command, as well as the Vice Wing Commander and multiple UAS unit commanders at Creech Air Force Base and the Wing Commander and Operations Group and multiple UAS unit commanders at Holloman Air Force Base to determine Air Force UAS pilots’ training completion rates; the Air Force’s UAS manning levels; and metrics that Air Force has in place to determine aviation personnel requirements. To determine the extent to which the Army and the Air Force have a sufficient number of qualified UAS pilot instructors, we identified and analyzed criteria included in the Army’s course prerequisite requirements that provide the minimum requirements for rank, the number of flying hours a pilot has flown, the readiness level of a pilot, and whether that pilot is current, which measures if the pilot has recently completed certain flying tasks. We compared these course prerequisites to the most recent Army documentation on UAS operators who attended the Army school to become an instructor in fiscal year 2013, fiscal year 2014, and October 2014 to February 2015, to determine the number of instructors who met these course prerequisites. We also interviewed the Director of Training at the Army’s initial qualification school at Fort Huachuca, and officials at Army Headquarters to get their views about whether the Army school and units have adequate numbers of instructors. We also compared Air Force documentation on the actual numbers of Air Force UAS pilots in Air Force UAS assignments to the Air Force planned number of positions for UAS pilots. In addition, we compared the actual numbers of Air Force UAS instructor pilots at the formal training unit at Holloman Air Force Base to the Air Force planned number of positions at the formal training unit. The formal training unit is the organization that provides training for the second major phase of the Air Force’s initial qualification training and all of the Air Force’s active duty UAS pilots are to attend this training to learn to fly the MQ-1 Predator or MQ-9 Reaper. We also interviewed the Wing Commander and Operations Group and multiple UAS unit commanders at the Air Force’s formal training unit at Holloman Air Force Base to get their views about whether the formal training units have a sufficient numbers of instructors. We visited UAS units at five bases: Ft. Huachuca, AZ; Ft. Hood, TX; Holloman Air Force Base, NM; Creech Air Force Base, NV; and Marine Corps Air Station Cherry Point, NC. We chose units at these locations to get a perspective on a variety of UAS operations and selected the locations on the basis of several factors including the type and size of UAS flown in the unit; missions of the unit; whether or not the unit is deployed (we did not meet with units who were deployed); number of UAS pilots in the unit; the major command of the unit; and location of the unit. At each instillation, we met with unit commanders and other leaders to discuss their views about training UAS pilots. We also conducted 18 focus groups with active-duty UAS pilots at these locations to gain their perspectives on their services’ UAS training efforts. We met with eight Army focus groups, seven Air Force focus groups, and three Marine Corps focus groups for 90 minutes each. To select specific UAS pilots to participate in our focus groups, we worked with officials at each of the instillations to develop a diverse group of active-duty UAS pilots. To obtain a variety of perspectives, we selected UAS pilots with various amounts of experience flying UASs and additional duties in their units. To help ensure an open discussion in the groups, we organized them by rank and met with groups of similar rank. We also met with some groups of instructor pilots separately. These groups typically consisted of six to nine UAS pilots. We used content analysis to analyze detailed notes from each focus group to identify themes that participants expressed across all or most of the groups. To do this, two GAO analysts analyzed an initial set of the records and individually developed themes. Then, they convened to discuss and agree on a set of themes to perform the coding. The analysts then analyzed our records and made coding decisions based on these themes. Following the initial analysis by one analyst, a second analyst reviewed all of the coding decisions that the first analyst made for each of the records. Where there were discrepancies, the analysts reviewed one another’s coding and rationale for their coding decisions and reached a consensus on which codes should be used. The results of our analyses of the opinions of UAS pilots we obtained during our focus groups are not generalizable to the populations of all UAS pilots in the Army, Air Force, and Marine Corps. To evaluate the extent to which DOD and the military services coordinate and collaborate with one another to train their UAS pilots, we used criteria for enhancing and sustaining collaboration among federal agencies that we previously developed. We assessed the department’s actions using seven of the eight key practices from our prior report. We excluded one key practice related to reinforcing individual accountability for collaborative efforts through performance management systems. Evaluating this practice involves assessing the extent to which agencies set expectations for senior executives for collaboration within and across organizational boundaries in their individual performance plans. We did not include this key practice in our review because many of the officials who oversee UAS pilot training in the services are military members and the military does not establish individual performance plans for its servicemembers. We reviewed our adaptation with officials from the Office of the Deputy Assistant Secretary of Defense for Readiness. These officials agreed that these practices were relevant to our review. The seven key practices that we assessed in our review were: (1) defining and articulating a common outcome; (2) establishing mutually reinforcing or joint strategies; (3) identifying and addressing needs by leveraging resources; (4) agreeing on roles and responsibilities; (5) establishing compatible policies, procedures, and other means to operate across agency boundaries; (6) developing mechanisms to monitor, evaluate, and report on results; and (7) reinforcing agency accountability for collaborative efforts through agency plans and reports. To identify the extent to which the DOD organizations applied these practices, we analyzed documentation related to coordination on UAS pilot training that we obtained from a variety of DOD offices. For example, we analyzed guidelines for a UAS training strategy that the Office of the Deputy Assistant Secretary of Defense for Readiness provided to the RAND Corporation; a draft UAS training strategy developed by the RAND Corporation; UAS strategies that the Army and Air Force issued; and documentation that shows that the Air Force and Army train all Marine Corps UAS pilots. In addition, we analyzed responses we obtained from each of the questionnaires we administered and focused on questions related to coordination among the services. Further, we collected additional information in interviews with officials from the Office of the Deputy Assistant Secretary of Defense for Readiness, the UAS Task Force, and knowledgeable officials within each military service. We then compared the information we collected from these sources to the key practices that help enhance and sustain coordination that we previously developed to determine the extent to which the Office of the Deputy Assistant Secretary of Defense for Readiness and the military services coordinate to train UAS pilots. We conducted this performance audit from July 2014 to May 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, Lori Atkinson (Assistant Director), James P. Klein, Leigh Ann Sennette, Michael Silver, Paola Tena, Alex Welsh, Erik Wilkins-McKee, and Michael Willems made key contributions to this report. | The Department of Defense's (DOD) UAS portfolio has grown over the years to rival traditional manned systems, and, as of July 2013, DOD had acquired over 10,000 UAS, according to a 2013 DOD report. Training DOD UAS pilots, most of whom are in the Army or the Air Force, is an integral part of DOD's strategy to accomplish its mission. Senate Report 113-176 included a provision that GAO review DOD's efforts to train UAS pilots. This report examines, among other things, the extent to which the Army and the Air Force (1) face challenges ensuring that their UAS pilots complete required training and (2) have taken steps to ensure they have sufficient numbers of UAS instructors. GAO analyzed DOD guidance on training UAS pilots, distributed a questionnaire to Army and Air Force headquarters and units, examined nongeneralizeable training records of seven Air Force UAS units selected because they have the same mission requirements, and interviewed DOD officials. GAO also conducted 18 focus groups with active duty UAS pilots who were selected based on rank and other factors. The results of the questionnaire and focus groups are not generalizable. The Army and the Air Force face challenges ensuring that the pilots who remotely operate their unmanned aerial systems (UAS) complete their required training. Specifically, a March 2015 Army review showed that most pilots in certain Army units did not complete fundamental training tasks in fiscal year 2014—a finding that GAO corroborated through discussions with pilots in focus groups and unit responses to questionnaires. In addition, Army unit status reports do not require UAS pilot training information, and as a result, the Army does not know the full extent to which pilots have been trained and are therefore ready to be deployed. In addition, Air Force training records from a nongeneralizeable sample of seven UAS units showed that, on average, 35 percent of the pilots in these units completed the training for all of their required missions. Pilots in all of the seven focus groups GAO conducted with Air Force UAS pilots stated that they could not conduct training in units because their units had shortages of UAS pilots.GAO found similar shortages of UAS pilots in April 2014 and in particular, GAO found that the Air Force operated below its crew ratio, which is a metric used to determine the number of pilots needed in units. At that time, GAO made four recommendations including that the Air Force update its update crew ratio. The Air Force concurred with these recommendations and has taken actions, or has actions underway. For example, an Air Force Headquarters official stated that, in February 2015, the Air Force completed the first phase of a three-phase personnel requirements study on the crew ratio and expects to update the crew ratio in 2015. However, at this time, the Air Force has not fully implemented any of the recommendations. The Army and the Air Force are taking actions to increase the number of UAS instructors, but the Army has not fully addressed the risks associated with using less experienced instructors and the Air Force faces instructor shortages. In order to increase the number of its instructors in response to an increase in the number of UAS units, the Army waived course prerequisites for about 40 percent of the UAS pilots attending the course to become instructor pilots from the beginning of fiscal year 2013 through February 2015.The Army originally established these prerequisites—such as a minimum number of flight hours—for UAS pilots volunteering to become instructors to help ensure that instructors were fully trained and ready to instruct UAS pilots. The Army has taken some steps to mitigate the potential risks of using less proficient UAS instructors. For example, beginning in fiscal year 2015, the Army no longer grants waivers for course prerequisites related to proficiency. However, the Army can continue to grant waivers for additional course prerequisites related to experience. As a result, the Army risks that its UAS pilots may not be receiving the highest caliber of training needed to prepare them to successfully perform UAS missions. Furthermore, as of March 2015, the Air Force had staffed its UAS training squadrons at Holloman Air Force Base at 63 percent of its planned staffing levels. This shortage is a key reason that the Air Force has shortages of UAS pilots across the Air Force, according to an Air Force headquarters official. The Air Force is studying the personnel requirements for its school and expects to report the results of this study by spring 2016. GAO recommends, among other things, that the Army require unit status reports to include information on the readiness levels of UAS pilots; and the Army take additional steps to mitigate potential risks posed by its waiver of course prerequisites related to experience for pilots attending the course to become instructors. DOD concurred with each of GAO's recommendations. |
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VA comprises three major components: the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA). VA’s mission is summed up in its mission statement, a quotation from Abraham Lincoln: “to care for him who shall have borne the battle and for his widow and his orphan.” VA carries out this mission by providing benefits and other services to veterans and dependents. The department’s vision is to be a more customer-focused organization, functioning as “One VA.” This vision stemmed from the recognition that veterans think of VA as a single entity, but often encountered a confusing, bureaucratic maze of uncoordinated programs that put them through repetitive and frustrating administrative procedures and delays. The “One VA” vision is to create versatile new ways for veterans to obtain services and information by streamlining interactions with customers and integrating IT resources to enable VA employees to help customers more quickly and effectively. This vision will require modifying or replacing separate information systems with integrated systems using common standards to share information across VA programs and with external partner organizations, such as the Department of Defense. Accordingly, effective management of its IT programs is vital to VA’s successful achievement of its vision and mission. Table 1 shows a breakdown of VA’s approximately $2.1 billion IT budget request for fiscal year 2006. Of the total, VHA accounted for approximately $1.8 billion, VBA approximately $150 million, and NCA approximately $11 million. The remaining $84 million was designated for the department level. The Congress has long recognized that IT has the potential to enable federal agencies to accomplish their missions more quickly, effectively, and economically. However, fully exploiting this potential presents challenges to agencies. Despite substantial IT investments, the federal government’s management of information resources has produced mixed results. One of the ways in which the Congress has addressed this issue was to establish the CIO position; an agency’s CIO is to serve as the focal point for information and technology management within an agency. In 1996, the Clinger-Cohen Act established the position of agency CIO and specified responsibilities for this position. Among these responsibilities, the act required that the CIOs in the 24 major departments and agencies have information resources management (IRM) as their “primary duty.” The Congress has mandated that CIOs should play a key leadership role in ensuring that agencies manage their information functions in a coordinated and integrated fashion in order to improve the efficiency and effectiveness of government programs and operations. CIOs have responsibilities that can contribute significantly to the successful implementation of information systems and processes. In July 2004, we reported on CIO roles, responsibilities, and challenges (among other things) at 27 major agencies. For this work, we identified major areas of CIO responsibilities that were either statutory requirements or critical to effective information and technology management. Altogether, we identified the 13 areas shown in table 2. According to our report, CIOs were generally responsible for the key information and technology management areas shown in the table, although not all CIOs were completely responsible for all areas. For example: ● All the CIOs were responsible for the first five areas in the table (capital planning and investment management, enterprise architecture, information security, IT/IRM strategic planning, and IT/IRM human capital). ● More than half had responsibility for six additional areas (major e- government initiatives, systems acquisition, information collection/paperwork reduction, records management, information dissemination, and privacy). ● Fewer than half were responsible for two areas (information disclosure and statistics). It was common for CIOs to share responsibility for certain functions, and in some cases responsibilities were assigned to other offices. For example, systems acquisition responsibility could be shared among the CIO and other officials, such as a procurement executive or program executive; disclosure could be assigned to general counsel and public affairs, while statistical policy could be assigned to offices that deal with the agency’s data analysis. Nevertheless, even for areas of responsibility that were not assigned to CIOs, agency CIOs generally reported that they contributed to the successful execution of the agency’s overall responsibilities in that area. In carrying out their responsibilities, CIOs generally reported to their agency heads. For 19 of the agencies in our review, the CIOs stated that they had this reporting relationship. In the other 8 agencies, the CIOs stated that they reported instead to another senior official, such as a deputy secretary, under secretary, or assistant secretary. In addition, 8 of the 19 CIOs who said they had a direct reporting relationship with the agency head noted that they also reported to another senior executive, usually the deputy secretary or under secretary for management, on an operational basis. According to members of our Executive Council on Information Management and Technology, what is most critical is for the CIO to report to a top level official. Federal CIOs often remained in their positions for less than the length of time that some experts consider necessary for them to be effective and implement changes. At the major departments and agencies included in our review, the median time in the position of permanent CIOs whose time in office had been completed was about 23 months. For career CIOs, the median was 32 months; the median for political appointees was 19 months. To the question of how long a CIO needed to stay in office to be effective, the most common response of the CIOs (and former agency IT executives whom we consulted) was 3 to 5 years. Between February 10, l996, and March 1, 2004, only about 35 percent of the permanent CIOs who had completed their time in office reportedly had stayed in office for a minimum of 3 years. The gap between actual time in office and the time needed to be effective is consistent with the view of many agency CIOs that the turnover rate was high, and that this rate was influenced by the political environment, the pay differentials between the public and private sectors, and the challenges that CIOs face. In contrast, the CIOs at the 27 agencies were generally helped in carrying out their responsibilities by the background and experience they brought to the job. The background of the CIOs varied in that they had previously worked in the government, the private sector, or academia, and they had a mix of technical and management experience. However, virtually all had work experience or educational backgrounds in IT or IT-related fields; 12 agency CIOs had previously served in a CIO or deputy CIO capacity. Moreover, most of the them had business knowledge related to their agencies because they had previously worked at the agency or had worked in an area related to the agency’s mission. To allow CIOs to serve effectively in the key leadership role envisioned by the Congress, federal agencies should use the full potential of CIOs as information and technology management leaders and active participants in the development of the agency’s strategic plans and policies. The CIOs, in turn, must meet the challenges of building credible organizations and developing and organizing information and technology management capabilities to meet mission needs. In February 2001, we issued guidance on the effective use of CIOs, which describes the following three factors as key contributors to CIO success: ● Supportive senior executives embrace the central role of technology in accomplishing mission objectives and include the CIO as a full participant in senior executive decision making. ● Effective CIOs have legitimate and influential roles in leading top managers to apply IT to business problems and needs. Placement of the position at an executive management level in the organization is important, but in addition, effective CIOs earn credibility and produce results by establishing effective working relationships with business unit heads. ● Successful CIOs structure their organizations in ways that reflect a clear understanding of business and mission needs. Along with knowledge of business processes, market trends, internal legacy structures, and available IT skills, this understanding is necessary to ensure that the CIO’s office is aligned to best serve agency needs. The CIO study that we reported on in July 2004 also provides information on the major challenges that federal CIOs face in fulfilling their duties. In particular, CIOs view IT governance processes, funding, and human capital as critical to their success, as indicated by two challenges that were cited by over 80 percent of the CIOs: implementing effective information technology management and obtaining sufficient and relevant resources. ● Effective IT management. Leading organizations execute their information technology management responsibilities reliably and efficiently. A little over 80 percent of the CIOs reported that they faced one or more challenges related to implementing effective IT management practices at their agencies. This is not surprising given that, as we have previously reported, the government has not always successfully executed the IT management areas that were most frequently cited as challenges by the CIOs—information security, enterprise architecture, investment management, and e-gov. ● Sufficient and relevant resources. One key element in ensuring an agency’s information and technology success is having adequate resources. Virtually all agency CIOs cited resources, both in dollars and staff, as major challenges. The funding issues cited generally concerned the development and implementation of agency IT budgets and whether certain IT projects, programs, or operations were being adequately funded. We have previously reported that the way agency initiatives are originated can create funding challenges that are not found in the private sector. For example, certain information systems may be mandated or legislated, so the agency does not have the flexibility to decide whether to pursue them. Additionally, there is a great deal of uncertainty about the funding levels that may be available from year to year. The government also faces long-standing and widely recognized challenges in maintaining a high-quality IT workforce. In 1994 and 2001, we reported on the importance that leading organizations placed on making sure they had the right mix of skills in their IT workforce. About 70 percent of the agency CIOs reported on a number of substantial IT human capital challenges, including, in some cases, the need for additional staff. Other challenges included recruiting, retention, training and development, and succession planning. In addition, two other commonly cited challenges were communicating and collaborating (both internally and externally) and managing change. ● Communicating and collaborating. Our prior work has shown the importance of communication and collaboration, both within an agency and with its external partners. For example, one of the critical success factors we identified in our guide focuses on the CIO’s ability to establish his or her organization as a central player in the enterprise. Ten agency CIOs reported that communication and collaboration were challenges. Examples of internal communication and collaboration challenges included (1) cultivating, nurturing, and maintaining partnerships and alliances while producing results in the best interest of the enterprise and (2) establishing supporting governance structures that ensure two- way communication with the agency head and effective communication with the business part of the organization and component entities. Other CIOs cited activities associated with communicating and collaborating with outside entities as challenges, including sharing information with partners and influencing the Congress and OMB. ● Managing change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization’s natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. Some CIOs reported challenges associated with implementing both changes originating from their own initiative and changes from outside forces. Implementing major IT changes can involve not only technical risks but also nontechnical risks, such as those associated with people and the organization’s culture. Six CIOs cited dealing with the government’s culture and bureaucracy as challenges to implementing change. Former agency IT executives also cited the need for cultural changes as a major challenge facing CIOs. Accordingly, in order to effectively implement change, it is important that CIOs build understanding, commitment, and support among those who will be affected by the change. Effectively tackling these reported challenges can improve the likelihood of a CIO’s success. Until these challenges are overcome, federal agencies are unlikely to optimize their use of information and technology, which can affect an organization’s ability to effectively and efficiently implement its programs and missions. In September 2005, we reported the results of our study of CIOs at leading private-sector organizations, in which we described the CIOs’ responsibilities and major challenges, as well as private-sector approaches to information and technology governance. The set of responsibilities assigned to CIOs in the private sector were similar to those in the federal sector. In most areas, there was little difference between the private and federal sectors in the percentage of CIOs who had or shared a particular responsibility. In 4 of the 12 areas—enterprise architecture, strategic planning, information collection, and information dissemination and disclosure—the difference between the private- and federal-sector CIOs was greater; in each case, fewer CIOs in the private sector had these responsibilities. In all, the six functions least likely to be the CIO’s responsibility in the federal sector were equivalent to the five functions least likely to be his or her responsibility in the private sector. Some of the federal CIOs’ functions, such as information collection and statistical policy, did not map directly to the management areas in several of the private-sector organizations we contacted. Figure 1 compares federal and private-sector CIO responsibilities for the 12 areas, showing the percentage of CIOs who had or shared responsibility for each area. Among the private-sector CIOs, it was common to share responsibility with either business units or corporate functional areas; these sharing relationships accounted for almost a third of all responses. Among federal CIOs, the sharing of responsibility was not described in as many areas. Approximately half of all the private-sector CIOs described four major challenges: ● Aligning IT with business goals was cited by 11 of the CIOs. This challenge requires the CIOs to develop IT plans to support their companies’ business objectives. In many cases this entails cross- organization coordination and collaboration. ● Implementing new enterprise technologies (e.g., radio frequency identification, enterprise resource planning systems, and customer relationship management systems) was cited by 8 of the CIOs. This challenge requires the broad coordination of business and corporate units. ● Controlling IT costs and increasing efficiencies was cited by 9 of the CIOs. Several CIOs explained that by controlling costs and providing the same or better service at lower cost, they are able to contribute to their companies’ bottom lines. A few CIOs also said that they generate resources for new investments out of the resources freed up by cost savings. ● Ensuring data security and integrity was cited by 9 of the CIOs. Closely associated with this challenge was ensuring the privacy of data, which was raised by 6 CIOs. Additional management challenges commonly raised by the private- sector CIOs included ● developing IT leadership and skills (7), ● managing vendors, including outsourcing (7), improving internal customer satisfaction (5). Additional technical challenges commonly raised by the private- sector CIOs included implementing customer service/customer relationship management (CRM) systems (7), identifying opportunities to leverage new technology (6), integrating and enhancing systems and processes (5), and ● rationalizing IT architecture (5). The challenges mentioned by the private-sector CIOs overlapped with those mentioned by federal CIOs in our previous study. Improving various IT management processes was mentioned by several private-sector CIOs (e.g., IT investment decision making) as well as by federal CIOs, as was developing IT leadership and skills. In technology-related areas, both private-sector and federal CIOs mentioned working with enterprise architectures and ensuring the security of systems as challenges. Although the challenges mentioned by private-sector CIOs resembled those mentioned by federal CIOs, there were a few differences. Private-sector CIOs mentioned challenges related to increasing IT’s contribution to the bottom line—such as controlling costs, increasing efficiencies, and using technology to improve business processes—while federal CIOs tended to mention overcoming organizational barriers and obtaining sufficient resources. When asked to describe how the governance of information management and technology is carried out in their companies, 16 of the 20 private-sector companies told us that they had an executive committee with the authority and responsibility for governing major IT investments. As part of the governance of IT assets in their companies, nine of the CIOs said that they shared responsibility for IT investment management and that their involvement ranged from providing strong leadership to reviewing plans to ensure that they complied with corporate standards. Many of the private-sector CIOs were actively working to increase coordination among business units to enhance their governance process. Seven of the CIOs described efforts under way to implement enterprisewide financial and supply chain systems, which will move the companies to common business processes. Six CIOs also described using cross-organizational teams (sometimes called centers of excellence), which drive these broad collaborative efforts and others, such as the establishment of standards and common practices. With regard to the governance of the development of new systems, many of the private-sector CIOs described a process in which they collaborated closely with business units and corporate functional units in planning and developing systems to meet specific needs. The extent of the CIOs’ involvement ranged from providing strong leadership and carrying out most activities to reviewing the other components’ plans to ensure that they complied with corporate standards. With regard to sharing authority for decisions on the management of IT assets, several CIOs spoke of balancing between centralization and decentralization of authority and described their efforts to move between the two extremes to find the right balance. The appropriate balance often depended on other events occurring in the companies, such as major strategic realignments or acquisitions. For example, one CIO described his current evolution from a relatively decentralized structure—an artifact of a major effort to enable growth in the corporation—to a more centralized structure in order to reduce costs and drive profits. Since enactment of the Clinger-Cohen Act in 1996, the roles and responsibilities of VA’s Chief Information Officer have evolved. From lacking a CIO entirely, the department has taken steps to address the challenges posed by its multiple widespread components and its decentralized information technology and services. In June 1998, VA assigned CIO responsibility to a top manager. However, we reported in July 1998 that the person holding the CIO position at VA had multiple additional major responsibilities, as this person also served as Assistant Secretary for Management, Chief Financial Officer, and Deputy Assistant Secretary for Budget. According to the act, the CIO’s primary responsibility should be information and technology management. Noting that VA’s structure was decentralized, its IT budget was large, and its CIO faced serious information and technology management issues, we recommended that the Secretary appoint a CIO with full-time responsibilities for IRM. Concurring with the recommendation, VA established the position of Assistant Secretary for Information and Technology to serve as its CIO. As of May 2000, however, the position of Assistant Secretary for Information and Technology was vacant, and as we reported at the time, it had been unfilled since its creation in 1998. The Secretary then created and filled the position of Principal Deputy Assistant Secretary for Information and Technology, designating that person as VA’s acting CIO until an Assistant Secretary could be appointed. The Secretary also realigned IRM functions within VA under this position, which reported directly to the Secretary. As we reported, the Principal Deputy Assistant Secretary was involved in IT planning issues across the department. In addition to advising the Secretary on IT issues, he served as chair of the department’s CIO Council and as a member of the department’s Capital Investment Board, and he worked with the CIOs in VBA and VHA (at the time, NCA had no CIO). According to this official, one of his priorities was to ensure that IT activities in VBA and VHA were in concert with VA’s departmentwide efforts. In August 2001, VA filled the CIO position. In March 2002, we testified that this hiring was one of the important strides that the Secretary of Veterans Affairs had made to improve the department’s IT leadership and management, along with making a commitment to reform the department’s use of IT. On June 29, 2003, the CIO retired after a tenure of almost 2 years (about the median length of tenure for federal CIOs, as discussed above); the current CIO was confirmed in January 2004. Figure 1 is a time line showing the history of the CIO position at VA since the passage of the Clinger-Cohen Act. Our prior work highlighted some of the challenges that the CIO faced as a result of the way the department was organized to carry out its IT mission. Among these challenges was that information systems and services were highly decentralized, and the VA administrations and staff offices controlled a majority of the department’s IT budget. For example, in VA’s information technology budget for fiscal year 2002 of approximately $1.25 billion, VHA controlled about $1.02 billion (over 80 percent), whereas the department level controlled about $60.2 million (less than 5 percent). In addition, we noted that there was neither direct nor indirect reporting to VA’s cyber security officer—the department’s senior security official—thus raising questions about this person’s ability to enforce compliance with security policies and procedures and ensure accountability for actions taken throughout the department. The more than 600 information security officers in VA’s three administrations and its many medical facilities throughout the country were responsible for ensuring the department’s information security, although they reported only to their facility’s director or to the chief information officer of their administration. Given the large annual funding base and decentralized management structure, we testified that it was crucial for the departmental CIO to ensure that well-established and integrated processes for leading, managing, and controlling investments are commonplace and followed throughout the department. This is consistent with the finding in our CIO review that implementation of IT management practices was a challenge; over half of federal CIOs identified IT investment management specifically. Recognizing weaknesses in accountability for the department’s IT resources and the need to reorganize IT management and financing, the Secretary announced a realignment of the department’s IT operations in a memorandum dated August 2002. According to the memorandum, the realignment would centralize IT functions, programs, workforce personnel, and funding into the office of the department-level CIO. In particular, several significant changes were described: ● The CIOs in each of the three administrations—VHA, VBA, and NCA—were to be designated deputy CIOs and were to report directly to the department-level CIO. Previously, these officials served as component-level CIOs who reported only to their respective administrations’ under secretaries. ● All administration-level cyber security functions were to be consolidated under the department’s cyber security office, and all monies earmarked by VA for these functions were to be placed under the authority of the cyber security officer. Information security officers previously assigned to VHA’s 21 veterans integrated service networks would report directly to the cyber security officer, thus extending the responsibilities of the cyber security office to the field. ● Beginning in fiscal year 2003, the department-level CIO would assume executive authority over VA’s IT funding. In September 2002, we testified that in pursuing these reforms, the Secretary demonstrated the significance of establishing an effective management structure for building credibility in the way IT is used, and took a significant step toward achieving a “One VA” vision. The Secretary’s initiative was also a bold and innovative step by the department—one that has been undertaken by few other federal agencies. For example, of 17 agencies contacted in 2002, 8 reported having component-level CIOs, none of which reported to the department-level CIO. Only one agency with component-level CIOs reported that its department-level CIO had authority over all IT funding. We also noted that the CIO’s success in managing IT operations under the realignment would hinge on effective collaboration with business counterparts to guide IT solutions that meet mission needs, and we pointed out the importance of the three key contributors to CIO success described in our 2001 guidance (discussed earlier). Although we have not reviewed the current status of this proposed realignment or VA’s current organizational structure, it remains our view that the proposed realignment held promise for building a more solid foundation for investing in and improving the department’s accountability over IT resources. Specifically, under the realignment the CIO would assume budget authority over all IT funding, including authority to veto proposals submitted from subdepartment levels. This could have a significant effect on VA’s accountability for how components are spending money. To sum up, the CIO plays a vital role in ensuring that VA’s funds are well spent and in managing information technology to serve our nation’s veterans. In our view, the realignment of VA’s IT organization proposed in 2002 held promise for improving accountability and enabling the department to accomplish its mission. The additional oversight afforded the CIO could have a significant impact on the department’s ability to more effectively account for and manage its proposed $2.1 billion in planned IT spending. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of this Committee may have at this time. For information about this testimony, please contact Linda D. Koontz, Director, Information Management Issues, at (202) 512-6240 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Barbara Collier, Lester Diamond, Barbara Oliver, and J. Michael Resser. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In carrying out its mission of serving the nation's veterans and their dependents, the Department of Veterans Affairs (VA) relies extensively on information technology (IT), for which it is requesting about $2.1 billion in fiscal year 2006. VA's vision is to integrate its IT resources and streamline interactions with customers, so that it can provide services and information to veterans more quickly and effectively. Fully exploiting the potential of IT to improve performance is a challenging goal for VA, as it is throughout government. The Clinger-Cohen Act of 1996 addressed this challenge by, among other things, establishing the position of chief information officer (CIO) to serve as the focal point for information and technology management within departments and agencies. As agreed with Congress, GAO will discuss the role of CIOs in the federal government and in the private sector, as well as provide a historical perspective on the roles and responsibilities of VA's CIO. In developing this testimony, GAO relied on its previous work at VA and on the CIO role, including a 2004 review of CIOs at major departments and agencies and a 2005 review of CIOs at leading private-sector organizations. In the federal government and in the private sector, the responsibilities and challenges of CIOs are largely similar. In most management areas, the federal and private-sector organizations reviewed showed little difference in the percentage of CIOs who had or shared a particular responsibility. The challenges cited by private-sector CIOs were also similar to those of federal CIOs: both groups cited improving IT management processes, developing IT leadership and skills, working with enterprise architectures, and ensuring the security of systems. Over time, VA has increased its attention to the CIO position and to information and technology management. After several years with CIOs whose primary duty was not information and technology management or who were serving in an acting capacity, the department appointed a full-time permanent CIO in August 2001. VA also recognized that its decentralized computing environment presented challenges, with a large proportion of the department's IT budget controlled by its administrations and staff offices. As a result, in 2002, the department proposed a realignment to strengthen the department-level CIO position and centralize IT management under this official. GAO has not reviewed the current status of this proposed realignment or VA's current organizational structure, but its view is that the realignment held promise for improving accountability and helping to accomplish VA's mission by increasing the CIO's oversight over IT management and spending. |
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To determine whether DHS has developed policies and established a workforce to use other transactions, we analyzed DHS’s organization, and policy and draft guidance for using these authorities. We interviewed DHS contracting officials and representatives from the DOD agencies that DHS has used for contracting support, officials in its S&T Directorate, and contractors to whom it made initial other transactions awards. We collected and reviewed other transactions agreement documents for DHS’s Countermeasures for Man-Portable Air Defense System (Counter- MANPADS) and Chemical and Biological Countermeasures (Chem-Bio) projects, the only two projects with other transactions awards as of the time of our review. We also reviewed other S&T Directorate solicitations that could result in other transactions agreements, but which had not yet resulted in awards as of the completion of our audit work. We analyzed information obtained from our interviews and file reviews using criteria that we found are generally important to federal acquisitions, namely, planning, reviews and approvals, market knowledge, and monitoring of contractor performance. We derived these criteria from our prior reports on other transactions and knowledge-based acquisition principles, DOD’s policies for other transactions, and selected parts of the FAR. To determine how effectively DHS used its other transactions authority to attract nontraditional government contractors, we analyzed DHS’s reported results from using these authorities in the Counter-MANPADS and Chem-Bio programs. We also reviewed other DHS acquisitions that could result in other transactions awards but for which DHS had not yet made awards. DHS relies on contractors to self-certify their status as a nontraditional government contractors during agreement negotiation. In analyzing the reported results from DHS’s other transactions awards, we did not independently verify a contractor’s reported status as a nontraditional contractor. We also compared DHS’s practices to attract nontraditional government contractors against policies and practices used by DOD. In addition, we interviewed DHS contracting and project management officials, contractors that DHS made other transactions awards to, and representatives from the commercial research and development and technology communities to gain their perspectives on DHS’s use of other transactions to attract nontraditional government contractors. We performed our review from February through October 2004 in accordance with generally accepted government auditing standards. The acquisition function plays a critical role in helping federal agencies fulfill their missions. DHS is expected to spend billions of dollars annually to acquire a broad range of products, technologies, and services from private-sector entities. Other transactions authority is one of the acquisition tools—in addition to standard FAR contracts, grants, and cooperative agreements—available to DHS to help support its mission. Other transactions were created to enhance the federal government’s ability to acquire cutting-edge science and technology. They help agencies accomplish this, in part, through attracting nontraditional contractors from the private sector and other areas that typically have stayed away from pursuing government contracts. There are two types of other transactions authorities—(1) research and (2) prototype. Other transactions for research are used to perform basic, applied, or advanced research. Other transactions for prototypes are used to carry out projects to develop prototypes used to evaluate the technical or manufacturing feasibility of a particular technology, process, or system. A single S&T program could result in multiple awards using other transactions. Because they are exempt from certain statutes, other transactions permit considerable latitude by agencies and contractors in negotiating agreement terms. For example, other transactions allow the federal government flexibility in negotiating intellectual property and data rights, which stipulate whether the government or the contractor will own the rights to technology developed under the other transactions agreement. Table 1 shows the statutes that DHS has determined are generally inapplicable to its other transactions agreements. Because other transactions agreements do not have a standard structure based on regulatory guidelines, they can be challenging to create and administer. Experts on other transactions and industry officials who have used these procurement arrangements told us that other transactions agreement terms are significantly different from FAR contracts and more closely resemble procurement agreements between private-sector firms. According to DHS, the unique nature of other transactions agreements means that federal government acquisition staff who work with other transactions agreements should have experience in planning and conducting research and development acquisitions, strong business acumen, and sound judgment to enable them to operate in a relatively unstructured business environment. DHS views the use of other transactions as key to attracting nontraditional government contractors—typically high-technology firms that do not work with the government—that can offer solutions to meet agency needs. As defined by the Homeland Security Act, a nontraditional government contractor is a business unit that has not, for at least a period of 1 year prior to the date of entering into or performing an other transactions agreement, entered into or performed any contract subject to full coverage under the cost accounting standards any contract in excess of $500,000 to carry out prototype projects or to perform basic, applied, or advanced research projects for a federal agency that is subject to compliance with the FAR. The S&T Directorate of DHS supports the agency’s mission by serving as its primary research and development arm. According to a senior DHS Chief Procurement Office official, the S&T Directorate currently is the only DHS organization using the other transactions authority provided in the Homeland Security Act. As of September 2004, other transactions agreements accounted for about $125 million (18 percent) of the S&T Directorate’s fiscal year 2004 total acquisition activity of $715.5 million. The S&T Directorate’s fiscal year 2004 total acquisition activity is depicted in figure 1. After DHS was established in 2003, the department rapidly established the S&T Directorate, which issued several solicitations using other transactions authority. These solicitations used some commonly accepted acquisition practices and knowledge-based acquisition principles. DHS issued a management directive, drafted guidance, and recruited additional program and contracting staff, which now provide a foundation for using other transactions authority; however, refinements in these policies and attention to workforce issues are needed to promote success in the department’s future use of other transactions. DHS’s policy guidance does not specify when audit requirements should be included in its other transactions agreements to help ensure, for example, that payments to contractors are accurate. Also, the department’s guidance does not address training requirements for its contracting and program staff to ensure that staff understand and leverage the use of other transactions. In addition, the limited size and capacity of DHS’s internal contracting workforce to conduct other transactions may hamper DHS’s goal to internally manage its increasing number of mission programs that could use its other transactions authority. DHS was directed by Congress and the executive branch to quickly initiate and execute R&D projects to help strengthen homeland security. The S&T Directorate at DHS was largely established to centralize the federal government’s homeland security R&D efforts, a function that was not the responsibility of any of DHS’s legacy agencies. Figure 2 depicts the Directorate’s four offices and their functions. The S&T Directorate initiated various projects to address homeland security concerns, including two prototype projects using other transactions authority. Initiating and executing these first projects took priority over establishing the Directorate’s operating procedures. The S&T Directorate’s need to rapidly initiate and execute projects forced a reliance on other federal agencies’ acquisition offices to award and administer its project agreements. (HSARPA) (SED) The S&T Directorate hired program managers and staff with R&D expertise from other government agencies and the private sector to manage its other transactions authority and other acquisitions. These initial hires included several former Defense Advanced Research Projects Agency (DARPA) officials experienced in R&D and other transactions authority acquisitions. In the absence of DHS policies and procedures for other transactions, the S&T Directorate relied on these key officials and other staff with R&D expertise in their former organizations to implement its early projects. These experienced staff helped train DHS program and contracting staff in other transactions and supervised and managed the acquisition process. For example, one official drafted a model other transactions agreement and guided program managers and contracting officers through the other transactions process. In addition to these officials, the S&T Directorate obtained portfolio and program managers from other government agencies and federal laboratories to act in key programmatic positions in their areas of expertise. Some of these portfolio and program managers serve on detail from their home agency. The S&T Directorate’s workforce strategy is to have its program and technical staff serve term appointments, most of which will not be longer than 4 years, in order to promote the influx of leading-edge science and technology skills to DHS. DHS’s planning and budget documents identified the need to develop countermeasures and detection systems against chemical-biological (Chem-Bio) and radiological-nuclear attacks. Under one area of the Chem- Bio project, being implemented by the S&T Directorate using other transactions, DHS is developing mobile laboratories to be rapidly deployed in the field to detect and analyze chemical warfare agents and toxic industrial chemicals in the environment. Figure 3 depicts a mobile laboratory being developed for DHS. The S&T Directorate also initiated projects to address homeland security needs identified by Congress and the executive branch. One such project is aimed at protecting commercial aircraft against possible terrorist use of shoulder-fired missiles, sometimes referred to as man-portable air defense systems (MANPADS). The Counter-MANPADS other transaction project is a multiyear development and demonstration program that will produce prototype systems to be used on commercial aircraft to defend against shoulder-fired missiles. An illustration of a proposed Counter-MANPADs technology being considered by DHS is depicted in figure 4. The S&T Directorate and Office of the Chief Procurement Officer (CPO) used Federal Acquisition Regulation principles as a framework for other transactions solicitations. The Directorate also utilized additional acquisition tools commonly used by DARPA and other agencies, such as broad agency announcements (BAA) to serve as general announcements of the Directorate’s research interest, including general principles for selecting proposals, and soliciting the participation of all offerors capable of satisfying the S&T Directorate’s needs; a white paper process under which firms submit to S&T brief synopses of the main concepts of a proposal introducing technology innovations or solutions; and payable milestone evaluations under which the S&T Directorate’s managers measure the progress of its projects at key points before making payments to contractors. The S&T Directorate modeled its acquisition process after DARPA’s to solicit proposals from as many industry sources as possible to meet its research needs and hosted technical workshops and bidders conferences for its early solicitations to help convey its technical needs to industry. An overview of the S&T Directorate’s generally used acquisition process for other transactions is in figure 5. The Homeland Security Advanced Research Projects Agency (HSARPA) and Office of Systems Engineering and Development (SED) hosted technical workshops prior to publishing some of their early solicitations to obtain information from the industry on what technical requirements were feasible to include in the solicitation. Following the issuance of the solicitations, HSARPA and SED held bidder’s conferences to answer industry questions about the solicitations. The S&T Directorate used a white paper review stage in its early solicitations, including solicitations for the Counter-MANPADS and Chem- Bio programs. According to DHS’s Chem-Bio solicitation, the use of the white paper approach allows DHS to provide firms with feedback on their proposed technologies without the firms having to incur the expense and time of writing complete proposals. For the Chem-Bio project, HSARPA received over 500 white papers from industry. S&T officials told us they provided each contractor that submitted a white paper for this project with feedback, giving the agency’s views on the merits of the proposed technology. HSARPA officials told us that the white paper process helps ensure that the office gets the best proposals and represents an inexpensive way for nontraditional firms to pursue business with DHS. To rapidly execute its projects, including other transactions agreements, the S&T Directorate used other federal agencies to award and administer its contracts to fill DHS’s contracting workforce gaps. DHS has interagency agreements with these agencies for their contracting services. For example, HSARPA is using the U.S. Army Medical Research Acquisition Activity, based in Ft. Detrick, Maryland, which performs acquisition services for the Army, to award other transactions instruments in support of its Chem-Bio project. In addition, DHS is using a contractor who is an expert in other transactions and R&D procurement to help draft its other transactions policy guidance and also provide assistance to administer several of its other transactions projects. The S&T Directorate incorporated some knowledge-based acquisition approaches throughout its acquisition process for using its other transaction authorities. We previously reported that an agency’s use of a knowledge-based acquisition model is key to delivering products on time and within budget. By using a knowledge-based approach, an agency can be reasonably certain about the progress of its project at critical junctures during development, which helps to ensure that a project does not go forward before the agency is sure that the project is meeting its needs. For example, some of the knowledge-based approaches being used by the S&T Directorate and CPO to manage their Counter-MANPADS and Chem- Bio other transaction projects are as follows: Integrated Product Teams (IPTs). Using IPTs to bring together in a single organization the different functions needed to ensure a project’s success is a knowledge-based acquisition best practice. The S&T Directorate formed IPTs that combine the expertise of representatives from each of its four offices to analyze customer requirements and make planning and budget decisions for the portfolio. Contractor Payable Milestone Evaluations. The S&T Directorate’s program managers measure the progress of its projects at key points before making payments to contractors. These milestones are usually associated with contractors satisfying certain performance criteria— commonly referred to as “exit criteria.” Examples of SED’s four payable milestones for Phase I and six payable milestones for Phase II of the Counter-MANPADS project are shown in figure 6. Design Reviews. HSARPA and SED program managers also use design review decision points to ensure the contractor’s product development is meeting program expectations and to determine if the product is ready to proceed to the next stage of development. (See figure 6 for the design review points in Phase I of the Counter-MANPADS project.) In 2002 we identified key success factors for DHS to effectively create its organization, including creating strong systems and controls for acquisition and related business processes. The development of formal policies and procedures for DHS’s authority to use other transactions is guided by statute and DOD’s experiences and practices in using the other transactions authority. DOD’s extensive experiences with and policies for using other transactions provide a useful framework for the effective management of projects using other transactions. For example, DOD uses a guidebook for other transactions prototype projects, which provides detailed policies and procedures in areas such as criteria for using other transactions, acquisition planning, agreement execution, and reporting requirements. In 2004 DHS prepared several policy and draft guidance documents, which should help provide DHS with a structure for using its other transactions authority. In October 2004, DHS issued an other transactions management directive, which provides DHS’s policy for the use of other transactions for research and for prototype projects. The policy is generally consistent with DOD’s policy. The management directive prescribes the responsibilities of key officials in using other transactions, such as the DHS Under Secretary of Management and its Chief Procurement Officer. Specifically, under the management directive, the CPO is responsible for setting policy, conducting oversight, and approving the use of other transactions authority for each project. The management directive also provides general policies and requirements for the documentation of a strategy for using other transactions and provides the purposes and criteria for using research and prototype other transactions. DHS’s explanation of the types of other transactions and criteria for their use, if effectively implemented, should help promote its compliance with the Homeland Security Act by helping to ensure that agency officials adequately assess the utility of other acquisition vehicles—such as FAR contracts, grants, or cooperative agreements, prior to using an other transaction for research. The purposes and criteria for other transactions use as stated by DHS are shown in table 2. DHS is using a contractor experienced with other transactions to assist in the preparation of a guidebook for using other transactions for prototype projects. The draft guidebook, which is loosely based on the DOD guide on other transactions for prototype projects, provides a broad framework for DHS to plan and use other transactions. It covers topics such as acquisition planning, market research, acquisition strategy, and agreements analyses requirements. According to a DHS official, its draft guidebook, when completed, is not to be part of the DHS official management directive system. In addition, the contractor drafted a lessons learned report on other transactions to help DHS fully leverage the benefits and minimize any problems associated with using other transactions. DHS’s draft lessons learned report on other transactions summarizes lessons from various sources, such as federal agencies and think tanks with other transactions experience, on topics related to those discussed in the draft guidebook. Figure 7 shows the development of DHS’s other transactions policy. DHS’s management directive and draft guidebook for other transactions does not yet specify roles, responsibilities, and requirements for agency program and contracting officials in two key areas: audit and training. Addressing these areas is important since, according to DHS officials, DHS plans to issue solicitations that could result in other transactions use at an increasing rate. S&T Directorate and CPO officials acknowledged the importance of these areas and told us they intend to address them in the future. Audit requirements. While DHS’s management directive covers Comptroller General access to contractor records under certain conditions, the directive does not address audits by other entities or specify other circumstances when audits of other transactions agreements may be needed to protect the government’s interest. For example, audits may be needed in certain other transactions agreements to help ensure that payments to contractors are accurate. DOD’s policy for auditing prototype other transactions projects, by contrast, provides more complete guidance on audits of other transactions agreements. For example, the DOD policy states that contracting officers should include information on the frequency of audits, scope of audits, and the means by which audits are to be performed. DOD’s policy also recognizes the flexibility in negotiating other transactions agreements by allowing the contracting officer, in certain circumstances, to waive the inclusion of audit provisions if it would adversely affect the execution of the agreement. DHS’s management directive, in contrast, does not address these conditions. A DHS official told us that its contracting officers negotiate specific auditing provisions in other transactions agreements with contractors on a case-by-case basis. Also, the DOD other transactions prototype projects policy has provisions for its contracting officers to use the Defense Contract Audit Agency (DCAA) or another independent auditor to audit other transactions agreements. Although DHS has a Memorandum of Understanding with DCAA to provide contract audit services, neither DHS’s other transactions management directive nor its draft guidance contain information on the specific conditions when contracting officers should use DCAA’s or another independent auditor’s services. Training requirements. DHS’s management directive requires other transactions contracting officers to be senior warranted contracting officers with a Level III acquisition certification and who possess a level of experience, responsibility, business acumen, and judgment that enables them to operate in this relatively unstructured business environment. This staffing requirement for other transactions closely mirrors the contracting workforce staffing qualification used by DOD. DHS’s management directive also requires its contracting staff to possess a special contracting officer certification, which can be achieved only after the staff have received appropriate training in other transactions. However, DHS has not yet developed a training program on other transactions for its contracting officers or its program managers expected to work on other transactions projects. By not establishing other transactions training requirements and schedules for its contracting and program staff to complete them, DHS may not be equipping its staff to fully understand and leverage the benefits of other transactions. We have previously reported on the importance of training and reported that leading organizations usually prioritize key processes, identify staff needing training, and establish requirements to ensure that the appropriate staff are trained. Furthermore, because S&T’s technical program personnel serve on details from other government agencies and have varying levels of experience with other transactions, appropriate training is key to help ensure that such staff uniformly and effectively use other transactions. DHS’s draft lessons learned report on other transactions states that it is critical to train contracting officers on aspects such as (1) the flexibilities associated with other transactions to help ensure the proper and optimal use of the authority, and (2) negotiating intellectual property (IP) rights, which can vary from project to project. The S&T Directorate plans an increasing number of mission programs that could use its other transactions authority, but DHS’s current contracting workforce may not be sufficient to manage this workload. DHS has relied on a small number of key S&T program personnel, who are experienced other transactions practitioners, to develop or approve solicitations. In fiscal year 2004, two of the S&T Directorate’s programs resulted in other transactions awards—Counter-MANPADS and Chem-Bio. In fiscal year 2005, the S&T Directorate could award other transaction agreements for at least eight additional programs, which could significantly increase its contracting workload because some programs could include multiple other transactions awards. (One S&T program could result in multiple awards using other transactions, contracts, grants, or cooperative agreements as the acquisition vehicle.) For example, S&T’s ongoing Chem-Bio project has resulted in 17 other transactions awards as of August 2, 2004. Figure 8 depicts the S&T Directorate’s project workload that could involve other transactions and the corresponding CPO in-house contracting support. DHS is currently developing a plan to address contracting workforce issues. Senior DHS officials told us that their strategy is to generally have in-house contracting staff award and administer all of the S&T Directorate’s other transactions and R&D projects by fiscal year 2006. Currently, CPO has dedicated six contracting staff—some of whom are warranted contracting officers dedicated to conducting other transactions—to support S&T acquisitions on a temporary basis. CPO and S&T Directorate officials told us that they intend to increase this staff support to 15 staff by the end of fiscal year 2005. As cited in DOD policy and DHS’s guidance, acquisition staff that award and administer other transactions need special skills and experience in business, market acumen, and knowledge of intellectual property issues. CPO and S&T Directorate officials told us that contracting officers with these skills and experience are difficult to find in the current acquisition workforce. In addition, they noted lengthy delays in DHS’s ability to process needed security clearances for these staff, which caused some contracting officer candidates to accept positions elsewhere. DHS’s challenges in developing its acquisition workforce are similar to other federal agencies’ experiences in managing attrition and retirements affecting their acquisition workforces. As a result, DHS will continue to rely on other agencies for contracting support until the end of fiscal year 2006. For example, for its Chem-Bio other transactions project, the S&T Directorate is using DOD’s U.S. Army Medical Research Acquisition Activity for contracting support. According to DHS’s S&T Directorate and CPO officials, the offices are in the process of drafting a Memorandum of Understanding regarding the contracting personnel that CPO will dedicate to support the S&T Directorate’s projects. DHS included nontraditional government contractors in its two initial other transactions projects. But DHS is not capturing knowledge learned from these acquisitions that could be used to plan and execute future projects. The S&T Directorate has conducted outreach to engage nontraditional government contractors in its early projects, including briefing industry associations, setting up a Web site to facilitate contractor teaming, and conducting project-specific workshops. However, the S&T Directorate does not systematically capture and use knowledge learned from its acquisition activities for use by program staff. The S&T Directorate’s Counter-MANPADS and Chem-Bio projects included nontraditional government contractors in all of the initial awards at the prime and subcontractor levels. For example, in February 2004 DHS made three Phase I awards for the Counter-MANPADS project to contractor teams led by BAE Systems, Northrop Grumman, and United Airlines (a nontraditional contractor). BAE Systems and Northrop- Grumman, which are traditional contractors, included nontraditional contactors on their teams. Nontraditional government contractors serve significant roles in the Counter-MANPADS and Chem-Bio projects, such as leading the aircraft integration team incorporating the counter measure technology with commercial aircraft in the Counter-MANPADS project. Table 3 shows the composition of the Counter-MANPADS project contractor teams. An intent of Congress in granting other transactions authority to DHS was to attract firms that traditionally have not worked with the federal government. The use of other transactions may help attract high-tech commercial firms that have shied away from doing business with the government because of the requirements mandated by the laws and regulations that apply to traditional procurement contracts. According to DHS officials, early DHS other transactions award recipients, and industry association officials, two primary barriers to nontraditional contractors pursuing government contracts are: Intellectual Property (IP) Rights. IP rights refer to access to information or data used in the performance of work under a contract. We previously reported on contractors’ reluctance to pursue government R&D funding because the FAR’s IP provisions could give the government rights to certain information and data, which could decrease their businesses’ competitive advantage. For example, a nontraditional contractor without prior federal R&D contracting experience under the FAR who won one of DHS’s early other transactions awards told us that the flexibility to negotiate IP rights was critical to its participation because it allowed the contractor to negotiate IP rights favorable to its company. Cost Accounting Standards (CAS). CAS are the federal government’s accounting requirements for the measurement, assignment, and allocation of costs to contracts. According to contractors and procurement experts outside the government that we interviewed, nontraditional firms generally do not operate accounting systems in compliance with the federal government’s CAS, and developing such systems can be cost prohibitive. For example, a nontraditional contractor who won an initial DHS other transactions award told us developing a CAS-compliant accounting system would have required the establishment of a subsidiary firm to perform its accounting functions. DHS’s Science and Technology Directorate used extensive outreach to attract nontraditional contractors to participate in its projects. It briefed industry groups, conducted project-specific workshops, and used Web sites to publicize the agency’s needs. In the fall of 2003, shortly after the S&T Directorate was established, its HSARPA sponsored separate 1-day briefings to business and academia to help engage the private sector in R&D to satisfy DHS’s needs. These sessions were designed to gather input on best practices to optimize the solicitation, procurement, and program execution aspects of its projects. For example, at these sessions DHS officials presented information on its organization and approach to program management, such as the roles and responsibilities of agency officials and managers; investment and research priorities; available solicitation methods, such as requests for proposals, broad agency announcements, and research announcements; and possible procurement vehicles, including FAR contracts, grants, cooperative agreements, and other transactions. The S&T Directorate supplemented these sessions by conducting project- specific industry workshops and other outreach events. For example, in October 2003, the S&T Directorate held an industry day session for its Counter-MANPADS project. The session provided participants with background on the project, the structure of the DHS organization that would manage it, the program’s goals and schedule, and an overview of other transactions for prototypes. DHS presented detailed information on the nature and requirements of other transactions agreements, firms that may qualify as a nontraditional contractor, and laws that would not apply to other transactions. In addition, the S&T Directorate gave an overview of the other transactions solicitation process to be used for the project, which covered topics such as the white paper process, oral presentations, and the proposed other transactions agreement. DHS attracted almost 200 participants to this event—approximately 85 percent of whom were from industry. Also, in September 2003, DHS held a bidders conference for its Chem-Bio project where it described its technical requirements and the solicitation process for this project. According to an agency official, the conference gave DHS the opportunity to obtain input from the private sector on the technical aspects of its solicitation and to answer participants’ questions about the solicitation. Similarly, DHS held technical workshops for projects that may result in other transactions awards, such as those intended to counter threats from truck, suicide, and public transportation bombs and to design cyber security systems. DHS also created and used Web sites to publicize its activities and procurement needs. For example, DHS created the “DHS—Open for Business” site, which centralizes information on its contracts, grants, small business opportunities, and R&D efforts. According to DHS, this site is intended to complement governmentwide portals such as Federal Business Opportunities, known as FedBizOpps. In addition, HSARPA created a solicitation and teaming portal Web site to help attract firms (www.hsarpabaa.com). On this site, HSARPA announces its current project solicitations and offers a teaming portal where contractors can learn about possible partners to bid on DHS work. This site also contains links to other DHS programs to facilitate industry participation in its projects, such as its Small Business Innovation Research program, which DHS established in December 2003 to increase the participation of innovative and creative small businesses in its R&D programs. Also, the site has a mailing list function where contractors can register to receive electronic e-mail notices of upcoming HSARPA solicitations. We found that industry’s views vary on the effectiveness of DHS’s outreach efforts. Some contractors and industry associations we interviewed said these outreach efforts are having a positive impact on the procurement process. For example, an industry association head in the technology field told us that DHS’s use of Broad Agency Announcements and other flexible solicitation methods to publicize its technology and research needs may help to attract nontraditional contractors. Officials from two technology associations told us commercial firms that traditionally do not work with the federal government believe that government officials have preconceived ideas of exactly what technology they need and which contractors they want to work with. However, one of the officials stated that DHS’s use of the BAA process demonstrates to industry that the agency desires to hear all the possible technology solutions that may meet its needs. Other industry officials believed that DHS’s outreach actions could be improved, for example, if DHS took additional actions to inform industry that it has other transactions authority and developed a more user-friendly process to attract broader interest in its projects. Representatives of a large industry association we interviewed were not aware that DHS possesses other transactions authority and said if this fact were more widely known, it could increase industry’s interest in working with DHS. In addition, representatives of some small companies told us that the fee DHS charges to attend its outreach events could pose a barrier to attending them. Also, several contractors we interviewed told us that DHS’s teaming portal site is a good idea in concept but found it cumbersome to maneuver in the automated system. However, two of the nontraditional contractors we interviewed that received a DHS other transactions award used this site to help identify industry partners for their team. The S&T Directorate’s capacity to build and sustain knowledge for use in its future acquisitions involving other transactions is in the early stages of development but the Directorate has not yet developed policies or procedures to ensure that program and portfolio managers are capturing and assessing critical information and knowledge gained from its acquisition activities, including the use of other transactions, for use in future projects. Knowledge gained from prior other transactions acquisitions on issues ranging from seeking nontraditional government contractors to assessing project outcomes is key to planning future projects. A knowledge base of important lessons learned from outreach to private-sector firms, the acquisition process, and the design and execution of projects can facilitate the work of program and acquisition staff in planning future acquisitions using other transactions authority. DHS’s draft guidebook on other transactions for prototypes acknowledges the importance of documenting knowledge gained during the acquisition process for planning future other transactions acquisitions. We have also reported on the benefits of agencies using systematic methods to collect, verify, store, and disseminate information for use by their current and future employees. Our previous work has identified the importance of setting goals and identifying performance indicators that will inform federal agencies of whether they have achieved the performance they expected. S&T Directorate officials acknowledge the need to create a “corporate memory” function to provide future staff with access to information and knowledge obtained from its current projects and to incorporate such knowledge into its training efforts. The S&T Directorate’s workforce-staffing strategy necessitates that it have a policy and procedure in place to capture employees’ knowledge. Under its current workforce strategy, the S&T Directorate’s technical staff serves regularly rotating term appointments that typically do not exceed 4 years. This approach, according to S&T Directorate officials, is designed to promote the influx of leading-edge science and technology skills to DHS. S&T Directorate officials recognize that these rotations can place a burden on its contracting staff that plan, conduct, and manage highly specialized other transactions programs by having to continually guide new technical staff on the workings of the process. However, these officials have told us that there is no policy or process yet in place to ensure that the capturing and sharing of such knowledge occur. The S&T Directorate’s current practices for capturing knowledge gained from its acquisition efforts vary. In establishing its structure the S&T Directorate drew its technical staff from a variety of organizations, each of which used different acquisition approaches. Consequently, portfolio managers and program managers we spoke with did not consistently capture knowledge acquired. In addition, the S&T Directorate’s efforts to assess the effectiveness of its industry outreach activities involving the use of other transactions authority are not rigorous enough to capture information needed in planning future outreach. By not assessing its activities, S&T cannot be assured that it is reaching the broadest base of firms to provide technological solutions for the S&T Directorate’s needs. Without policies and a supporting process to capture the experiences and knowledge gained from its acquisition efforts, DHS may not capitalize on lessons learned from its early use other transactions. Given the S&T Directorate’s planned rotations of its key technical staff, building and maintaining institutional knowledge are critical to ensuring that new S&T Directorate staff have the ability to quickly learn about previous other transactions acquisitions when designing future projects. For example, the S&T Directorate invests funding and staff resources to advertise its organization and projects to help attract firms but does not fully assess the effectiveness of these activities for use in planning future projects. Figure 9 depicts the S&T Directorate’s acquisition process and a possible knowledge management function for collecting, storing, and sharing information. Recognizing the flexibility offered by other transactions authority to tap nontraditional sources to meet its needs for new homeland security technologies, DHS moved quickly to use this authority to build its science and technology capabilities. In doing so it signaled its seriousness about using other transactions authority to advance its strategic objectives. However, to sustain its progress made to date DHS needs to take additional actions, such as completing the necessary foundation of policies and procedures, including guidance on audit provisions, and ensuring that it has an adequately trained and staffed acquisition function. Furthermore, given its strategy of using regularly rotating term appointments in staffing its S&T programs, long-term success will depend on the department’s ability to harness its institutional knowledge on other transactions. DHS’s ability to identify, prioritize, and access the most promising research and technologies in the future will depend, in part, on its ability to capture and make accessible critical knowledge on the agency’s use of other transactions authority to ensure that it is accessing the broadest and most appropriate technologies in the marketplace. By completing its foundation for using other transactions and creating a means for capturing key knowledge and measuring performance, DHS will be better prepared to capitalize on the full potential of the private sector to provide the innovative technology it needs to secure the homeland. To promote the efficient and effective use by DHS of its other transactions authority to meet its mission needs, we have three recommendations for the Secretary of Homeland Security. The Secretary should direct the Under Secretary for Management and the Under Secretary for Science and Technology to establish guidance on when it is appropriate to include audit provisions in develop a training program for DHS staff in the use of other transactions to help ensure the appropriate use of this authority, and capture knowledge obtained during the acquisition process for use in planning and implementing future other transactions projects. We provided a draft of this report to DHS for its review and comment. DHS provided written comments generally agreeing with the facts and conclusions expressed in the draft report. DHS agreed with our first two recommendations and noted that it is already working to address them. Regarding our recommendation that DHS capture knowledge obtained during the acquisition process for use in planning and implementing future projects that could use other transactions, DHS agreed with the utility of retaining such historical information and “lessons learned” about its procurement activities, acquisition planning, execution, and program management activities. DHS stated that while no formal system for assembling such information is in place within the organization, this information is being monitored. However, DHS sought further clarity about the types of information we recommend it retain and to what end it is to be used. Based on our review of DHS’s early use of its other transactions authority, we believe that systematically capturing, analyzing, and making readily available knowledge about using this authority is needed. We recognize that the S&T Directorate’s work and focus cuts across various technology areas, which are continuously evolving, making each solicitation’s requirements unique. We also recognize and appreciate DHS’s concern over the administrative aspects of collecting, maintaining, and monitoring this information over time. We believe, however, that DHS can build upon its current informal system of monitoring acquisition information. Specifically, we think DHS could collect and disseminate information on what has worked and not worked in areas such as outreach efforts. This information could be useful for future other transactions projects. For example, if DHS wants to ensure that its outreach attracts firms who have a recognized core competency desired by S&T, including nontraditional government contractors, it may want to use forms of outreach that have been used successfully in the past. We believe this information could be particularly important given the S&T Directorate’s workforce-staffing strategies, under which its technical staff serves regularly rotating term appointments. DHS also provided technical revisions to our draft report, which we incorporated as appropriate. The department’s comments are reprinted in appendix I. We are sending copies of this report to other interested congressional committees; the Secretaries of Homeland Security and Defense; and the Director, Office of Management and Budget. We also will make copies available to others on request. This report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-4841, or John K. Needham, Assistant Director, at (202) 512-5274. Other major contributors to this report were Rachel Augustine, Eric Fisher, Alison Heafitz, John Krump, Robert Swierczek, and Anthony J. Wysocki. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | The Homeland Security Act of 2002 authorized the Department of Homeland Security (DHS) to establish a pilot program for the use of acquisition agreements known as "other transactions." Because they are exempt from many of the requirements that apply to government contracts, other transactions can be useful in acquiring cutting-edge technologies from entities that traditionally have declined to do business with the government. The act requires GAO to report to Congress on the use of other transactions by DHS. To fulfill this obligation, GAO (1) determined if DHS has developed policies and established a workforce to manage other transactions effectively and (2) evaluated how effectively DHS has used its other transactions authority to attract nontraditional government contractors. The Department of Homeland Security has issued policy and is developing a workforce to implement its other transactions authority, but the department's policies need further development and its contracting workforce needs strengthening to promote the successful use of the authority in the future. Soon after it was established, DHS issued other transactions solicitations using some commonly accepted acquisition practices and knowledge-based acquisition principles. Subsequently, the department issued a management directive and drafted guidance for using other transactions, loosely modeled on the practices of the Department of Defense (DOD), one of several other agencies with other transactions authority and the one with the most experience with using these agreements. Unlike DOD, however, DHS has not specified in its policies or guidance when its contracting staff should consider the use of independent audits to help ensure, for example, that payments to contractors are accurate. Similarly, DHS has not established training requirements to aid staff in understanding and leveraging the benefits of other transactions. The DHS contracting workforce is limited in size and capacity, which could impede the department's ability to manage a potential increase in its other transactions workload. DHS is taking steps to enhance the capacity of its contracting workforce. The DHS Science and Technology Directorate included nontraditional government contractors in its first two other transactions projects. The Directorate engaged in extensive outreach efforts, such as conducting briefings on its mission and research needs to industry and academic institutions and using a number of Web-based tools to publicize its solicitations. But DHS has not yet developed mechanisms to capture and assess the knowledge gained about the use of other transactions. As a result, DHS may not be able to leverage information from current projects for use in future solicitations that use other transactions. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
The Smithsonian is a unique entity possessing a dual nature, described by former Chief Justice Taft, the Chancellor of the Board of Regents in 1927, as a “private institution under the guardianship of the Government.” Initially established by Congress in 1846 to carry out the federal government’s trust responsibilities under the bequest of James Smithson, the Smithsonian is a privately endowed institution, largely funded by federal appropriations and governed by a Board of Regents composed of federal officials and private citizens. In fiscal year 2005, the Smithsonian had operating revenues of just under $1 billion and about 6,000 employees. Approximately 75 percent of the Smithsonian’s operating revenues were from federal sources—60 percent from direct congressional appropriations and 15 percent from government grants and contracts— and the remaining 25 percent was from restricted and unrestricted trust funds. Restricted trust funds include gifts, grants, and earnings on endowments from individuals, foundations, organizations, and corporations that specify the purpose of the funds. Generally, they support a particular exhibit or program, or are used to manage the collections or support research projects. Sources of unrestricted trust funds include investment income, earnings on unrestricted endowments, membership programs, and net proceeds from business activities. Unrestricted trust funds can be used to support any Smithsonian activity or need. Revenue generated by the contract with Showtime will be unrestricted trust fund revenue. The Smithsonian has about 136.5 million objects in its collections, but only a small percentage of the objects are on display in the museums at any given time. The museums recorded about 24 million visits in fiscal year 2005, which was down significantly from the 33.7 million visits recorded in fiscal year 2001. In the years since the 9/11 terrorist attacks, visitation has fluctuated around 20 million to 25 million annually. While most of the Smithsonian’s exhibited collections are in or around Washington, D.C., Smithsonian content was viewed by 109 million visitors to its 447 Web sites in fiscal year 2005—12 million more Web visitors than in 2004. In addition, Smithsonian magazine has a readership of more than 7 million monthly. Smithsonian officials saw the new channel as an opportunity to bring more Smithsonian content to a television viewing audience. A Smithsonian directive on collections management states that the Smithsonian will provide reasonable access to its collections and collections information, consistent with its stewardship responsibilities. Access, as defined by this directive, is the opportunity for the general public, scholars, and Smithsonian staff to utilize the diverse collection resources of the Smithsonian. To carry out its mission “for the increase and diffusion of knowledge among men,” the directive states that the Smithsonian promotes access to its collections and associated information through research opportunities, traditional and electronic exhibitions, educational programs and publications, reference systems, loan exchange of collections, and electronic information services. Smithsonian directives allow access fees to be charged and also allow restrictions to accessing collections and collections information due to resource limitations, object availability, intellectual property rights, applicable restrictions, and preservation constraints. The Board of Regents retains ultimate oversight authority and fiduciary responsibility for Smithsonian collections. The Smithsonian’s statutory charter gives broad discretion in the conduct of its affairs, including managing the Smithsonian’s authority to enter into contracts. In 1846, Congress authorized the Board of Regents to conduct the “business of the Institution.” The Board of Regents has the authority to accept funds from private sources, use the interest earned on the trust fund to further the Smithsonian’s purpose, and acquire, display, restore, loan, sell, or otherwise dispose of items of historical or artistic interest. These authorities have been delegated to various individuals within the Smithsonian, including the Deputy Secretary/Chief Operating Officer of the Smithsonian, SBV’s Chief Executive Officer, and the Office of General Counsel. The new venture is tasked with creating new programming services, the first of which is expected to be a digital on-demand television channel— Smithsonian on Demand. Digital television is a new television delivery technology that uses digital technology to capture images and sounds, in contrast to traditional analog television service. Digital television allows a broadcaster to offer multiple programs (multicasting) or a single program of high definition television. Images and sound are captured using digital technology, providing a better picture resolution, a wider screen, CD- quality sound, and better color rendition. This technology represents the most significant development in television technology since the advent of color television in the 1950s. In February 2006, the Digital Television Transition and Public Safety Act of 2005 established a deadline of February 17, 2009, for the complete transition from analog television to digital television. A full-power television broadcast license that authorizes analog television service may not be renewed to authorize such service for a period that extends beyond February 17, 2009. In February 2005, we reported that about 86 million households view television via a cable service or have a subscription to a direct broadcast satellite service, and approximately 21 million households rely exclusively on free over-the- air broadcasting. As of September 2006, the new venture had developed a list of 74 potential programs for the new channel’s initial season. The list included (1) 15 “mission critical” programs selected by the new venture from a list of 30 potential programs proposed by the Smithsonian; (2) 36 programs that the new venture was working on with individual Smithsonian units and a few existing programs that contain Smithsonian content that the new venture proposed acquiring the rights to; and (3) 23 programs to be acquired that contain no Smithsonian content but feature content with which the Smithsonian is generally associated, such as arts and culture, history, and science. On or around June 1 of each calendar year, during the first 29 years of the contract, the Smithsonian will provide the new venture with 30 or more written program ideas. The new venture is required to select at least one-half, but no more than 15 of the program ideas to develop, produce, and exhibit during the next calendar year. The Smithsonian also generally has the right to review rough and final program cuts to ensure that the program’s content is factually, historically, and scientifically accurate and in compliance with the other quality control requirements in the contract, including consistency with the high standards, quality, and image of the Smithsonian. While the Smithsonian has not earmarked how the revenue from the new venture will be spent, it has a number of pressing funding needs. For example, in April 2005, we reported on the deteriorated condition of several of the Smithsonian’s facilities. At that time, the Smithsonian estimated that its planned capital and maintenance projects for 2005 through 2013 would cost about $2.3 billion. However, we cautioned that this estimate could grow because it was largely based on preliminary assessments. We also noted that the Smithsonian’s historical funding levels, from federal appropriations and trust funds, would be insufficient to cover the facility projects planned for 2005 through 2013. We recommended that the Smithsonian establish a process for exploring funding options with the Administration and the Congress, leading to the development and implementation of a strategic funding plan to address the Smithsonian’s revitalization, construction, and maintenance needs. The Smithsonian agreed with our findings and recommendation and informed us that Smithsonian’s Board of Regents has established an ad hoc committee to identify various ways to raise additional funds for the Smithsonian. The committee’s work is ongoing. In entering into the contract with Showtime, the Smithsonian generally followed its internal guidelines regarding competition, oversight, and conflicts of interest. Regarding competition, only SBV’s limited written contracting guidance, which promotes the use of commercial business practices and consultation with the Office of General Counsel, was applicable to the solicitation of a strategic business partner in this case. SBV officials applied a general principle of commercial business practices—fostering competition—by initially reaching out to multiple major media companies, and they relied heavily on consultation with the Office of General Counsel to guide their actions. In addition, the Board of Regents has broad oversight responsibility for all Smithsonian programs and activities, including the establishment of any new program or activity. The Board of Regents exercised this authority over SBV by periodically reviewing documents related to the contract terms and approving the final contract terms. SBV’s Board of Directors acts under the authority granted to it by the Board of Regents to provide advice to the chief executive officer on a variety of issues. Finally, the potential conflict of interest that arose during the contract negotiations was disclosed and reviewed in accordance with the Smithsonian’s Standards of Conduct for employees. In adhering with the commercial business practice of fostering competition, SBV reached out to 18 major media companies when they began exploring the idea for a television venture in the spring of 2002. This initiated a 3-year search process for a strategic business partner and a final deal (see fig. 1). In August 2002, one company expressed interest in proceeding beyond initial discussions toward developing a more definitive structure and offered terms that the Smithsonian found favorable. For the next 9 months, SBV and the media company negotiated a term sheet and letter of intent. While SBV and the company were negotiating the final terms of the agreement, the company’s board declined to proceed with the investment, and the deal fell through. In the final months of 2003 and early months of 2004, the Smithsonian had conversations with a second company, which also ended without reaching an agreement because the company became concerned that developing a new Smithsonian channel may undercut its existing channel. Soon after this, the Smithsonian was approached by, and had preliminary discussions with, several companies that expressed renewed interest. Finally, in August 2004, the Smithsonian began negotiations with Showtime because its initial investment offer was the most favorable. The two entities engaged in serious negotiations for more than a year to finalize the contract; the final terms of which are comparable with, or in some cases more favorable than, the deal that Smithsonian had previously negotiated in 2003. Smithsonian’s Board of Regents and SBV’s Board of Directors provided oversight of the activities regarding the television venture in accordance with their respective bylaws. The Board of Regents’ meeting minutes show that the board was periodically informed of SBV’s efforts to find a strategic business partner. Furthermore, SBV’s Board of Directors’ meeting minutes show that it was also engaged in the process (see fig. 1). SBV’s Chief Executive Officer presented a business plan for the proposed venture to the Board of Regents in June 2002. In May 2003, the Board of Regents authorized the Secretary to enter into an agreement for the formation and operation of a television channel with the first company. SBV provided interim status updates to both its Board of Directors and the Board of Regents on its efforts to secure another partner for the initiative between the time that the first deal fell through and when it began negotiating with Showtime. The SBV Board of Directors forwarded a motion to the Secretary recommending that SBV finalize agreements with Showtime on terms as presented by the Chief Executive Officer. In May 2005, the Board of Regents signaled its agreement and authorized the Executive Committee to empower the Secretary to enter into definitive agreements with Showtime to form a joint venture. Six months later, the Board of Regents’ Executive Committee approved the final terms of the agreement. A potential conflict of interest that surfaced during contract negotiations was handled according to the Smithsonian’s Standards of Conduct. Prior to working for the Smithsonian, SBV’s Chief Executive Officer helped establish the Sundance Channel, a company in which Showtime is one of three owners. As part of that endeavor, he received an equity interest in the Sundance Channel from one of the two non-Showtime owners and retained that interest when he came to the Smithsonian. During the Smithsonian’s negotiations with Showtime, one of the owners of the Sundance Channel—through which the SBV Chief Executive Officer had his interest in the channel—was in negotiations to sell some of his interests, with Showtime and the other owner of the Sundance Channel being potential buyers. SBV’s Chief Executive Officer disclosed this potential conflict of interest to the Smithsonian’s Ethics Officer. The Ethics Officer reviewed the disclosure and concluded that the interest did not represent a conflict under the Smithsonian’s Standards of Conduct or a prohibited financial interest under federal law because SBV’s Chief Executive Officer did not have a general partnership interest in the Sundance Channel and was not participating in negotiations concerning the sale of interests in the channel. SBV’s Chief Executive Officer confirmed that he had no role, and did not participate, in the sale negotiations involving the Sundance Channel. GAO’s Ethics Officer reviewed the documentation and the Smithsonian’s decision and concurred with the findings. The Smithsonian granted the new venture a 30-year, semiexclusive right to produce and commercially distribute certain audiovisual programs using Smithsonian trademarks and/or content in exchange for national television exposure and a new revenue stream. According to a Smithsonian official, the goal was to extend the reach of the Smithsonian nationwide by participating in the development of programming about the Smithsonian’s national collections and its research. The new channel is projected to reach more than 31 million households by 2010, which the Smithsonian hopes will increase its brand recognition and have a synergistic effect on other revenues by increasing memberships, merchandise sales, and concession sales through increased visitation to the museums. In soliciting a suitable business partner, the Smithsonian wanted to find a company that would support the Smithsonian’s mission and have the financial and technical ability to develop new programs and launch a new digital television channel. Showtime was attracted to the vast amount of Smithsonian content and the Smithsonian’s good reputation and widely recognized brand name. Both parties characterized the contract as unique and the year-long negotiations as long and hard fought. Terms of particular interest have been the contract’s length, opportunities for contract termination, and the public’s ability to access and use the collections, in contrast with the rights the Smithsonian retains over programming content, the revenue Smithsonian will receive, and the expectation of increased exposure to the Smithsonian brand. The 30-year contract term raised many questions with members of Congress and the public because in relation to other contracts, particularly those that the Smithsonian has entered into for other business activities, it is unprecedented. However, according to officials involved in the contract negotiations, Showtime’s joint venture contracts are normally in perpetuity. Generally––and in this case––this is because starting a new channel is a high-risk endeavor that requires a significant investment. Showtime is investing 100 percent of the initial capital in the partnership and is therefore accepting all of the financial risk of the new venture. While Showtime agreed to a shorter term than most of its other media contracts, it has the right, through the new venture, to terminate the contract at certain intervals with or without cause. The Smithsonian may not terminate the contract without cause. However, the Smithsonian negotiated performance benchmarks in the contract that the new venture must meet. The Smithsonian may terminate the contract if the new venture fails to (1) launch its first channel by a specific date, (2) invest a minimum amount of money in programming to be exhibited on the new channel within an initial phase of the contract, and (3) earn a specific amount of average gross revenues by a specific date. Another question raised has been continued access to and use of the collections by the public. The contract contains no restrictions on public access to the collections. However, the noncompete clauses generally prohibit the Smithsonian from entering into agreements or engaging in activities that would compete with the new venture. Of particular concern is that PBS is identified as a directly competitive service. Additional noncompete clauses provide that the Smithsonian must: cease operation of a Smithsonian Web portal called Smithsonian.tv, which was an aggregation of programming available through the Smithsonian’s Web site; not allow others to produce programs of The Smithsonian Associates’ “Campus on the Mall” events; and not provide any other provider of audiovisual programming with pan- Institutional, “priority” guided access to Smithsonian content similar to that provided to the new venture. In return, the Smithsonian negotiated a number of exceptions to these noncompete clauses, which are designed to eliminate or minimize their impact on the Smithsonian’s normal programming activities. For example, nonrecurring news and public affairs programs; academic and curriculum- based programs; and in certain cases scholarly programs, were all deemed not to compete. The Smithsonian was also able to negotiate an exception that allows it to produce a fixed number of programs annually with other entities (one-offs). Initially the Smithsonian is allowed six one-offs annually, but the number is reduced to five when the new channel is available to at least 25 million households. There are a number of other detailed parameters regarding the one-off programs. will not permit any Scholarly Program to be exhibited or exploited by a Commercial Distributor unless first offers such Scholarly Program to the for no additional charge to the , for exhibition and/or distribution by the . The provision states that before scholarly programs can be distributed by a commercial distributor, they must first be offered to the venture, but the language is silent about whether it applies only to Smithsonian-generated scholarly programs, or if it also applies to third-party generated scholarly programs. Smithsonian officials stated that it was their intent and understanding that the provision would not apply to third party-generated programs. In contrast, Showtime officials stated that it was their intent to cover the unlikely possibility, however remote, that a scholarly program would be marketed commercially after it was distributed for scholarly purposes. According to Showtime’s interpretation, even if the idea for the program was generated by a third party, the Smithsonian would be required to acquire the commercial distribution rights to this program and offer them to the new venture at no cost or not allow the third party to commercially distribute the program. After we raised this issue during our review, the Smithsonian and Showtime reached an agreement stating that the Smithsonian is not required to offer third-party generated scholarly programs to the venture, but it does stipulate that if such program is commercially distributed, it will be counted as a one-off. In exchange for the concessions made by the Smithsonian and the rights granted to the new venture, the Smithsonian also received a new revenue stream that consists of four components: (1) minimum annual payments starting at $500,000 for the early years and growing to millions of dollars per year as the contract progresses; (2) a share of revenues to the extent that the share exceeds the minimum annual payment; (3) an initial 10 percent equity interest in the venture; and (4) an option to acquire an additional equity interest. The annual payments will total a minimum of $99 million over the 30-year term of the contract. The net present value of the minimum required annual payments is $45 million. However, a significant amount of the contract’s value is more likely to be in the revenue sharing and equity interest components. In addition to the minimum annual payments, the Smithsonian is entitled to a percentage of gross revenues to the extent it exceeds the minimum annual payment. The Smithsonian has the right to sell its equity interest to Showtime for cash for a period after each of the 8th, 10th and 12th anniversaries, subject to certain restrictions. If the Smithsonian exercised this right in year 10, it estimates that the cumulative value of the contract would be more than $150 million, assuming that it acquired the additional equity in year 5 and sells its total equity in year 10. Of the total estimate, only a small portion would be from the minimum annual payments. Since the contract became effective in January 2006, the Smithsonian has been working to put in place policies and procedures necessary to implement the contract, but the information it has provided about the contract’s impact to interested parties has been insufficient. The contract was signed on Thursday, December 22, 2005, and it became effective 10 days later on January 1, 2006. The Smithsonian did not have in place the policies and procedures necessary to implement the contract when it became effective on January 1, 2006, and it did not publicly announce the creation of the new venture with Showtime until March 9, 2006. As a result, decisions on some filming requests received in early 2006 were delayed until March 2006 when the Smithsonian established a central review committee in the Office of Public Affairs to review filming requests for compliance with the contract and began informing its PIOs about the changes to the filming application process. The news of the contract was first reported in The New York Times and The Washington Post on March 31, 2006, and April 4, 2006, respectively. These and subsequent newspaper articles expressed a number of concerns by filmmakers and other interested parties about the contract. In addition, in late April 2006, the Smithsonian received correspondence from Congress and a group of more than 200 filmmakers, producers, academics, and others expressing concerns about the lack of transparency in the Smithsonian’s process and their understanding of certain contract terms. The group noted that there has been an explosion in the creation of documentary films in recent years and that limiting the use of Smithsonian resources will have a chilling effect on creativity, and it argued that the contract violates the mission and purpose of the Smithsonian. In a separate letter to the Smithsonian, the American Historical Association expressed concerns regarding the secretive nature of the contract and the potential violation of the trust of Americans who have donated materials to which they believed the public would have free, open, equal, and nondiscriminatory access in perpetuity. In response to these concerns and growing criticism of the contract, the Smithsonian responded with letters and mounted a public affairs initiative. In April 2006, the Smithsonian issued a “Statement on Smithsonian on Demand,” and on May 4, 2006, it issued a fact sheet on Smithsonian on Demand. The Smithsonian also posted on its Web site a revised list of “Frequently Asked Questions about Filming at the Smithsonian Institution” along with a new filming application form. In response to congressional concerns, the Smithsonian provided a copy of the contract to Congress; and the Secretary of the Smithsonian, along with other Smithsonian staff, appeared before the House Committee on Administration on May 25, 2006, at a hearing about the contract. However, the information that has been disseminated has lacked the specificity necessary to dispel the concerns of interested parties, whether legitimate or based on misinformation; and it has, in some cases, failed to reassure them that the impact will be as limited as the Smithsonian has repeatedly asserted. To monitor the impact of the contract on filmmakers, the review committee that was established in March 2006 to review filming applications for compliance with the Smithsonian’s obligations under the contract developed a spreadsheet to track filming requests. The tracking spreadsheet includes basic information about each filming application, such as the name of the film, producer, distributor, date requested, proposed run-time of Smithsonian content, description of the program, and the review committee’s decision to approve or deny an application. While there is a place for the committee to record why an application was declined, the committee does not provide a detailed rationale for decisions in which a film request is either denied because it involved more than incidental use or approved as a one-off. Since the contract does not define the term incidental use, Smithsonian officials said it will be interpreted over time, in practice, by the precedents that the review committee will set with its decisions on individual filming applications. The vast majority of the filming applications involve minimal use of Smithsonian content, so the rationale used for decisions on these applications is not particularly useful in defining what constitutes incidental use. Conversely, the handful of decisions each year in which the review committee determines that more than incidental use is being requested by a filmmaker will be useful in clarifying the Smithsonian’s interpretation of incidental use. If the Smithsonian does not document these key decisions in detail, it may be difficult to provide useful information to filmmakers about what constitutes incidental use and ensure accountability with consistent decision making over the term of the contract. Some of the key characteristics of effective and efficient government programs are transparency and clear criteria that are consistently applied to ensure accountability. Similarly, the Smithsonian should have a process in place for reviewing filming requests that, to the extent possible, is transparent to filmmakers and that has clear criteria that are consistently applied over the term of the contract. However, the Smithsonian has not yet developed a mechanism or process to synthesize its decisions over time to provide filmmakers with additional guidance for their use in developing future filming requests. A review committee member mentioned that the committee directs filmmakers to the Smithsonian’s Web site for answers to “Frequently Asked Questions,” but it provides little information about Smithsonian on Demand. As a result, filmmakers and other interested parties remain uncertain about what factors the Smithsonian will use in its decision-making process regarding filming requests and in general about the impact of the contract. In August 2006, the Smithsonian established a separate Smithsonian on Demand Committee to coordinate the Smithsonian’s program concepts for submission to the venture, coordinate the Smithsonian’s review of programming content, and provide recommendations regarding content review and other administrative issues related to the contract. As of September 30, 2006, this committee had not had its first meeting to discuss the list of initial programs proposed by the new venture, so it is too early to assess how well this process will work. See figure 2 for a timeline summarizing some of the key events that have occurred during the first 9 months of the contract. In general, the Smithsonian has been working to implement the contract. The first priority was to get a process in place to resolve filming requests and now other policies and procedures are being implemented to deal with actual production issues with the new venture. While the Smithsonian on Demand Committee had not yet met to discuss the list of proposed programs as of September 30, 2006, committee members had seen the list and requested additional information on eight of the programs that the new venture is considering for possible exhibition on the new channel that do not involve any Smithsonian content. The provisions of the contract state that, the Smithsonian can comment on the factual, historical, and scientific accuracy of a program and whether the program is consistent with the reputation of the Smithsonian. In response to the Smithsonian’s comments on these topics, the new venture must either (1) edit the programs based on the Smithsonian’s comments or (2) choose not to exhibit the program. Again, it is too early to know how those discussions and negotiations will play out regarding these eight programs. The impact of the contract on interested parties is uncertain because it only has been in effect since January 1, 2006, and it is still too early to tell what the long-term impact of the contract will be. Specifically, we reviewed the impact, or potential impact, of the contract in three areas: (1) the direct impact on filmmakers during the first 9 months of the contract; (2) the projected impact on filmmakers based on the Smithsonian’s historical analysis of filming contracts for a 6-year period, from 2000 through 2005; and (3) other potential impacts raised by interested parties. During the first 9 months of the contract, from January 1, 2006, through September 30, 2006, two filming requests were denied due to the contract and four were approved as one-offs out of a total of 117 filming requests reviewed by the central review committee. However, it is too early to assess the total impact of the first year of the contract until the remaining 3 months of the year are concluded. Regarding the Smithsonian’s historical analysis of filming contracts, we found the Smithsonian’s analysis to be unreliable for the purpose of estimating the contract’s potential impact, primarily due to incomplete data and oversimplified selection criteria. For example, in some cases, projected run-time was not available on the spreadsheet used for the analysis. Moreover, the criterion used in the analysis was not the same as the criteria being used in practice by the review committee. In the analysis, the Smithsonian defined incidental use as less than 15 percent of projected run-time of Smithsonian content in the film. However, the review committee considers multiple factors about the proposed use of Smithsonian content in making the actual decisions about incidental use. Aside from direct potential impacts on filmmakers, larger concerns have been raised about damage to the Smithsonian’s image and goodwill. Concerns have been raised by filmmakers, curators, and other interested parties regarding the appropriateness of the Smithsonian limiting the use of the collections held in trust for the American public, as well as other potential impacts, including hampering collaborative partnerships and future donations. The direct impact to filmmakers during the first 9 months of the contract has been minimal because, for the requests it has wanted to pursue, the Smithsonian has been able to accommodate those involving more than incidental use of Smithsonian content within its annual allotment of one- offs. During the first 9 months of the contract, the Smithsonian’s central review committee reviewed 117 filming applications, of which 2 were denied due to the contract and 4 were approved as one-offs. The four one- offs were approved to air in various years—one in 2006, one in 2007, and two in 2008. See table 1 for the decisions on remaining applications through September 30, 2006. It is too early to assess the total impact of the first year of the contract until the remaining 3 months of the year are concluded. Some interested parties have raised the issue that having a cap on the number of one-offs will cause the Smithsonian to be more selective in the programs it approves. The Smithsonian has denied two requests due to the contract, even though there was still space available under its one-off allocation. The contract initially included separate limits for “branded” and “nonbranded” one-off programs. A branded program is defined by the contract as a program containing a Smithsonian mark in its title, in its main credits, or, under certain circumstances, in its end credits. The contract originally specified that the initial allotment of six one-offs annually could include no more than three branded and no more than three nonbranded programs. To obtain more flexibility under the contract, the Smithsonian recently reached an agreement with Showtime on new contract language that would eliminate the current requirement that no more than three one-offs can be nonbranded in any given year. Under this agreement up to the total annual allotment of one-offs could be nonbranded, but the number of branded one-offs would still be limited. In addition, during any time period in which the distribution of the new channel reaches 25 million households, the number of branded one-offs allowed is reduced from three to two, and the total annual allotment of one-offs is reduced from six to five. Furthermore, these two branded one- offs can only be exhibited via a broadcast outlet, which is defined as “free, over-the-air broadcast television networks and local television stations.” The initial business plan for the new channel projected that it would reach the threshold of 25 million households by 2008. If the Smithsonian’s projection for the distribution of the new channel is realized, the Smithsonian will only be able to approve three more one-offs for initial airing during 2008. On the basis of a historical analysis of filming contracts over a 6-year period from 2000 through 2005, the Smithsonian contends that it will be able to accommodate the same level of filming activity as it has in the past. However, we found the Smithsonian’s analysis to be unreliable for estimating the potential impact of the contract, primarily due to incomplete data and oversimplified selection criteria. In April 2006, the Smithsonian conducted an in-depth historical analysis of about 350 filming contracts from 2000 through 2005 utilizing information provided in a spreadsheet by the Smithsonian’s Office of Contracting, with input from the Office of General Counsel, to estimate the number of programs that contained more than incidental use of Smithsonian content. In some cases, the actual filming contracts were reviewed by Smithsonian staff to confirm and supplement the information in the spreadsheet. The following criteria were applied to the 350 filming contracts to identify programs with more than incidental use of Smithsonian content: news, public affairs, academic, curriculum-based, scholarly, and local access programs were excluded from the analysis; programs distributed exclusively on DVD/home video, as a streaming video or webcam or by a foreign distributor without a domestic partner were excluded from the analysis; and of the remaining programs, those projected to use Smithsonian content during more than 15 percent of the program’s total run-time were identified as using more than incidental use of Smithsonian content (i.e., 6 minutes of Smithsonian content in a 60-minute program would equal a run-time of 10 percent). Upon completion of this review, the Smithsonian initially determined that filming contracts for 17 programs involved more than incidental use of Smithsonian content over the 6-year period. This analysis has been a cornerstone of the Smithsonian’s assertion that its annual allotment of six one-offs, totaling 36 programs over 6 years, would more than accommodate future demand from filmmakers who wish to use more than an incidental amount of Smithsonian content. The Smithsonian later revised the number of programs on the list from 17 to 23, after asking its museums in June 2006 to provide any additional programs they thought contained more than incidental use that were not accounted for in the original analysis. The individual museums provided six additional contracts that neither the Smithsonian Office of Contracting or the Office of General Counsel had record of. When we attempted to replicate the Smithsonian’s analysis, we found several problems with the analysis, which led us to conclude that it is not a reliable measure of the contract’s potential impacts. Specifically, we found that the data used in the analysis were incomplete and the selection criteria were oversimplified. Calculating run-times of Smithsonian content was an integral part of the analysis, however run-times were not available for some of the entries in the spreadsheet. Also, some of the filming contracts could not be located to verify or supplement the information in the spreadsheet; and when the filming contracts were available, they did not consistently contain projected run-times for Smithsonian content. Furthermore, the run-times used in the analysis were projected run-times based on the filming contracts and not the actual run-times of Smithsonian content in the final programs. Examples of the oversimplified selection criteria include the following: The Smithsonian used a projected run-time of 15 percent or less of Smithsonian content as its definition for incidental use. However, this criterion is not being used in practice by the central review committee to make decisions about requests to film Smithsonian collections or staff. The central review committee told us that it has not defined the percentage of run-time in a program that would constitute incidental use, but it is instead using a combination of run-time and content to determine what constitutes incidental use. To illustrate the sensitivity of the analysis, using a run-time threshold of just 13 percent, a deviation of 2 percentage points, would add at least nine filming contracts to the list of programs that would have been affected by the contract. Programs distributed via the Internet were excluded from the analysis, but this distribution method may compete with the new venture’s activities under the contract. Therefore, at least one program distributed via the Internet should have been included in the analysis. Through our evaluation of the Smithsonian’s analysis, we found at least 6 additional programs that we believe the Smithsonian should have included on its list of 23, raising the total to at least 29 programs. According to the Smithsonian, all of the 29 programs were nonbranded programs. To estimate the potential impact of the contract, the 29 programs can be analyzed in two different ways—(1) in aggregate against the total number of one-offs allowed over a 6-year period, which could range from 30 to 36 programs and (2) on an annual basis against the annual allotment of five or six one-offs. By comparing the Smithsonian’s original result of 17 programs to a 6-year allotment of 30 to 36 one-offs, the Smithsonian asserted that the contract would have no major impact on outside filmmakers. However, comparing the revised figure of at least 29 programs to the 30 programs at the lower end of the one-off allotment indicates that it is much more likely that outside filmmakers may be impacted by the contract. The annual distribution of the 29 programs exceeded the annual limit of six one-offs in 1 year, and it exceeded the lower limit of five one- offs per year in 3 of the 6 years (see fig. 3). Regardless of the problems with the Smithsonian’s historical analysis, the underlying assumption of the analysis that the past demand for filming will be a good forecast of the future demand, may also be flawed. If the new channel is successful and there is an increased demand for programs featuring Smithsonian content, particularly as important historical milestones occur, the future demand may exceed that of the past. For example, one of the filmmakers with whom we spoke highlighted that 2008 will mark the 50th anniversary of the National Aeronautics and Space Administration (NASA), and that there is likely to be a number of requests to film at the National Air and Space Museum for programs commemorating the space program. Aside from direct potential impacts on filmmakers, larger concerns have been raised about damage to the Smithsonian’s image and goodwill. In the minds of stakeholders, these concerns have been exacerbated by the lack of information provided by the Smithsonian about the impact of the contract. Concerns have been raised by filmmakers, curators, and other interested parties regarding the appropriateness of the Smithsonian limiting the use of the collections held in trust for the American public for the direct benefit of a single commercial enterprise, as well as other potential impacts of the contract. Interested parties have also raised concerns and pointed to potential impacts of the contract that may not be directly related to filmmaking, including hampering collaborative partnerships with other entities, future donations, and future availability of Smithsonian material via the Internet. Specifically, A PBS member station official with whom we spoke indicated that the station regularly works with museums, such as the Smithsonian, and other entities to create well-known programming. Consequently it was troubling to the official when, in July 2006, a Smithsonian official declined the station’s request for the Smithsonian to be listed as a strategic partner on a definitive historical documentary series that it was producing, citing that the contract prohibited it from entering into such a partnership with the station. Recently, however, the station official indicated that the Smithsonian has reopened discussions with the station to collaborate on the effort. Individual donors have inquired about the terms of the Showtime contract and how these terms might affect the availability of their donations for use by filmmakers and the general public. While access to the Smithsonian collections has always been controlled and subject to individual donor agreements, limits pertaining to more than incidental use of Smithsonian content, including collections and staff, for the purposes of filming, is a new limitation resulting from the contract. Organizations such as the American Historical Association have expressed concerns that the contract may be a violation of the trust of generations of Americans who have donated materials to which they believed the public would have free, open, equal, and nondiscriminatory access in perpetuity. Some interested parties have raised questions about the loss of Smithsonian.tv, which was an aggregation of various Smithsonian programs, and the impact the contract may have on future digitization of the Smithsonian collections for access by the public via the Internet. The Smithsonian has said that the programs formerly aggregated on Smithsonian.tv are being moved to other pages of the Smithsonian Web site and that the contract will not affect its digitization efforts. The question of whether or not the Smithsonian’s contract with Showtime is in the best interest of the Smithsonian and the American public will only be answered after the passage of time, as events unfold. Moreover, the contract is final and is moving forward; as long as Showtime and the new venture abide by its terms and meet the performance benchmarks, the Smithsonian cannot terminate the contract. If the new channel does well, the Smithsonian could reap significant financial benefits through revenue sharing and the appreciation of its equity interest. If the channel does poorly, the Smithsonian would not lose any money directly because it did not invest any initial capital into the partnership; however, its image and goodwill could be damaged, and opportunities for making alternate use of Smithsonian content during the contract period may be lost. The Smithsonian recognizes that its public relations have suffered throughout the implementation of the contract, as evidenced by the numerous negative newspaper articles over the past year. While the Smithsonian provides Board of Regents meeting minutes to Congress, they are voluminous and lack tables of contents, and thus may not, by themselves, be the most ideal communication mechanism for alerting Congress to significant policy decisions made by the Smithsonian. Moreover, the Smithsonian did not conduct any additional congressional or public outreach to solicit input or provide information about the television venture concept prior to the contract becoming effective. As such, the Smithsonian lost opportunities to address concerns proactively, and it has instead had to address issues as they arise within the framework of the contract. We recognize the difficulty associated with trying to establish a clear definition of incidental use of Smithsonian content and understand that the parties to the contract made a conscious decision not to define it in the contract. In practice, the Smithsonian’s decisions on the hundreds of filming requests it receives each year, over time, will set the precedent for how the term is defined. However, the Smithsonian does not have a mechanism or process in place to (1) document those key decisions in detail, (2) synthesize those decisions over time into a record of precedents of what constitutes more than incidental use that could be used as guidelines for filmmakers submitting filming requests, and (3) communicate those guidelines to the filmmakers that need it. Without such a process, it may be difficult to provide useful information to filmmakers about what constitutes incidental use and ensure accountability with consistent decision making over the 30-year term of the contract. Consequently, filmmakers and other interested parties may remain uncertain about what factors the Smithsonian will use in its decision-making process regarding filming requests. To improve the implementation of the contract and increase the information available to interested parties, we recommend that the Secretary of the Smithsonian take the following two actions: fully document decisions for filming applications that are denied because they involve more than incidental use or are approved as one- offs to establish a record of precedents, which will define over time what constitutes incidental use and help to ensure consistent decision making by the review committee; update the “Frequently Asked Questions about Filming at the Smithsonian Institution” on the Smithsonian’s Web site to better describe what the contract means for filmmakers, especially as it relates to incidental use of Smithsonian content. GAO provided a draft of this report to the Smithsonian and Showtime for review and comment. The Smithsonian commented that it generally agreed with our findings and recommendations and will take actions to implement our recommendations. Showtime also generally agreed with the report and endorsed the Smithsonian’s comments. The Smithsonian’s and Showtime’s written comments are in appendixes III and IV, respectively. The Smithsonian and Showtime also provided joint technical comments, which we incorporated as appropriate. While the Smithsonian generally agreed with our findings and conclusions and intend to take actions to implement both recommendations, the Secretary of the Smithsonian commented on our observations regarding the Smithsonian’s historical analysis of filming contracts. Specifically, the Smithsonian believes that the historical data support its conclusion that the contract’s potential impact will be minimal and that the actual impact to date has been minimal as well. In addition, during the May 25, 2006, House hearing, the Secretary used the Smithsonian’s analysis to assert that under the contract, the Smithsonian had “almost double the capacity” necessary to accommodate future filming requests involving more than incidental use of Smithsonian content. We concluded that the Smithsonian’s historical analysis was not sufficiently reliable to support such an assertion. Notwithstanding any historical analysis, we agree that if the number of filming requests for more than incidental use of Smithsonian content averages around five per year, the Smithsonian will be able accommodate those requests. During the first 9 months of the contact there were six such requests—two were denied and four were approved as one-offs. We acknowledge that the direct impact on filmmakers to date has been minimal. However, because the 30-year contract has been in effect for less than a year, it is still too early to judge the potential impact that the contract may have on interested parties in the future. We are sending copies of this report to interested congressional committees, as well as the Secretary of the Smithsonian, and Showtime. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 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 V. We were asked to (1) evaluate the extent to which the Smithsonian Institution (Smithsonian) followed its internal guidelines with respect to competition, oversight, and protecting against conflicts of interest when negotiating the contract with Showtime Networks Inc., (Showtime); (2) identify what the Smithsonian gave up and received in return under the contract; (3) evaluate the Smithsonian’s implementation of the contract; and (4) identify what, if any, impacts the contract has had on outside parties. To evaluate the extent to which the Smithsonian followed its internal guidelines for competition, oversight, and conflicts of interest, we obtained and reviewed bylaws and meeting minutes for the Smithsonian’s Board of Regents and Smithsonian Business Venture’s (SBV) Board of Directors, documentation related to a potential conflict of interest, and Smithsonian guidelines regarding contracting and conflicts of interest. We also interviewed the Smithsonian and Showtime officials involved in negotiating the contract. To evaluate the extent to which the Smithsonian followed its guidelines regarding competition, we analyzed information from the boards’ meeting minutes and conducted interviews to understand the process by which the Smithsonian developed and solicited the on- demand television concept to potential partners and compared that with SBV’s contracting guidelines. Regarding board oversight, we reviewed meeting minutes from both boards to determine the frequency and extent of board involvement in the process. Finally, regarding conflicts of interest, the GAO Ethics Officer reviewed the Smithsonian’s Standards of Conduct in effect during the time of the negotiations, the SBV’s chief executive officer’s disclosure of a potential conflict, and the Smithsonian Ethics Officer’s opinion regarding the potential conflict. To determine what the Smithsonian gave up and received in return, we reviewed the contract and other Smithsonian documents such as existing directives governing access to the Smithsonian collections. We also interviewed Smithsonian and Showtime officials who were involved in the contract negotiations to determine each party’s interpretation of certain contract provisions. We also attempted to evaluate the reasonableness of the contract’s term in relation to its economic provisions by comparing the Showtime contract with those of a similar nature, but were not able to identify suitable analogies. We were, however, able to obtain information on typical media contract lengths and provisions through interviews with media industry experts. Finally, we conducted an economic analysis to determine the net present value of the minimum annual payments. To evaluate how the Smithsonian has implemented the contract, we reviewed relevant Smithsonian documents and interviewed Smithsonian staff that have been involved with implementing changes resulting from the contract. Specifically, we obtained and analyzed the Office of Public Affairs review committee’s spreadsheet that is used to track filming requests to determine the total number of filming applications the Smithsonian received between January 1, 2006, and September 30, 2006, the number of applications that were accepted, declined, withdrawn or closed, or pending, and the reasons for the committee’s decisions. We also interviewed public information officers from the National Museum of Natural History, the National Museum of American History, and the National Air and Space Museum, which are the museums that receive the majority of filming requests, to get their perspectives on how the filming request process has changed as a result of the contract. In addition, we reviewed other Smithsonian documents pertaining to actions it has taken in response to the contract, such as establishing a committee to develop program ideas, coordinate the Smithsonian’s review of programming content, and provide recommendations regarding content review and other administrative issues related to the contract. To identify what, if any, impact the contract has had on the Smithsonian’s operations and outside parties, we reviewed the methodology and results of the Smithsonian’s analysis of filming contracts from 2000 through 2005 to determine the reliability of the analysis. We discovered several problems with the Smithsonian’s analysis that led us to determine that the analysis was unreliable, and we discuss those limitations in this report. We also interviewed Smithsonian staff that have been involved with implementing changes resulting from the contract and reviewed statements from individuals and organizations that have spoken out about the contract. Finally, we interviewed a selective sample of interested parties that could potentially be affected by the contract. We selected the individuals with whom we spoke from a wide range of disciplines, including filmmakers, curators, and historians. We conducted our work from June to November 2006 in accordance with generally accepted government auditing standards. Filming reqt come into musm Public Informtion Officer (PIO) or i roted to them from musff new or public ffirrpoe? Reqt indled y PIO nd/or Smithonin Office of Public AffirNo ppliction or contrct reqired Reqtor directed to fill-ot “Appliction for Filming Smithonin Intittion,” which detil the nre of the reqnd provide revelnt informtion. Reqter then submit ppliction to PIO. PIO determine, based on ppliction, whether reqt i pproprite nd content with the Smithonin’ filming policy. Conidertion inclde whether reqt will/i: 1. Content with the Smithonin’ mission; 2. Rech the pproprite audience; 3. Involve pproprite use of Smithonin fcilitie, collection, nd ff rerce; 4. Whether the relevnt ff or ctorve the time to cooperte with the reqt; 5. Whether the relevnt ff or ctor re intereted in cooperting with the reqt; 6. Whether nde co or expen will e incrred cooperting with the reqt; 7. Whether the intended use me deftory of or impct the Smithonin’ reption negtively; 8. Compete with or detrct from n exiting or plnned Smithoniuse or project. pproprite? Reqt denied y musm PIO PIO ubmit propoal to review committee overeen by the Office of Public Affair for final determination on three additional criteria (in conultation with the Office of General Counel, a necessary). 1. I the requet part of an academic, cholarly, or curriculum-baed proram? 2. I the film bein ditributed via a noncommercial ditributor? 3. I the propoed ue of Smithonian content incidental in the context of the finihed proram? If “ Ye” to a one-off? Filmmaker may ubmit project independently to the new venture (eparate process) Filmmaker can reduce the amount of propoed Smithonian content o that it i conidered incidential uIn the case of scholarly programs, uestions 1 and 2 above must be answered “yes” for the program to be approved. Appendix IV: Comments from Showtime Networks Inc. In addition to the individual named above, Jeffery D. Malcolm, Assistant Director; Jean Cook; Michele Fejfar; Richard P. Johnson; Jamie J. Meuwissen; and Anne Stevens made key contributions to this report. Also contributing to the report were John Finedore, Carol Kolarik, Alison O’Neill, Jena Y. Sinkfield, and William Woods. | In March 2006, the Smithsonian Institution (Smithsonian) announced that it had entered into a 30-year contract with Showtime Networks Inc., (Showtime) to create a digital on-demand television channel. Members of Congress and other interested parties, particularly filmmakers, raised issues about the contract's potential effects on public access to and use of the Smithsonian's collections, its confidential nature, and the process by which the Smithsonian negotiated it. This report discusses (1) the extent to which the Smithsonian followed its internal contracting guidelines, (2) what the Smithsonian gave up and received in return under the contract, (3) the Smithsonian's implementation of the contract, and (4) the contract's potential impact on outside parties. GAO reviewed the contract and pertinent documents, and interviewed Smithsonian and Showtime officials. The Smithsonian followed its internal contracting guidelines regarding competition, oversight, and conflicts of interest. When it began exploring a television venture in 2002, it approached 18 major media companies and negotiated with two before reaching a deal with Showtime. The process was overseen by Smithsonian Business Ventures' (SBV) Board of Directors and the Smithsonian's Board of Regents, who approved the contract in November 2005. When SBV's Chief Executive Officer disclosed a potential conflict of interest, the Smithsonian's Ethics Officer reviewed the disclosure in accordance with Smithsonian policies and concluded that no conflict existed. GAO's Ethics Officer concurred with the Smithsonian's decision. The Smithsonian granted the new venture a 30-year, semiexclusive right to produce and commercially distribute audiovisual programs using Smithsonian trademarks and/or content in exchange for national television exposure and new revenue. The Smithsonian projects that the new channel will reach more than 31 million households by 2010 and will have a total value of over $150 million after 10 years. The Smithsonian's major concession is a noncompete clause that generally prohibits it from engaging in activities that would compete with the new venture. The Smithsonian negotiated exceptions for various news and educational programs. The Smithsonian has been working to implement policies and procedures necessary under the contract since it became effective in January 2006, but the information that it has provided to interested parties has been insufficient. The Smithsonian and Showtime waited until March 2006 to publicly announce the new venture and did not implement internal processes to review filming requests for compliance with the contract until after the public announcement. The Smithsonian has created a committee to review filming requests, but does not document in detail its rationale for key decisions or attempt to synthesize these decisions over time. Also, the "Frequently Asked Questions" on the Smithsonian's Web site provides little information for filmmakers about the new contract. It is too early to determine the long-term impact of the contract. Access to the Smithsonian's collections and staff for research purposes remains unchanged, but the direct impact on filmmakers will depend largely on how many request permission to use a substantial amount of Smithsonian content. So far, 6 of 117 filming requests have involved a substantial amount of Smithsonian content--2 were denied and 4 were approved as exceptions. The Smithsonian contends that it will be able to accommodate the same level of filming activity as it has in the past based on its historical analysis of filming contracts. GAO found that this analysis was unreliable because it was based on incomplete data and oversimplified criteria. In addition, concerns have been raised about damage to the Smithsonian's image and the appropriateness of limiting the use of the collections held in trust for the American public. |
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California is the nation’s most populous state and the eighth-largest economy in the world. California is estimated to receive approximately $85 billion in Recovery Act funds, or about 10 percent of the funds available nationally. Nearly 80 percent of Recovery Act funding to states and localities is projected to be distributed within the first 3 years. Peak projected outlays are in fiscal year 2010, with outlays that year projected to be more than twice the level of fiscal year 2009 outlays. The California Recovery Task Force (Task Force), which was established by the Governor in March 2009, has overarching responsibility for ensuring that the state’s Recovery Act funds are spent efficiently and effectively and are tracked and reported in a transparent manner. The Task Force reports on the use and status of Recovery Act funds using the state’s recovery Web site (www.recovery.ca.gov). In addition to the Task Force’s efforts, other California entities with oversight responsibilities, including the State Auditor, have expanded the scope of their work to include a focus on state programs receiving Recovery Act funds. As of December 9, 2009, the Task Force estimated that approximately $53 billion has been allocated to California state agencies and local governments, nonprofits, local education agencies, and private companies through spending programs. The remaining portion, approximately $30 billion, is being provided to individuals and businesses in the form of direct tax relief. Approximately $33.7 billion has been awarded and $17.8 billion has been expended. As shown in figure 1, health, education, and labor accounted for almost 96 percent of California’s Recovery Act expenditures. The largest programs within these areas were the state Medicaid program and SFSF. To help measure the impact of the Recovery Act, the act contains numerous provisions that require recipients of Recovery Act funding to report quarterly on several measures. Nonfederal recipients of Recovery Act funds, such as state and local governments, private companies, educational institutions, and nonprofits, are required to submit reports with information on each project or activity, including amounts and a description of the use of funds and an estimate of the jobs created or retained. To collect this information, the U.S. Office of Management and Budget (OMB) and the Recovery Accountability and Transparency Board created a nationwide data collection system to obtain data from recipients, www.federalreporting.gov (FederalReporting.gov), and another site for the public to view and download recipient reports, Recovery.gov. Shortly before recipients could begin entering data into FederalReporting.gov for the second quarterly reporting period, OMB issued a memorandum for the heads of U.S. executive departments and agencies on December 18, 2009, updating its reporting guidance on the Recovery Act, in response to suggestions made by recipients, agencies, and our recommendations. The updated guidance focuses on issues related to data quality, nonreporting recipients, and reporting of job estimates, among other important reporting requirements. We previously reported that the Task Force, with the assistance of the state’s Chief Information Officer (CIO), created and deployed a central information technology system for state departments to report quarterly recipient report data. For the first two rounds of recipient reporting, California established a centralized reporting system, the California ARRA Accountability Tool (CAAT), which state agencies receiving Recovery Act funds used to report their data to the Task Force. California’s CIO, on behalf of the Task Force, was responsible for collecting the data from state agencies and uploading the data to FederalReporting.gov. California used Recovery Act funds to help balance the state fiscal year 2009-2010 budget, when the state faced a nearly $60 billion budget gap, and future budget shortfalls are expected. As discussed in our prior reports, California balanced its state fiscal year 2009-2010 budget by, among other things, making more than $31 billion in cuts, increasing taxes by $12.5 billion, and using over $8 billion in Recovery Act funds. However, California’s long-term fiscal prospects remain of concern. For example, in November 2009, the Legislative Analyst’s Office (LAO) estimated the size of the 2009-2010 and 2010-2011 budget shortfall at about $21 billion. According to the LAO, the main reasons for the budget gaps are: the inability of the state to achieve previous budget solutions in several areas, the effects of several adverse court rulings and, for 2010-2011, the expiration of various one-time and temporary budget solutions approved in 2009. The Governor’s 2010-2011 budget proposal was somewhat more optimistic and identified a $18.9 billion budget shortfall. Nonetheless, the budget gap constitutes roughly one-quarter of the state’s annual budget expenditures. The Governor declared a fiscal emergency on January 8, 2010, calling the legislature into special session to act on his proposed solutions to address the budget shortfall. Those proposed solutions include reductions in state programs, shifts of state funds to pay for general fund expenses, and requests for additional federal funds and greater flexibility. On January 22, 2010, the state Controller urged the state legislature and Governor to address the state’s projected budget and cash shortfalls for the remainder of the current fiscal year, as well as the next fiscal year, in order to protect California’s economic recovery, continue the financing of public works projects, and prevent even greater financial hardship. Further, the Controller stated that, if the budget situation is not resolved, the legislature and Governor will again face the prospect of a cash crisis beginning in July 2010. Local city and county governments in California are also struggling with declining revenues and budget problems. Additionally, local governments are affected by the fiscal situation of the state as a number of revenue sources—such as sales tax, gas tax, vehicle license, and many others— pass through the state. For example, in order to balance the California’s fiscal year 2009-2010 budget, state leaders agreed to borrow almost $2 billion in local property tax revenue and make $877 million in local government transportation revenue available to the state general fund for transit debt service. Officials we met with in the City of Los Angeles (Los Angeles) and the County of Sacramento said that they face budget shortfalls this fiscal year due to declines in state funding for programs, tax revenues, and fees. (Fig. 2 highlights information about the two local governments we reviewed.) For example, a Los Angeles official told us that, for the remainder of fiscal year 2010, they are trying to close a deficit of $212 million and have a projected $485 million deficit for fiscal year 2011. Sacramento County officials reported that the county is facing a nearly $14 million general fund budget shortfall for the remainder of fiscal year 2009-2010, and faces cuts of around $149 million for next fiscal year. According to government officials in both localities, Recovery Act funds are helping to preserve the delivery of essential services and repair infrastructure but have generally not helped stabilize their base budgets. Overall, as of February 18, 2010, a Los Angeles official reported that the city had been awarded about $597 million in Recovery Act grants, and Sacramento County officials reported the county had been awarded about $88 million in Recovery Act formula grants as of January 15. Most Recovery Act funds to local governments flow through existing federal grant programs. Some of these funds are provided directly to the local government by federal agencies, and others are passed from the federal agencies through state governments to local agencies. As shown in table 1, local officials reported their governments’ use of Recovery Act funds in program areas including public safety (Edward Byrne Memorial Justice Assistance Grant (JAG)) and Energy Efficiency and Conservation Block Grant (EECBG). Other Recovery Act funds received by these localities included formula grants for prevention of Internet crimes against children, public housing, emergency shelter, health centers, capital improvements, airport security and improvement, transportation, and additional competitive grant awards. Officials reported that Los Angeles has applied for about $893 million in additional Recovery Act grants, and the County of Sacramento has applied for an additional $330 million in competitive grants. In March 2009, California was apportioned $2.570 billion in Recovery Act funds for the restoration, repair, and construction of highways and other activities allowed under the Federal-Aid Highway Surface Transportation Program. As of February 16, 2010, the U.S Department of Transportation (DOT) Federal Highway Administration (FHWA) had obligated $2.525 billion (98 percent) of California’s apportionment. Highway funds are apportioned to states through federal-aid highway program mechanisms, and states must follow existing program requirements, which include ensuring each project meets all environmental requirements associated with the National Environmental Policy Act (NEPA), complying with goals to ensure disadvantaged businesses are not discriminated against in the awarding of construction contracts, and using American-made iron and steel in accordance with Buy American requirements. The Recovery Act also required that 30 percent of these funds be suballocated, primarily based on population, for metropolitan, regional, and local use. In California, according to state sources, a state law enacted in late March 2009, increased the suballocation so that more—62.5 percent of the $2.570 billion ($1.606 billion)—would be allocated to local governments for projects of their selection. The majority of Recovery Act highway obligations for California have been for pavement improvements—including resurfacing, rehabilitating, and constructing roadways. Of the funds obligated, approximately 65 percent ($1.643 billion) is being used for pavement widening and improvement projects, while 32 percent ($815 million) is being used for safety and transportation enhancements, and 3 percent ($68 million) for bridge replacement and improvement projects. Figure 3 shows obligations in California by the types of road and bridge improvements being made. According to information reported on Recovery.gov, as of December 31, 2009, California funded 761 highway infrastructure projects with Recovery Act funds. Fourteen percent, or 103 of these projects, were completed, 34 percent (268 projects) were under way, and about 51 percent (390 projects) had not yet started. Projects under way, which were in various stages of completion, accounted for over $1 billion in obligations, and projects that have been obligated funds but had not yet started, had an estimated value of almost $953 million. (See fig. 4 for an example of Recovery Act-funded pavement project.) Under both the Recovery Act and the regular Federal-Aid Highway Surface Transportation Program, California has considerable latitude in selecting projects to meet its transportation goals and needs. California Department of Transportation (Caltrans) officials reported using the state portion to fund state highway rehabilitation and maintenance projects that would not have otherwise been funded due to significant funding limitations. In addition to maintenance projects, the state has allocated Recovery Act funds to large construction projects, including one of the largest transportation investments, approximately $197.5 million for the construction of the Caldecott Tunnel, a new two-lane, bore tunnel connecting Contra Costa and Alameda counties. In addition, as previously mentioned, according to state officials, a March 2009 state law provided more funding directly to local governments, allowing a number of locally important projects to be funded. For example, $319 million in Recovery Act funds were obligated for 195 local projects in the Los Angeles area that may not have otherwise been funded in 2009, such as the Compton Boulevard resurfacing project. This project received approximately $750,000 in Recovery Act funds and would not have been funded for many years without these funds. As of February 16, 2010, $273 million of the $2.525 billion obligated to California highway projects had been reimbursed by FHWA. Although federal reimbursements in California have increased over time, from $22 million in September 2009 to $273 million, this rate, 11 percent, continues to be lower than the amount reimbursed nationwide, 25 percent ($6.3 billion) of the $25.1 billion obligated. As we reported in December 2009, Caltrans officials attributed the lower reimbursement rate to having a majority of its projects administered by local governments, which may take longer to reach the reimbursement phase than state projects, due to additional steps required to approve local highway projects. For example, highway construction contracts administered by local agencies generally call for a local review and a local public notice period, which can add nearly 6 weeks to the process. Additionally, Caltrans officials stated that localities with relatively small projects tend to seek reimbursement in one lump sum at the end of a project to minimize time and administrative cost. Caltrans has started to monitor pending invoices submitted by local agencies for Recovery Act projects to better assess how quickly Recovery Act funds are being spent. The Recovery Act required states to ensure that all apportioned Recovery Act funds were obligated within 1 year after apportionment and, according to Caltrans officials, as of February 18, 2010, 100 percent of California’s highway infrastructure Recovery Act apportionment has been obligated. If any states did not meet this requirement by March 2, 2010, the Secretary of Transportation would withdraw and redistribute the unobligated funding to other eligible states. Any Recovery Act funds that are withdrawn and redistributed are available for obligation until September 30, 2010. In addition to meeting the 1-year obligation deadline under the Recovery Act, Caltrans has also been working to meet two other Recovery Act requirements that do not exist in the regular Federal-Aid Highway Surface Transportation Program: (1) identification of economically distressed areas and (2) maintenance of effort. Identifying economically distressed areas. As we reported in December 2009, Caltrans revised its economically distressed areas determination using new guidance issued to states in August 2009 by FHWA, in consultation with the Department of Commerce, giving more direction on “special needs” criteria for areas that do not meet the statutory criteria in the Public Works and Economic Development Act. As a result, the number of counties considered distressed increased from 49 to all 58 counties. According to Caltrans officials, this new determination did not change how it funded or administered Recovery Act projects. Caltrans officials told us that, in selecting projects for funding, they first considered how quickly the project could be started and its potential to create and retain jobs, then considered the extent of need with each economically distressed area. The Recovery Act requires states to give priority to projects that can be completed within 3 years and to projects located in economically distressed areas. Recently, FHWA reviewed the documentation that California used in its application of special needs criteria and determined that the data used were not consistent with FHWA guidance. Caltrans has been advised that the data must show a connection between demonstrated severe job losses and actual, identified firm closures and restructuring. On February 24, 2010, Caltrans officials reported that Caltrans was working to address FHWA’s data concerns by evaluating methods to assess the job losses without the use confidential data. Maintaining effort. While California is still reviewing its current maintenance-of-effort certification, it does not anticipate difficulty in maintaining the level of spending for transportation projects funded by the Recovery Act that it planned to spend as of February 17, 2009—the day the Recovery Act was enacted. California, like many other states, had to revise its initial March 5, 2009, certification, because the certification included a conditional statement, which was not permitted by the Recovery Act. On February 9, 2010, DOT requested that each state review its current certification and take any corrective action with regard to the state’s calculation of the maintenance-of-effort amount on or before March 11, 2010. Although California is reviewing its certification, Caltrans officials maintain that California expects to meet the planned level of spending, in part because the state reinstated a transportation bond program worth approximately $20 billion. The Recovery Act appropriated $5 billion for the Weatherization Assistance Program, which the Department of Energy (DOE) is distributing to each of the states, the District, and seven territories and Indian tribes, to be spent over a 3-year period. This program helps low- income families reduce their utility bills by making long-term energy efficiency improvements to their homes by, for example, installing insulation or modernizing heating or air conditioning equipment. DOE has limited states’ access to 50 percent of these funds and plans to provide access to the remaining funds once a state meets certain performance milestones, including weatherizing 30 percent of all the homes in its state plan that it estimates it will weatherize with Recovery Act funds. In addition, the Recovery Act requires all laborers employed by contractors and subcontractors on Recovery Act projects to be paid at least the prevailing wage, as determined under the Davis-Bacon Act. The Department of Labor (Labor) first established prevailing wage rates for weatherization in all of the 50 states and the District by September 3, 2009. DOE allocated approximately $186 million in Recovery Act funds for weatherization in California. This represents a large increase in funding over California’s annually appropriated weatherization program, which received about $14 million for fiscal year 2009. By June 2009, DOE had provided 50 percent—about $93 million—of the Recovery Act funds to the California Department of Community Services and Development (CSD), the state agency responsible for administering the state’s weatherization program. In late July, the state legislature approved CSD’s use of these funds. Of the funds received, CSD retained about $16 million to support oversight, training, and other state activities. CSD has begun distributing the remaining $77 million throughout its existing network of local weatherization service providers, including nonprofit organizations and local governments. According to CSD, as of January 25, 2010, CSD had awarded about $66 million of the $77 million to 35 local service providers throughout the state for planning, purchasing equipment, hiring and training, and weatherizing homes. This amount includes $14.3 million to two service providers for three of the four service areas in the County of Los Angeles. It also includes almost $3 million and $3.8 million, respectively, to the service providers for Orange and Riverside counties. CSD has not yet awarded the remaining funds—approximately $10 million—to service providers for the remaining part of the County of Los Angeles, parts of Alameda County, Alpine County, El Dorado County, Santa Clara County, San Francisco County, and Siskiyou County. For these areas, CSD has been either seeking a new service provider or is withholding funds pending the completion of an investigation of the designated service provider. CSD reported that, as of December 31, 2009, CSD and its service providers spent approximately $10 million—or about 5 percent—of the Recovery Act funds on weatherization-related activities. Also, according to CSD, 849 homes were weatherized as of February 26, 2010, which is less than 2 percent of the approximately 43,000 homes that CSD currently estimates will be weatherized with Recovery Act funds. In particular, 7 homes have been weatherized in the County of Los Angeles, and 0 and 20 homes have been weatherized in Orange and Riverside counties, respectively. Weatherization in California has been delayed, in part, because (1) CSD decided to wait until Labor determined the state’s prevailing wage rates, which occurred on September 3, 2009, and (2) after the prevailing wage rates were determined, local service providers raised concerns about an amendment CSD is requiring them to adopt to their Recovery Act weatherization contracts to ensure compliance with the act. CSD officials explained that, in anticipation of additional staffing and administration challenges for service providers, they wanted more clearly defined Davis- Bacon Act requirements, including the actual wage rates, before spending Recovery Act funds. CSD estimates that waiting for the wage rate determinations delayed weatherization in California for 2 to 3 months. CSD reported to us that, although the rate determinations for two of three weatherization-related job categories are mostly similar to what service providers currently pay, the rates for the third category—heating, ventilating, and air conditioning work—are much higher and will, thus, lead to cost increases. CSD also reported that it expects that the Davis- Bacon Act administrative requirements—including expanding existing administrative and accounting systems, updating payroll documentation and reporting, and increasing subcontractor monitoring—will have a substantial impact on program costs. For example, CSD must seek a replacement service provider for three of the previously discussed designated service areas because the existing three providers for these areas chose not to participate in the Recovery Act-funded weatherization activities due, in part, to concerns that the funding did not adequately support these increased administrative requirements. CSD also reported that its service providers have had difficulty identifying subcontractors willing to comply with the Davis-Bacon Act requirements. According to state officials, CSD is requiring service providers to adopt an amendment to their Recovery Act weatherization contracts to ensure that they comply with the Recovery Act, including certifying that they comply with the Davis-Bacon provisions, before providing Recovery Act funds to them to weatherize homes. Only two providers adopted the amendment by the initial October 30 deadline. According to CSD, many providers did not adopt the amendment because they objected to some of its provisions, including those pertaining to compensation, cost controls, and performance requirements. As a result, CSD entered into negotiations with providers and formally issued a modified amendment on December 17, 2009. However, prior to December 17, CSD announced steps that providers could take to accept the modified amendment in advance of its formal issuance and, thus, begin weatherizing homes sooner. Twenty-six service providers accepted the modified amendment in advance of the formal issuance and, to date, all active service providers have adopted the amendment. According to state officials, the amendment requires service providers to submit a wage plan for meeting the Davis-Bacon Act requirements before receiving any funds to weatherize homes. As of February 24, 2010, 26 service providers have submitted wage plans, all of which CSD has approved. Finally, CSD has plans to issue an additional contract amendment by the end of March, 2010 to, among other things, release new prevailing wages rates issued by Labor in December 2009. A CSD official told us that the department does not anticipate any delays in implementing this amendment. In a February 2, 2010, audit of CSD, the State Auditor reported that delays in weatherizing homes could jeopardize CSD’s ability to meet DOE’s performance milestones and, thus, its ability to timely access the remaining $93 million in Recovery Act weatherization funds. Thirty percent of all homes estimated to be weatherized in the state plans approved by DOE must be completed before the remaining funds may be accessed. The State Auditor also found that CSD needs to improve its control over cash management and that it lacks written procedures for preparing program reports. In its response to the report, CSD stated that it plans to meet DOE’s performance milestones by redirecting funds from areas without service providers to providers with the capacity to weatherize more homes. CSD also outlined steps it is taking to provide weatherization services to the previously discussed unserviced areas where it is either seeking a new service provider or withholding funds. Our prior reports have also highlighted delays in this program, and we plan to continue to follow California’s progress in using Recovery Act weatherization funds, including: Number of homes weatherized. Although CSD has developed quarterly targets for weatherizing enough homes to meet DOE’s performance milestones, it is too early to assess whether service providers are meeting these targets. However, as of February 26, 2010, CSD reported that the state had weatherized only 849 of the 3,912 homes targeted for the first quarter of the 2010 calendar year. Service areas without weatherization providers. According to CSD, 6 out of 43 designated service areas do not yet have service providers that are ready to begin weatherizing homes with Recovery Act funds. According to CSD’s latest estimates, these service areas account for 3,624—or over 8 percent—of the approximately 43,000 homes that it currently plans to weatherize with Recovery Act funds. Additional contract amendment forthcoming. In light of service providers’ resistance to CSD’s first contract amendment process, CSD cannot be certain that its upcoming attempt to revise contracts will not be met with some level of resistance from providers and, therefore, lead to additional delays in weatherizing homes. In response to the State Auditor’s findings, the Task Force stated that it is working with CSD to improve internal controls and streamline contract approvals and that the Task Force is committed to ensuring that California “does not leave one dollar of Recovery Act funding on the table.” As of February 19, 2010, California disbursed approximately $4.7 billion in Recovery Act education funds for three programs—SFSF; ESEA Title I, Part A, as amended; and IDEA, Part B. These funds were allocated to local educational agencies (LEA), special education local plan areas, and institutions of higher education (IHE). Specifically, California was allocated $5.47 billion in SFSF funds to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other government services. Under the Recovery Act, states must allocate 81.8 percent of their SFSF to support education (education stabilization funds), and the remaining 18.2 percent must be used for public safety and other government services, which may include education programs. California has received about $1.1 billion in SFSF government services funds that it used for payroll costs for its corrections system and has received about $4 billion in SFSF education stabilization funds. California also received approximately $464 million in Recovery Act ESEA Title I, Part A funding, which supports education for disadvantaged students and about $286 million in IDEA funding, which supports special education efforts. The majority of LEAs in California said they anticipate using more than half of their Recovery Act funds to retain jobs. As of December 31, 2009, the California Department of Education (CDE) reported that LEAs in the state funded a total of nearly 50,000 education jobs—mostly teachers— with the three Recovery Act education funding programs in our review, with approximately 39,000 of those jobs funded by SFSF. In the Los Angeles Unified School District (LA Unified), according to district officials, almost 6,400 jobs were funded by the three Recovery Act programs. LA Unified officials said that, without the Recovery Act funds, teacher layoffs could have caused increased class size, with a resulting loss of individual attention to each student. Yet, even with SFSF funds, an estimated 50 percent of the California LEAs reported that they expect job losses. Recently, officials from two large California LEAs told us that their districts anticipate teacher and other staff layoffs for the next school year to address budget shortfalls. According to a senior LA Unified official, the district may face teacher and support staff cuts of 7,000 to 8,000 to balance its budget for the 2010-2011 school year. While LEAs are using a large portion of their Recovery Act funds for jobs, LEAs we met with told us they also planned to use funds for other eligible activities, such as purchasing textbooks and funding deferred facility maintenance, among other program uses. We visited two LEAs in California—the Los Angeles Unified School District and Alvina Elementary Charter School in Fresno County—to find out more about how they are spending Recovery Act funds, see table 2 for a description of these uses. LEAs also awarded contracts for services and materials using Recovery Act funds. Although including provisions related to the Recovery Act is not a requirement under the act, LEA officials we met with stated that including Recovery Act provisions in contracts could have been useful in helping vendors understand Recovery Act requirements, including reporting requirements. However, none of the contracts we reviewed included provisions related to Recovery Act requirements. We met with seven LEAs that awarded contracts using either SFSF or ESEA Title I Recovery Act funds, or both, for services, such as tutoring, professional development for teachers, for special programs for students, and for equipment. According to LEA officials and our review of contracts, contract terms did not include specific Recovery Act requirements, such as wage rate requirements, whistle blower protection, and reporting requirements. LEA officials stated that they neither received guidance from CDE regarding the administration of Recovery Act contracts, nor were they aware of Recovery Act specific contract terms and conditions. Two of the LEAs we met with told us that they plan to include Recovery Act terms and conditions in future contracts. Our prior reports highlighted concerns related to CDE’s and LEAs’ ESEA Title I, Part A, cash management practices—specifically CDE’s early drawdown of ESEA Title I Recovery Act funding and the release of $450 million (80 percent) of the funds to LEAs on May 28, 2009. According to CDE officials, the drawdown was in lieu of its normally scheduled drawdown of school year 2008-2009 ESEA Title I funds and, therefore, the schools would be ready to use the funds quickly. However, in August 2009, we contacted the 10 LEAs in California that had received the largest amounts of ESEA Title I, Part A Recovery Act funds and found that 7 had not spent any of these funds and that all 10 reported large cash balances— ranging from $4.5 million to about $140.5 million. This raised issues about the state’s compliance with applicable cash management requirements. In response to cash management concerns, CDE implemented a pilot program to help monitor LEA compliance with federal cash management requirements. The program uses a Web-based quarterly reporting process to track LEA cash balances. Currently, the pilot program collects cash balance information from LEAs that receive funds under one relatively small non-Recovery Act program. CDE officials told us that they plan to expand the pilot to include regular and Recovery Act ESEA Title I, Part A, and SFSF by October 2010. CDE has collected data from LEAs for two quarters and has conducted an analysis to compare drawdown amounts from prior fiscal years. However, CDE has not yet established performance goals for the pilot program or developed a program evaluation plan. We also raised concerns about the inconsistent interest calculation and payment remittance processes at LEAs in California. CDE has since developed an interest calculation methodology and, on January 25, 2010, provided guidance to all LEAs on calculating and remitting interest on federal cash balances. CDE officials also told us that they plan to monitor LEA remittance of interest from Recovery Act funded programs by reviewing expenditure data LEAs submit in their quarterly recipient reports and verifying that the LEA remitted appropriate interest amounts. However, CDE has not yet developed mechanisms to help ensure LEAs are using sound interest calculation methods and promptly remitting interest earned on federal cash advances for non-Recovery Act funded programs. We plan to continue following this cash management issue in our ongoing bimonthly work. Since the Recovery Act was enacted in February 2009, California oversight entities and state agencies have taken various actions to oversee the use of Recovery Act funds. State oversight entities, for example, have conducted risk assessments of internal control systems and provided guidance to recipients of Recovery Act funds. In our previous reports on Recovery Act implementation, we discussed the oversight roles and activities of key entities in California for Recovery Act funds. In addition to these entities, state agencies are responsible for, and involved in, oversight and audits of Recovery Act programs. Although certain federal agencies and Inspectors General also have various oversight roles, our review has focused on the state efforts. As mentioned in our previous reports, the Task Force was established by the Governor to track Recovery Act funds that come into the state and ensure that those funds are spent efficiently and effectively. The Task Force is relying on California’s existing internal control framework to oversee Recovery Act funds, supplemented by additional oversight mechanisms. Several agencies and offices play key roles in overseeing state operations and helping ensure compliance with state law and policy. The key oversight entities are the Task Force, the state’s Recovery Act Inspector General, and the State Auditor. Their key oversight roles are summarized in table 3. As California gained more experience in implementing the Recovery Act during the past year, state oversight entities have taken actions to evaluate and update controls and guidance related to Recovery Act funds. For example, the Task Force prepared and issued 30 Recovery Act Bulletins to provide instructions and guidelines to state agencies receiving Recovery Act funds on topics ranging from recipient reporting requirements related to jobs to appropriate cash management practices. Additionally, the California Recovery Act Inspector General coordinated seven fraud prevention and detection training events throughout the state for state and local agencies and the service provider community, with presentations from federal agencies on measures to avoid problems and prevent fraud, waste, and abuse. Over 1,000 state and local agency staff attended training events, which were also available through a Webinar. As of December 2009, the California State Auditor’s office published five letters or reports on the results of early testing and/or preparedness reviews conducted on 25 Recovery Act programs at nine state departments that are administering multiple Recovery Act programs. These audit reports resulted in numerous recommendations to state agencies aimed at improving oversight of Recovery Act funds. California agency officials and internal auditors, from state departments that manage transportation, education, and weatherization programs, are engaged to various degrees in the oversight and auditing of Recovery Act funds. Table 4 provides an overview of selected oversight and auditing activities of these agencies. As reported on Recovery.gov, as of February 23, 2010, California recipients reported funding 70,745 jobs with Recovery Act funds during the second quarterly reporting period ending on December 31, 2009. This was the largest number of jobs reported by any state for this quarter. The Recovery Act provided funding through a wide range of federal programs and agencies. Over 30 California state agencies have or are expected to receive Recovery Act funds and were required to report job estimates. Figure 5 shows the number and share of jobs funded by state agencies receiving Recovery Act funds, as reported on Recovery.gov. Education programs accounted for approximately 71 percent, about 50,000 jobs—38,924 under SFSF, and 11,048 under other programs administered by CDE. Task Force officials reported that new reporting guidance issued by OMB—approximately 2 weeks before recipients were to begin reporting— was implemented by most state agencies, but the notable exception was CDE, which continued to follow the old guidance. On December 18, 2009, OMB updated its reporting guidance, and the Task Force advised California recipients that there were some notable changes, specifically as follows: Recipients do not have to determine if a particular employee or job classification would have been laid off without the receipt of Recovery Act funds (i.e., retained), as they did before. If a position is being funded by the Recovery Act, the hours should be included in the number of jobs created; Recipients are no longer required to sum hours across reporting quarters or provide cumulative totals. Instead, they report jobs on a quarterly basis, providing a quarterly snapshot; and Recipients will find the federal reporting system open in February to correct data reported during January. The new OMB guidance still required recipients to report jobs as FTE, but it further defined FTEs as the total number of hours worked and funded by Recovery Act dollars within the reporting quarter and provided guidance on applying the new formula. According to Task Force officials, CDE did not instruct LEAs to recalculate job estimates using the new OMB guidance. CDE plans to have LEAs revise job estimates reported during the second reporting period when CDE requests data for the third report, which will be due on March 15, 2010, to CDE. Until that time, the data available to the public for education-related jobs in California are not comparable to that reported by other states. Additionally, although CDE’s uncorrected job estimates for the second reporting period remain on the Recovery.gov Web site, the Task Force announced that it will not include CDE’s job estimates in its reports. In addition to not following OMB’s updated guidance on calculating FTEs, we also found that partly due to unclear guidance from CDE, LEAs we reviewed had collected and reported job information from vendors inconsistently. We met with seven LEAs—including LA Unified, the largest LEA in California—to gain an understanding of their processes for obtaining information necessary to meet Recovery Act reporting requirements. LEAs told us that they received reporting guidance from CDE, including calculating teacher and administrative jobs, but did not receive clear guidance on how to collect and report vendor jobs funded by the Recovery Act. As a result, LEAs we reviewed had varying jobs data collection processes. For example, one LEA that did not report vendor jobs for the second reporting period told us that, for future quarters, they plan to survey vendors to estimate the range of jobs created or retained (e.g., 1-5, 6-10, 11-15 jobs). Two other LEAs told us they did not contact vendors to collect data on jobs created or retained but reported the number of vendors with a Recovery Act contract. For instance, if the LEA had four contracts using Recovery Act funds during the reporting period, the LEA reported four vendor jobs. Officials from LEAs also reported confusion regarding CDE’s guidance to identify vendors—by reporting their name and zip code or Dun and Bradstreet Universal Numbering System number—that received payments of $25,000 or more in the quarter. Some LEAs did not collect and report job estimates from vendors with payments of less than $25,000 because they erroneously applied CDE’s guidance on vendor identification to determine which vendor jobs to report. According to an official from one of these LEAs, the number of vendor jobs it reported for the second quarter would increase from 12 to at least 77 if it collected job estimates from all of its vendors with Recovery Act contracts. As a result, some vendor jobs funded by the Recovery Act were not reported. On February 23, 2010, CDE issued updated guidance to LEAs, and other subrecipients, to assist them with the third Recovery Act reporting period. However, this guidance neither provided LEAs additional information on collecting and reporting vendor jobs, nor did it clarify that the vendor identification guidance was not applicable to the Recovery Act’s jobs reporting requirements. As the prime recipient, CDE is responsible for ensuring Recovery Act requirements are met, including reporting vendor jobs funded by the Recovery Act. We plan to continue to follow these reporting issues as part of our ongoing bimonthly work. Task Force officials stated that while OMB’s revised guidance on calculating FTEs for the second reporting period was easier to implement compared with the first period, other data issues made it difficult to report timely, accurate, and complete information. For example, the Task Force received error messages in FederalReporting.gov when the congressional district where the Recovery Act-funded project was located did not match the recipient address. The Task Force reported receiving more than 1,500 error reports for data it submitted to FederalReporting.gov related to congressional districts and zip codes, even though California’s CAAT system had mechanisms in place to try to prevent the entry of false congressional districts. In order to expedite these corrections, Task Force officials told us that they decided to change their data to what FederalReporting.gov would accept, rather than what they knew was correct in some instances. For example, if they knew a recipient had moved and had a new zip code, but FederalReporting.gov did not have the updated zip code for the recipient’s new address, the Task Force used the old zip code to get the report to upload successfully to FederalReporting.gov. Issues with zip codes also surfaced for local agencies that reported directly to Federalreporting.gov. For example, officials from the Los Angeles County Metropolitan Transportation Authority said they received an error message for an incorrect congressional district, because they initially used the congressional district in which the project was located as opposed to the agency’s headquarters office. Officials from the transportation authority interpreted OMB’s guidance as the congressional district in which the project/activity was being performed, but they later received clarification that the congressional district should be consistent with the recipient’s address. Mr. Chairman and Madame Chairwoman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee or Subcommittee might have. For further information regarding this testimony, please contact Linda Calbom at (206) 287-4809 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 who made key contributions to this statement include Guillermo Gonzalez, Chad Gorman, Richard Griswold, Susan Lawless, Gail Luna, Heather MacLeod, Emmy Rhine, Eddie Uyekawa, and Lacy Vong. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The American Recovery and Reinvestment Act of 2009 (Recovery Act) specifies several roles for GAO, including conducting bimonthly reviews of selected states' and localities' use of funds made available under the act. This testimony is based on GAO's bimonthly work in California, where the Recovery Act provided more than $85 billion--or about 10 percent of the funds available nationally--for program funding and tax relief. This testimony provides a general overview of: (1) California's use of Recovery Act funds for selected programs, (2) the approaches taken by California agencies to ensure accountability for Recovery Act funds, and (3) the impacts of these funds. This testimony focuses on selected programs that GAO has covered in previous work including the use of Recovery Act funds by the state and two localities' --City of Los Angeles and County of Sacramento, Highway Infrastructure Investment, and the Weatherization Assistance Program. GAO also updated information on three education programs with significant Recovery Act funds being disbursed--the State Fiscal Stabilization Fund (SFSF), and Recovery Act funds for Title I, Part A, of the Elementary and Secondary Education Act of 1965 (ESEA), as amended, and Part B of the Individuals with Disabilities Education Act (IDEA),. GAO provided a draft of this statement to California state and local officials and incorporated their comments where appropriate. (1) State and Local Budgets: Despite the influx of Recovery Act funds, California continues to face severe budgetary pressures and estimates a current shortfall of as much as $21billion --roughly one-quarter of the state's annual budget expenditures. California's cities and counties are also struggling with budget problems. According to officials from the City of Los Angeles and County of Sacramento, Recovery Act funds are helping to preserve essential services and repair infrastructure but have generally not helped stabilize their base budgets. (2) Transportation Infrastructure: According to California officials, 100 percent of California's $2.570 billion highway infrastructure Recovery Act apportionment has been obligated. The state has dedicated most of these funds for pavement improvements--including resurfacing and rehabilitating roadways. (3) Weatherization Assistance: As of January 25, 2010, California had awarded about $66 million to 35 local service providers throughout the state for weatherization activities. State and federal requirements, such as prevailing wage rates, as well as the implementation of these requirements, have delayed weatherization and, as of February 26, 2010, the state had weatherized only 849 homes--less than 2 percent of the 43,000 homes that are estimated to be weatherized with Recovery Act funds. (4) Education: As of February 19, 2010, California had distributed approximately $4.7 billion for three education programs, including the SFSF. Local education agencies plan to use more than half of these funds to retain jobs; however, a majority reported that they still expect job losses. Also, cash management issues, related to federal cash balances and the calculation and remittance of interest, remain, but the California Department of Education has taken preliminary steps to resolve them.(5) Accountability: California oversight entities and state agencies have taken various actions to oversee Recovery Act funds, including training, risk assessments, on-site monitoring, and audits. The Governor established the Recovery Task Force to ensure funds are spent efficiently and effectively, and the State Auditor and Inspector General also have key oversight roles. (6) Jobs Reporting: Recipients reported that 70,745 jobs were funded in California during the last quarter of 2009. However, about 70 percent of these jobs were in education and were not reported using the Office of Management and Budget's (OMB) latest guidance, and therefore were not calculated consistently with other jobs reported. |
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To ensure the safety, security, and reliability of the nation’s nuclear weapons stockpile, NNSA relies on contractors who manage and operate government-owned laboratories, production plants, and a test site. NNSA’s eight enterprise sites each perform a different function, all collectively working toward fulfilling NNSA’s nuclear weapons-related mission. Figure 1 shows the locations of the sites and describes their functions. To provide support and oversight, NNSA locates between about 30 and 110 NNSA staff in a site office at each facility, and also draws on the resources of NNSA staff in headquarters and the Albuquerque complex. According to NNSA officials, this support and oversight requires that some NNSA staff have critical skills comparable to the contractors they support and oversee. For example, NNSA staff may need technical knowledge and expertise to accept and review deliverables from M&O contracts and, when presented with options, be able to determine how best to proceed to meet contract goals, mission, and objectives. They may also need skills related to the safe operation of sensitive defense nuclear facilities such as expertise in occupational safety and fire safety. For example, according to NNSA officials at the Livermore Site Office, most of the staff in critical skills positions there are focused on ensuring safety at the laboratory’s nuclear facilities. Maintaining critical skills within its workforce is not a challenge unique to NNSA. Every 2 years, we provide Congress with an update on GAO’s high-risk program, under which GAO designates certain government operations as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement, or their need for transformation to address economy, efficiency, or effectiveness challenges. In 2001, GAO designated strategic human capital management across the entire federal government as a high-risk area, in part because critical skill gaps could undermine agencies’ abilities to accomplish their missions. We have also reported in the past that NNSA and its predecessor organizations’ record of inadequate management and oversight of contractors has left the government vulnerable to fraud, waste, abuse, and mismanagement. Contract management at DOE has been on GAO’s high risk list since 1990, the first year our high-risk list was published. Progress has been made, but NNSA and DOE’s Office of Environmental Management remain on our high-risk list. As of 2011, our most recent update of the high-risk list, significant steps had been taken to address some of the federal government’s strategic human capital challenges. Strategic human capital management was designated a high-risk area 10 years earlier governmentwide and remains on the high-risk list because of a need for all federal agencies to address current and emerging critical skills gaps that are or could undermine agencies’ abilities to meet their vital missions. Specifically, across the federal government, we reported that resolving remaining high-risk human capital challenges will require three categories of actions: Planning. Agencies’ workforce plans must define the root causes of skills gaps, identify effective solutions to skills shortages, and provide the steps necessary to implement solutions. Implementation. Agencies’ recruitment, hiring, and development strategies must be responsive to changing applicant and workforce needs and expectations and also show the capacity to define and implement corrective measures to narrow skill shortages. Measurement and evaluation. Agencies need to measure the effects of key initiatives to address critical skills gaps, evaluate the performance of those initiatives, and make appropriate adjustments. NNSA and its M&O contractors have developed and implemented multifaceted strategies to recruit, develop, and retain both the federal and contractor workforces needed to preserve critical capabilities in the enterprise. NNSA focuses on attracting early career hires with competitive pay and development opportunities, and the agency is reassessing future enterprisewide workforce needs. M&O contractors’ strategies vary from site to site, but each site focuses on maintaining competitive compensation packages. NNSA takes various steps to recruit, develop, and retain a federal workforce with the necessary critical skills. NNSA’s recruitment strategies are focused primarily on students and recent graduates in science and engineering programs. NNSA generally relies on two key programs to develop its critically skilled workforce––one that identifies needs and another that identifies the qualifications necessary to meet them. Its retention efforts focus on competitive pay, flexible schedules, and development opportunities. NNSA is also undertaking a comprehensive reassessment to ascertain future federal workforce requirements. NNSA has several programs targeted toward recruiting students and recent graduates, primarily in science and engineering fields. NNSA began these programs within the past 7 years as a means of succession NNSA’s programs focused on recruiting students include the planning.following: The Student Temporary Employment Program is a summer internship program for high school through graduate students of any discipline. Students participating in this program receive a salary while working at NNSA. The Student Career Experience Program is a program for graduate students in science, engineering, and other fields. This program aims to persuade skilled graduates to pursue careers in NNSA. Participants work for NNSA full-time during school breaks and part-time the rest of the year. These positions can be converted to full-time competitive appointments when participants receive their degrees. The Minority Serving Institutions Program aims to strengthen the diversity of the applicant pool by exposing younger minority students to technical fields and NNSA work early in their educational careers. This program focuses on students beginning in junior high school and continues through college entry and has cooperative agreements to enhance science, technology, engineering, and mathematics curricula at all levels at 29 minority-serving institutions. Since the program’s inception in 2007, 167 minority students have participated in hands-on research at NNSA site offices and laboratories. NNSA’s key program for recruitment of recent graduates is its Future Leaders Program. NNSA established the program in 2005 to recruit recent U.S. citizen graduates of bachelor’s and master’s programs, primarily in engineering and science. The Future Leaders Program is a 2- year development program that requires participants to complete classroom and on-the-job training, in addition to developmental assignments outside their home office. NNSA hires about 30 recent graduates into this program each year. Applicants are hired into the program offices where they will be permanently placed and are selected based on each program office’s skills needs. According to NNSA officials, approximately two-thirds of the 175 program participants hired from 2005 through 2010 have engineering and science backgrounds that enable them to develop the technical critical skills NNSA needs to provide support and oversight of contractors. As their careers advance, some program participants are expected to become more focused on developing deep expertise in a particular technical area, and others will gravitate toward more senior management and leadership positions. NNSA officials told us they consider the program very successful because nearly 90 percent of all those hired into the program since 2005 remained at NNSA. NNSA relies primarily on two programs to develop a federal workforce with the requisite critical skills––the Federal Technical Capability Program and the Technical Qualification Program (TQP). NNSA employees’ critical skills generally fall into two broad categories: (1) technical skills related to managing the safe operation of nuclear facilities, and (2) technical knowledge and expertise necessary to accept and review contract deliverables. To ensure that it has sufficient numbers of federal employees with critical skills to manage the safe operation of nuclear facilities, NNSA relies on the Federal Technical Capability Program––a DOE-wide effort to define requirements and responsibilities for meeting the department’s commitment for recruiting, developing, and retaining the technically competent workforce necessary to achieve this mission. To implement the goals of the Federal Technical Capability Program at the site level, NNSA senior managers conduct annual workforce analyses and develop staffing plans that identify critical technical capabilities and positions that ensure the safe operation of nuclear facilities. For example, NNSA relies on senior managers to identify the fire safety needs for the National Ignition Facility, a stadium size research facility at Lawrence Livermore National Laboratory and to identify how many fire protection engineers are required to meet these needs. To help meet these goals, DOE established the TQP, which sets technical qualification requirements for NNSA positions related to the safe operation of nuclear facilities and tracks federal employees’ progress in meeting these qualifications. More specifically, the TQP documents how NNSA: tailors qualification standards for them, establishes time and duty limitations for qualification, describes the process to identify learning activities to achieve competency for the specific job duties, and establishes methods for evaluating qualification. NNSA officials told us that only federal employees in positions related to managing the safe operation of nuclear facilities are required to participate in the TQP. However, NNSA managers may also subject employees who accept and review contract deliverables to TQP requirements to help ensure that they have the skills necessary to evaluate technical criteria of contract deliverables. Beyond the TQP, according to NNSA officials, human capital managers rely on annual human capital needs assessments to inform subsequent recruitment and hiring efforts to ensure the requisite mix of skills is present in the federal workforce. These assessments consider attrition and other demographic data, succession planning, and education and experience requirements. For example, NNSA officials told us that in 2011 its Office of Human Capital Management surveyed NNSA programs to identify needs for the Future Leaders Program. As part of this survey, they analyzed attrition in the federal workforce and used the information to assist in decisions about how many engineers to hire across the enterprise through the Future Leaders Program. Recruitment efforts in 2012 will focus on finding replacements for these engineers. NNSA’s retention strategies focus on offering new staff competitive pay, flexible schedules, and career development opportunities. Competitive pay. According to NNSA officials, NNSA’s retention efforts place a high priority on preserving the agency’s capacity to offer competitive compensation. For example, for relatively new hires, such as those hired through the Future Leaders Program, NNSA can sometimes offer as much as $6,000 in lump sum hiring bonuses and up to $10,000 in student loan repayment in return for signing a service agreement. In some cases, NNSA is also able to offer retention bonuses of up to 25 percent of annual salary to employees that might otherwise leave federal service. In addition, NNSA has the flexibility to offer particularly desirable applicants higher starting salaries and reward top performers with higher pay. For more senior employees, according to NNSA officials, DOE and NNSA sought, and were granted, authorities by Congress to offer higher pay to staff primarily in certain engineering and science fields. Specifically, to help it retain more experienced competitive service employees with critical skills––that is, employees in regular civil service positions— Congress granted exceptions to normal hiring regulations, including salary caps, under three excepted service authorities. First, under the Department of Energy Organization Act, the Secretary of Energy is granted special excepted service hiring authorities to hire up to 200 highly skilled scientific, engineering, professional, and administrative individuals to upgrade the department’s technical and professional capabilities. NNSA can use this authority in some cases to hire senior-level employees from outside the government or difficult-to-hire administrative staff. According to NNSA officials, there are presently 50 such individuals employed by NNSA. Second, under the National Defense Authorization Act, the Secretary of Energy is also granted special excepted service hiring authorities to hire up to 200 highly skilled individuals––typically scientists, technicians and engineers with skills related to and necessary for the operation of nuclear facilities. According to NNSA officials, there are currently about 100 such individuals currently employed by NNSA. Third, under the National Nuclear Security Administration Act, NNSA may hire up to 300 highly qualified scientists, engineers, and other technically skilled workers needed to support the missions of NNSA under similar excepted service hiring authorities. According to NNSA officials, NNSA has used this authority to hire and employ about 280 highly skilled NNSA officials told us that all of these flexibilities are useful individuals.and help NNSA compete with the Nuclear Regulatory Commission and national laboratories. Flexible schedules. NNSA’s retention efforts also include a flexible schedule program that gives employees the opportunity to work a nontraditional schedule or vary their work hours from day to day. For example, employees with school-aged children may opt to work more than 8 hours some days and fewer hours other days in order to accommodate school early release days. Development opportunities. NNSA offers some employees the opportunity to undertake career development opportunities such as rotational assignments and details. Integral parts of the Future Leaders Program are 30-day local rotational assignments and 60-day headquarters or field assignments away from their home locations. For example, a Future Leaders Program participant based in NNSA’s Washington headquarters who is interested in a program run by Sandia National Laboratories in Albuquerque might be assigned for 60 days to related work at NNSA’s Sandia Site Office or Albuquerque complex. In addition, NNSA has implemented a program called the In-Teach Program, which focuses on knowledge preservation and transfer by providing funding to train highly skilled senior employees to become more adept at transferring knowledge and skills to less skilled more junior employees. NNSA is currently undertaking a comprehensive reassessment and analysis of the staffing requirements for its federal workforce through 2016 in headquarters and field locations. NNSA officials told us that the reassessment is needed for strategic planning purposes and will improve NNSA’s efforts to ensure that its federal workforce has the skills necessary to carry out its missions, including technical, support, and oversight capabilities. The reassessment includes the following four phases: Describing and identifying organizational core competencies, and the workforce required for NNSA’s future Analyzing the current workforce and gaps related to requirements for Developing a plan to close gaps between future requirements and the Developing and implementing a workforce management system which is integrated with legacy Department of Energy human capital information technology systems NNSA officials told us they expect the reassessment and resulting report to be complete in fiscal year 2013. M&O contractors’ recruitment, development, and retention strategies are site-specific. Generally, their recruitment efforts vary by the type of employee needed––particularly, whether the position requires an advanced degree. Their development efforts vary in approach but are also site specific and face some challenges––particularly in preserving underground nuclear testing skills. Their retention efforts focus on maintaining competitive total compensation packages––salaries and benefits––but their strategies to mitigate attrition vary from site to site. NNSA’s M&O contractors have developed and implemented site-specific strategies to recruit, develop, and retain the workforces needed to preserve critical capabilities throughout the enterprise and accomplish NNSA’s mission. Accordingly, contractors have typically developed site- specific workforce planning systems that enable them to identify the kinds of candidates they need to recruit, develop, and retain in order to align projected nuclear weapons-related work and budget resources. Using these workforce planning systems, site managers can anticipate the nuclear weapons-related work NNSA has contracted for, how it will be funded, how many staff are required, and what skills will be needed, and can avoid potential shortages in staff or skills. For example, in the course of their 2- and 5-year planning processes, managers at Sandia National Laboratories use a four-step workforce planning tool, the Workforce Acquisition Project, to anticipate critical skills hiring needs based on the expected lab-wide business outlook and attrition. This early assessment of critical skills requirements ensures that the contractor has sufficient time to identify and recruit new staff as necessary and give new staff time––generally 2 to 5 or more years––to develop their skills. M&O contractors’ strategies for recruitment vary according to the kinds of employees they need to hire—in particular, whether the position requires an advanced degree. For example, the weapons laboratories, which include Sandia, Los Alamos, and Lawrence Livermore National Laboratories, typically require highly skilled candidates with advanced degrees to replace physicists, engineers, and other experts who retire or leave for other jobs. M&O contractors at weapons laboratories thus focus their recruitment efforts on students and recent graduates of the nation’s leading graduate schools in science, engineering, and mathematics. Efforts to attract candidates begin with summer internship programs and continue with support for post-doctoral fellowships and direct offers of employment. Officials at the Lawrence Livermore National Laboratory told us that, in addition to these efforts to recruit students and recent graduates, they also recruit at the midcareer or higher level at professional meetings in science and technology fields and through the cooperative relationships with American universities and industries to broaden the prospective employee pool and enhance the intellectual vitality of its existing workforce. According to M&O contractor officials, the critical skills needs at other enterprise production plants, such as the Y-12 National Security Complex and Pantex Plant, differ from those at the weapons laboratories, and their recruiting strategies reflect these differences. Unlike the weapons laboratories, production plants generally do not require candidates with advanced degrees; rather candidates typically need a bachelor’s degree or, in the case of manufacturing and skilled craft positions, an associate’s degree or skills in advanced manufacturing techniques. As such, M&O contractors at production plants can generally recruit regionally for the staff they need and have less need to recruit nationally. For example, M&O contractor officials at Y-12 told us that they recruit predominately bachelor’s level candidates––predominately engineers––from universities within a 300-mile radius of Oak Ridge, particularly from the University of Tennessee in nearby Knoxville. Production plants are also generally well- established within their communities and focus most of their recruitment efforts for skilled manufacturing positions on the local area. For example, M&O contractor officials at the Pantex Plant told us that they have developed strong ties with local community colleges over the years and typically look for high school graduates and community college students and graduates with some specialized, skilled training or work experience. Nevertheless, according to Pantex officials, they have also taken advantage of opportunities to recruit from outside the local areas, seizing opportunities to recruit automotive workers with machine tool experience and highly skilled plant workers from another nuclear security enterprise production facility, the Savannah River Site, in the wake a reduction in force. M&O contractors told us their strategies for development are often linked to recruitment because appealing development opportunities can encourage candidates to accept job offers. As with strategies for recruitment, those for development are tailored to the specific needs of each site’s workforce, but many of the M&O contracting officials we spoke with cited continuing educational opportunities and the option to move within the organization as appealing development opportunities. For example, M&O contractor officials at Sandia National Laboratories told us that offering continuous training opportunities and the opportunity to move to different jobs within different components of the laboratory was very appealing to entry-level hires. Accordingly, Sandia’s Corporate Learning and Professional Development Programs offer various training opportunities. Sandia officials told us that these opportunities help employees keep skills current, provide additional educational opportunities, and help laboratory management anticipate critical skills needs in the workforce. As part of these programs employees can also take training offered by Sandia’s technical and compliance training group, which is focused on skills currently in demand at Sandia, or participate in university graduate degree programs, which Sandia will pay for. The Lawrence Livermore National Laboratory’s Education Assistance Program provides up to $50,000 in tuition assistance for coursework toward a higher degree. Production plants also offer continuous learning and development opportunities. For example, the M&O contractor officials at the Kansas City Plant told us employees are encouraged to pursue higher education in areas where the plant has a skills gap. In such cases, the contractor will pay tuition and, if the employee attends school full-time, continue to pay 70 percent of the employee’s base salary. Kansas City Plant employees may also participate in developmental programs at the entry or midcareer levels that allow participants to undertake three rotational assignments to support their targeted and tailored personal development plans. In addition, the Pantex plant offers employees support for technical training opportunities with local colleges. The Nevada National Security Site also offers a number of developmental opportunities to its staff, including a voluntary mentoring program for all employees, assistance with career planning, various training and certification programs, and attendance at seminars and conferences. M&O contractor employees also have access to online courses and books as well as CD-based training sessions on a wide variety of topics, including supervision, management and leadership; computer skills and certifications; communication; and mentoring. M&O contractors told us that, in their development efforts, they rely on knowledge preservation and transfer programs, including recording the performance of high-skill critical tasks, formal classroom training, on-the- job training, and mentoring programs to preserve critical capabilities in the nuclear security enterprise. Knowledge preservation programs are focused on the physical preservation or recording of critical information and knowledge––typically in paper records, microfilm and microfiche, and in various audio and video media. Knowledge transfer programs seek to ensure that experienced laboratory or production plant employees successfully pass on the knowledge to replicate critical tasks to newer employees. Knowledge preservation. All M&O contractors at nuclear security enterprise sites have taken steps to record critical knowledge. These knowledge preservation programs are broadly similar from site to site, whether laboratory or production plant. For example, Los Alamos National Laboratory officials report that their archives house information on weapons designs and experiments dating to the inception of the laboratory. This information is contained in documents and other media such as film, audio and videotape, drawings, and photographs. The information housed in the archives is still relevant and is used by researchers across the enterprise. It may also be used outside the enterprise by, for example, documentary filmmakers and occupational health researchers. More recently, in the 2000s, Los Alamos gathered and developed critical information in the course of the Reliable Replacement Warhead Program—a program that explored the possibility of developing new nuclear weapons designs. Los Alamos engineers and scientists documented all decisions in the Reliable Replacement Warhead design process through written and video documentation. The other weapons laboratories have also invested in electronic records and videos to preserve critical knowledge. According to Lawrence Livermore National Laboratory officials, Livermore maintains an extensive electronic archive of papers and reports, as well as tutorial lectures by experienced weaponeers on key areas of weapons knowledge. Sandia National Laboratories also has its Knowledge Management Streaming Assets Library program, which has recorded about 1,500 hours of classified exit interviews with retiring weaponeers and made them available to current staff. M&O contractors at the weapons production plants report broadly similar efforts to preserve critical knowledge at their sites. For example, the Y-12 National Security Complex has the Knowledge Preservation Program (KPP). Similar to Sandia National Laboratories’ knowledge preservation efforts, the KPP films retiring employees as they do their work and interviews them on how they do it, then archives the videos in an electronically searchable format. As employees approach retirement, a KPP video and interview is part of the retirement checklist. These videos are evaluated for accuracy by an expert before they are entered into the KPP system. Y-12 officials told us that other NNSA sites have created videos or archives for knowledge preservation but they are not as easily accessible. M&O contractors at the Pantex Plant have undertaken similar efforts, including creating and maintaining what Pantex officials call “picture books” on weapons assembly, and interviewing experienced Pantex workers to capture their knowledge in areas such as high explosives and making these interviews available as a training tool. According to M&O contractor officials at the Nevada National Security Site, however, efforts to preserve critical knowledge regarding underground nuclear testing have faced challenges, as they have been limited and sporadic. These efforts have been complicated by two factors: (1) the need to protect vital national security information against unauthorized disclosure led to a practice of not keeping written documentation about the specifics of critical tasks; and (2) significant numbers of employees were laid off in the mid-1990s after U.S. underground nuclear testing ended. Until 2007, NNSA maintained a program that undertook substantial efforts to capture and record critical knowledge possessed by these workers, but NNSA and M&O contractor officials said these efforts were not comprehensive or systematic, and funding was discontinued. Knowledge transfer. M&O contractors at the weapons laboratories rely on a range of approaches to transfer knowledge, while there is more similarity among the knowledge transfer programs of M&O contractors at production plants. Specifically, each of the three weapons laboratories uses a combination of classroom training, on-the-job training, and mentoring relationships to transfer critical nuclear weapons design information, but with varying reliance on each of these three components. For example, at one end of the spectrum, Sandia National Laboratories relies most heavily on a classroom-focused curriculum––its highly regarded Weapons Intern Program. According to Sandia officials, the 11- month Weapons Intern Program succeeds in transferring such knowledge and experience through a blended learning environment, consisting of live and multimedia-based classroom instruction, individual and team research projects, hands-on activities, and off-site facility and operations tours and briefings. The live instruction is provided through a large contingent of subject matter experts in the various weapon technology, design, evaluation, production, operations, policy, and management areas. Lawrence Livermore National Laboratory is at the other end of the spectrum, relying mostly on mentoring programs and on-the-job-training opportunities to transfer advanced nuclear weapon design skills to new staff. According to Lawrence Livermore officials, their approach to developing critical skills expertise is to embed new employees into work groups directly engaged in important work, with an experienced employee acting as a mentor. As new employees gain skills and experience and demonstrate their readiness, they are assigned tasks of increasing levels of complexity and responsibility. Laboratory officials stated that, in their experience, employees supporting the weapons program must be exposed to years of work in the field to acquire the needed knowledge and judgment to be a fully qualified weaponeer. An extensive electronic archive of papers and reports is available, as well as tutorial lectures on key areas of weapons knowledge, but Livermore officials told us there is no substitute for hands-on experience with weapons. Los Alamos National Laboratory’s approach is not as classroom-focused as Sandia’s program, nor is it as dependent on mentoring relationships and on-the-job training as Lawrence Livermore’s. Specifically, Los Alamos officials told us that critical skills are being transferred through a combination of formal training opportunities, mentoring, and archiving programs. For example, the TITANS program, referred to informally as “nuclear design university” is a 3-year, credential-granting program with 2 years of coursework and 1 year of thesis research and writing under the direction of a mentor. Thesis projects can either be focused on learning new modeling techniques or on mastering the simulation of above-ground experiments. For example, one knowledge transfer technique is to reanalyze old data from actual experiments to teach newer employees to use modern simulation techniques to estimate the results of real testing. The results of the student’s analysis are then compared to actual testing data. Los Alamos officials told us this practice is a very effective method for examining how well the student has mastered the use of computer simulation techniques—a very critical skill when live nuclear testing is not an option. Knowledge transfer at weapons production facilities is focused more on having employees demonstrate that they can replicate specific tasks. For example, M&O contractor officials at the Pantex Plant told us that they are very aggressively taking steps to ensure that younger workers can carry on performing some of the same tasks after older workers retire. The centerpiece of the Pantex effort is the Retiree Corps. Through this program, recent retirees are brought back on a part-time basis—for a maximum of 800 hours a year, an average of a little less than 2 days a week—specifically to teach current Pantex employees how to do their high-skill critical task. Retirees host talks and seminars, provide a narrative to schematics of detailed procedures and photos, and are recorded and/or videotaped explaining their tasks. Pantex officials told us they verify the knowledge transfer by requiring the trainee to demonstrate that he or she can replicate the task. Again, however, the M&O contractor at the Nevada National Security Site faces some challenges. The site has an active on-the-job training program and specialized training on specific diagnostic and recording techniques relevant to underground nuclear testing. However, according to M&O contractors, funding for this program has been minimal for several years. In addition, according to Nevada National Security Site M&O contractor officials, it is challenging to preserve some of the critical skills necessary for underground nuclear testing when there is no opportunity to provide any direct experience with such testing. NNSA officials and M&O contractors told us that maintaining competitive total compensation packages—that is, combined salary and benefits—is crucial for achieving their strategies for recruiting, developing, and retaining the workforce with the skills necessary to sustain critical capabilities in the nuclear security enterprise, but that other factors are also useful in both attracting desirable candidates and mitigating attrition. For example, M&O contractor officials at Sandia National Laboratories told us that offering the highest salary is not required to attract top talent, but offering pay comparable to peer institutions is a necessity. Accordingly, NNSA officials work very closely with M&O contractors to ensure that contractor compensation remains comparable to other enterprise laboratories and plants, private laboratories, companies, and other government entities that recruit and try to retain similar talent. M&O contractors undertake compensation studies every year and comprehensive benefits evaluation surveys every 2 years. This compensation study is done using survey data from recognized regional, national, and international surveys as needed. Based on these data, M&O contractors may seek permission from NNSA to pay certain employees more by submitting a special request in the Compensation Increase Plan. If the plan is accepted by NNSA, salaries will be increased. In addition to raising salaries for M&O contractors to keep them competitive, NNSA will also authorize and pay for sign-on and retention bonuses, significant monetary recognition and awards programs, and special compensation packages for especially difficult-to-recruit and retain critical skills specialties. The biennial benefits evaluation compares the value of M&O contractor workforce benefits to 15 peer competitors for the same talent. According to DOE policy,percent of the value of peer institutions’ benefits. M&O contractors may offer benefits up to 105 NNSA officials and M&O contractors told us that other factors are useful in both attracting desirable candidates and mitigating attrition. For example, the weapons laboratories in particular can offer scientists and engineers access to state-of-the-art equipment—such as the National Ignition Facility at Lawrence Livermore National Laboratory—and the opportunity to do cutting edge research that cannot be done outside the enterprise due to national security restrictions. Similarly, for the three production plants located in relatively remote, nonmetropolitan locations—particularly Pantex, Y-12, and the Savannah River Site— attrition rates are lower among candidates with ties to the local area. For example, M&O contractor officials at Y-12 told us that they recruit locally to the extent possible, because, historically, employees from nearby communities have been less likely to seek opportunities that would require them to relocate. These officials added that the local community is familiar with Y-12, and that about 35 percent of new applicants are employee referrals. M&O contractors have broadly similar retention initiatives. While M&O officials at all sites in the enterprise told us that competitive total compensation packages—that is, salary and benefits—are ultimately the most important factors in employee retention, sites also typically offer a similar mix of other programs designed to encourage retention, such as work/life balance programs, flexible work schedules, and some form of continuous education and learning programs. In addition, some of the M&O contractors we spoke with told us that, to the extent they are able, they try to accommodate the desires and expectations of more recently hired employees for opportunities for faster advancement, meaningful and challenging assignments, and recognition of high performance. To assess the effectiveness of its strategies for recruiting, developing, and retaining the NNSA staff and M&O contractors needed to preserve critical skills in the nuclear security enterprise, NNSA monitors key human capital metrics, including the length of time to hire employees and attrition. To assess the effectiveness of its M&O contractors’ strategies, NNSA uses M&O contractors’ data to monitor key human capital metrics, but these metrics do not have standardized definitions. To assess the effectiveness of its strategies for recruiting, developing, and retaining the federal workforce with the requisite critical skills to support and oversee M&O contractors, NNSA focuses on monitoring two key metrics—the length of time it takes them to hire an employee and its attrition rates—and tracks employees’ progress toward completing the required training and certifications through the TQP. NNSA officials told us the length of time it takes them to hire an employee is a useful metric because it is an indicator of the efficiency of their human capital management processes. Attrition rates, especially for those leaving NNSA for reasons other than retirement are a valid indicator of the relative attractiveness of NNSA employment. Increases in the time it takes to hire employees and increases in the attrition rate would indicate a potential problem that would eventually make it more difficult for NNSA to attract and retain the workforce it needs to achieve its mission. Overall responsibility for maintaining a federal workforce with the necessary critical skills to carry out NNSA’s mission resides in NNSA’s Office of Human Capital Management, located at NNSA headquarters, and its site offices are also responsible for closely monitoring changes in their workforces and keeping NNSA headquarters informed of any changes. They also have direct responsibility for making sure that site office employees are maintaining the technical certifications required to perform their duties. NNSA’s Office of Human Capital Management Services, located at the Albuquerque complex, may also assist both headquarters and site office staff in monitoring these issues. To assess the effectiveness of its M&O contractors’ strategies for recruiting, developing, and retaining their workforces, NNSA monitors key human capital metrics using data the contractors collect. M&O contractors assess key human capital metrics, but these metrics do not have standardized definitions. NNSA generally gives M&O contractors the primary responsibility for identifying their workforce needs and taking the necessary steps to ensure they maintain workforces with the skills to meet the responsibilities outlined in their M&O contracts with NNSA. Accordingly, NNSA officials told us that, in 2005, they discontinued a requirement for M&O contractors to report on efforts to recruit and retain staff with critical skills, as well as more formal reporting requirements for workforce and succession planning. More specifically, according to NNSA officials, M&O contractors expect NNSA to instruct them on what they are required to do and what the contract deliverable and timeline is, but expect to be able to determine on their own how to meet their contractual obligations, including how to recruit, develop, and retain staff with the requisite critical skills. Nonetheless, M&O contractors collect data on key human capital metrics for their workforces and provide these data to NNSA directly from their own human resource data systems. All contractors also undertake some level of workforce and succession planning, although there are no formal or specific requirements directing how they do so. According to NNSA officials, these metrics vary from site to site, but generally provide the same key information, including acceptance rates for offers of employment, which are benchmarked on a site-specific basis but are typically around 80 percent; attrition rates, both for retirement and non-retirement reasons, which are also benchmarked on a site-specific basis; pay comparability—whether salaries are competitive with peer benefits comparability––whether benefits are competitive with peer ability to fill a critical skills position within a certain number of days–– usually 48 to 90 days. According to NNSA officials, these five metrics are tracked very closely by M&O contractors at all sites, and attrition, employment acceptance rates, and pay and benefits comparability data are systematically collected at regular intervals enterprisewide. If any of these metrics indicate a problem in retention, for example, NNSA officials told us, action would be taken to address it. For example, these metrics were monitored very closely by NNSA and the M&O contractors at Los Alamos National Laboratory and Lawrence Livermore National Laboratory during their 2006 transition to a new M&O contract with less generous retirement and medical benefits. There were concerns that this change could lead to a spike in attrition among highly skilled staff that could in turn lead to difficulties in the laboratories meeting deadlines on project deliverables. Similarly, NNSA is now carefully watching the same metrics at Sandia National Laboratories because the M&O contractor substantially cut future retirement benefits that took effect for those employees who remained at the lab beyond the end of 2011. If the metrics indicate greater attrition than expected, the laboratory could adjust its recruiting strategies to hire more staff. NNSA also maintains close, cooperative working relationships between its federal and contractor workforces. Much of NNSA’s expertise in M&O contractor human capital issues resides in its Contractor Human Resources Division (CHRD) at its Albuquerque complex. According to NNSA officials, the work of CHRD is both critical and central to how NNSA manages human capital issues with the M&O contractors. CHRD staff are in day-to-day contact with the M&O contractors on a wide range of human capital issues, including those related to recruitment, development, and retention of employees with critical skills. For example, if an M&O contractor is having difficulty recruiting staff with particular critical skills, it can submit a supplementary Compensation Increase Plan to the NNSA site office for authorization to offer candidates higher salaries. When this occurs, NNSA headquarters and the relevant site office largely rely on CHRD to review, analyze, and make recommendations to senior management on whether to accept, amend, or reject such a request. Because most sites do not have full-time human capital subject matter expertise in residence, NNSA site office officials in particular rely heavily on CHRD both for such expertise and to monitor M&O contractors’ human capital performance metrics at all nuclear security enterprise sites. For example, officials at the Sandia Site Office told us that there is no full-time subject matter expert on human capital issues at the site office, so the office relies heavily on a CHRD staff member to inform the office’s oversight of Sandia National Laboratories on this issue. According to NNSA officials, if NNSA had concerns about what a contractor was doing or had doubts that the contractor was going to be able to continue meeting its contractual obligations because of weaknesses in its recruitment, development, and retention strategies for critically skilled workers, NNSA would raise such concerns and require that corrective actions be undertaken. However, as we noted in our February 2011 report,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 M&O 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. As a result, we recommended that NNSA 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. NNSA stated that it understood all of our recommendations in that report and believed that it could implement them. NNSA has taken some actions toward this recommendation. As of March 2012, NNSA had completed a draft plan and was incorporating stakeholders’ comments. NNSA officials said that they expect to complete the final contractor workforce baseline plan by May 2012. While contractor efforts may be effective at a specific site, these efforts neither ensure long-term survival of these skills across the enterprise nor provide NNSA with the information needed to make enterprisewide decisions that have implications on human capital. NNSA officials told us that they have determined that, as the responsible federal oversight agency for its M&O contractors, they recognize that they need a comprehensive and enterprisewide outlook regarding M&O contractor workforce data, particularly the identification of the critical skills needed to maintain and sustain future capabilities, and to verify that strategies are, indeed, in place to meet future requirements. Accordingly, NNSA officials told us that they are developing the Enterprise Modeling Consortium––an initiative to, among other things, develop the needed skills data and models necessary to help NNSA manage its contractor workforces in a more proactive manner. The consortium is designed to help NNSA undertake more integrated, enterprisewide M&O contractor workforce reporting and analysis and identify the skills and competencies needed by the workforce, as well as the necessary staffing levels, based on the known and projected integrated program requirements needed to implement the Stockpile Stewardship Management Plan and associated budgeted programs for NNSA, DOE, and other federal agencies. NNSA officials told us that NNSA provided $400,000 to the Enterprise Modeling Consortium in fiscal year 2012 to fund further research and development on modeling. However, according to these officials, there is significant work left to do on the Consortium and they cannot provide an estimate for when the Consortium will be completed. Each M&O contractor collects key human capital performance data; however, we found that there are no specific, enterprisewide definitions of these data. NNSA officials told us that they have not asked M&O contractors to standardize these definitions because they believe their current system is effective. We previously reported that the lack of standard definitions for performance measurement data can significantly hinder agencies’ ability to use such data in planning and reporting. NNSA officials also told us that they believe M&O contractors have effectively used the flexibilities provided in their contracts and have demonstrated that they can identify specific critical skills needed and take the steps needed to, by and large, sustain them. However, NNSA is now considering developing a more comprehensive enterprisewide system, the Enterprise Modeling Consortium, to track M&O contractor human capital performance metrics and other workforce data and common definitions of performance metrics may become more important. Specifically, without common enterprisewide definitions of human capital performance metrics, NNSA may not be able to collect consistent and comparable data across all eight sites in the enterprise. For example, one of the M&O contractors’ key metrics—acceptance rates for offers of employment—may not be consistently measured across the enterprise. Human capital staff at one national laboratory told us they participated in a program they compared to “speed dating,” whereby candidates at a career fair may be interviewed for multiple positions and given offers of employment on the spot. However, job applicants may receive multiple offers of employment in a single day and may accept more than one offer to negotiate for a better salary or to have more time to consider their options. In such a situation, the employment offer to a candidate could be counted as an acceptance even if that candidate never became a laboratory employee. When asked about this scenario, NNSA officials stated that it was their understanding that M&O contractors were only counting as accepted offers those who ultimately reported for work, but acknowledged there was no NNSA standard definition and that they did not know for certain how such offers were counted. Successful human capital management and workforce planning depend on valid and reliable data. These data can help an agency determine: performance objectives, goals, and the appropriate number of employees, and can help develop strategies to address gaps in the number, deployment, and alignment of employees. However, NNSA has not identified or considered the potential inconsistencies in these human capital metrics; therefore, decision makers are relying on information that may not be consistently reported. NNSA and its M&O contractors face challenges in recruiting, retaining, and developing their workforces and are using several tools to address these challenges. NNSA and its M&O contractor work environments, site locations, and high costs of living pose recruiting challenges. NNSA and its M&O contractors also face shortages of qualified candidates, an aging workforce, and variable funding. NNSA and its M&O contractors are taking actions to address their current human capital challenges, where possible. Officials from NNSA site offices and M&O contractor work sites reported that their secure work environment and location make recruitment of advanced science and technology candidates more challenging. Due to the sensitive nature of nuclear weapons work, NNSA and M&O contractor sites must be more secure than most private sector laboratories or commercial plants. To meet this security requirement, laboratories and plants in the enterprise tend to be restrictive environments, isolated from security threats by geography and classification protocols. In addition to these potentially undesirable traits, in the view of some candidates, some sites are further constrained by a high cost of living. Restrictive environment. Officials from most M&O contractors reported that the restrictive environment required for nuclear weapons research and maintenance is a disadvantage in recruiting new staff with the potential to become weapons experts. Staff typically need to acquire and maintain high-level clearances and must often work in secure areas that prohibit the use of personal cell phones, personal e-mail, and social media. In particular, they told us younger candidates typically expect to stay continuously connected to their peers via cell phone and social media. Furthermore, any research completed in classified work can only be seen within the classified community; for researchers who desire broader recognition of their work and opportunities for wider collaboration, academia or private industry may be more attractive. Because of these restrictions, most M&O contractor human resources staff told us that it was more difficult to recruit younger scientists and engineers. Isolation. An isolated location may be desirable for building or maintaining nuclear weapons, but it may not appeal to some desirable candidates with advanced degrees in science, technology, and engineering. For example, Los Alamos National Laboratory officials told us that the laboratory’s relative isolation––nearly 100 miles from Albuquerque, New Mexico–– may make it less appealing to some candidates. In addition, the relative lack of other types of employment opportunities nearby may pose challenges for candidates with spouses in careers outside of science, technology and engineering. Officials at two of the three weapons laboratories told us they focus on recruiting top candidates nationwide to gain a wide breadth of thought and opinion among their staff. The laboratories track the proportion of job offers accepted but cannot always ascertain or be sure of the reason a candidate rejects an offer because, according to officials at Lawrence Livermore, candidates may simply state they declined an offer for “personal reasons.” In addition, some of the production plants and the test site are also in isolated locations and face some of the same challenges as the laboratories. However, these sites require fewer candidates with advanced degrees and can generally rely on the local workforce to fill other types of critical skills positions. For example, Savannah River Site and Pantex are also both located far from other large cities. However, because of their relative isolation, they are among the biggest employers in these areas, and many local candidates are qualified and eager to accept positions in weapons manufacturing and maintenance. Pantex officials reported that they do not have difficulty finding most workers to perform weapons maintenance, which requires a shorter amount of on- the-job training than weapons design but nonetheless requires a set of critical skills. However, site staff have had to develop strategies to attract candidates to fill those positions that require advanced degrees. Unlike the laboratories, officials at all of the production plants told us that they focus their recruiting efforts for these positions at local and regional colleges and universities. Officials at Y-12, for example, have identified competitive science and engineering programs at universities within 300 miles of their plant in Oak Ridge, Tennessee. Y-12 officials reported that they have better results in both recruiting and retaining critically skilled workers when those workers have personal ties to the area. In contrast, M&O contractor officials from the laboratories told us that they needed to recruit from the top academic programs across the country. High cost and competition. Two enterprise sites are located in areas with high costs of living, which can deter qualified candidates—Los Alamos and Lawrence Livermore. NNSA and its M&O contractors have flexibility to offer higher compensation for some critical skills, but some candidates are unwilling to live in high cost areas. For example, housing in Los Alamos is expensive and scarce. According to Los Alamos National Laboratory staff, some employees commute nearly 100 miles each way from Albuquerque every day partly due to cost of living constraints. Los Alamos Human Resources managers reported that high housing costs are a concern among current and prospective employees. Lawrence Livermore National Laboratory, located in the San Francisco Bay Area, is also a high cost area. NNSA has authorized higher salaries for some critically skilled M&O contractor employees but delays during the hiring process can give private sector recruiters an advantage with critically skilled candidates. Lawrence Livermore uses the flexibilities it has to negotiate competitive compensation, but a candidate interested in weapons work may be drawn to another site with a lower cost of living, such as Sandia National Laboratories in Albuquerque or one of the production plants. Further complicating NNSA’s recruiting efforts is the demand for qualified candidates in the private sector as well, and private sector jobs may offer a work environment that many candidates may find more desirable. The same pool of candidates who can excel in engineering, modeling, and simulation tasks is also attractive to high technology firms. For example, according to M&O contractor officials at Lawrence Livermore National Laboratory, a web-based provider of DVD rentals and streaming media uses computational scientists to predict consumers’ preferences for films, which is the same skill set the weapons laboratories would use for modeling and simulation. However, this company does not have the constraints that a federal contractor has with compensation limits and a restrictive work environment. NNSA and its M&O contractors are making workforce plans, but face shortages in qualified critically skilled candidates and an aging workforce. In addition, uncertainty about future funding makes long-term workforce development initiatives challenging to execute. The laboratories have not yet experienced any critical shortages of critically skilled workers, but they all reported that finding candidates with the appropriate qualifications is a growing recruitment challenge and that a more mobile and aging workforce is a retention challenge. Shortages of qualified candidates. NNSA officials told us that qualified candidates are in short supply and that competition from science and technology-related companies in the private sector poses additional challenges. Candidates for most critical skills positions at national laboratories must meet certain criteria, including (1) an advanced degree (master’s or doctorate) in a scientific, technical, or engineering field; (2) the ability to obtain a high-level security clearance, which requires U.S. citizenship; and (3) an interest in and willingness to learn weapons design work. The requirement for U.S. citizenship in particular is becoming an increasingly difficult criterion to satisfy in the recruitment process. National laboratory officials told us that a large percentage of students graduating from top science, technology, and engineering programs are foreign nationals. M&O contractors can hire foreign nationals to work outside of weapons-related areas, but the citizenship requirement for working on programs supporting U.S. nuclear weapons is not negotiable. In addition, national laboratory recruiting staff noted hurdles finding candidates with an interest in and willingness to learn weapons design work. For example, officials at Sandia National Laboratories told us younger candidates with the necessary qualifications are often more interested in fields that contribute to improving the environment. In addition, because of the sensitive nature of weapons work, civilian graduate programs cannot teach weapons-specific skills, so would-be weaponeers may not know whether the work suits them until after they have invested significant time working in the enterprise. Even if candidates accept a position, they do not actually have the authorization to design nuclear weapons; current policy allows them to refurbish components within the existing stockpile, and then only when funding is appropriated for that specific activity. A more mobile workforce. NNSA and M&O contractor officials noted that a general shift from defined benefit retirement systems offering pensions to a defined contribution retirement system has made employees much more mobile and, therefore, harder to retain. A defined contribution retirement system makes employees much more mobile because, once the employee is vested––typically after a few years––their contributions to their retirement accounts are portable, therefore they no longer depend on tenure with a single employer. According to NNSA officials, M&O contractors no longer expect newly hired employees to spend their entire careers in the enterprise; rather, they expect them to work for a national laboratory or production plant for an average of 5 to 10 years. Aging workforce. Many of the critically skilled employees currently filling these positions, both at the national laboratories and other NNSA sites, are at or near retirement age, which adds additional uncertainty to the projected human capital needs of the enterprise. NNSA officials told us that they are aware that many critically skilled employees are at or near retirement age, and they are tracking those retirements closely. Human capital staff from NNSA and its M&O contractors told us that it is difficult to anticipate retirement trends, especially during an economic recession. M&O contractor human resources staff said that they have found fewer staff retiring than they would have projected, due to uncertainties about their financial investments. These economic factors may have helped to preserve some critical skills within the enterprise, but officials are concerned that when the economy rebounds, eligible staff may retire at higher-than-projected levels. Such levels of attrition could leave a skills gap that would take years to replenish. Knowledge transfer activities in the nuclear security enterprise tend to require multiple years to complete, but contractors have been challenged to plan and maintain these development efforts because funding varies from year to year. NNSA officials typically do not dictate whether or how much funding goes toward knowledge transfer within contractor workforces, except for specific programs at Sandia, because NNSA prefers not to fence funding for particular contractor activities. Contractors use what NNSA calls science campaigns—which, among other things, fund research to improve the ability to assess warhead performance without nuclear testing and help to maintain the scientific infrastructure of the nuclear weapons laboratories—and life extension programs—which ensure weapons’ readiness and extend the life of existing warheads through design, certification, manufacture, and replacement of components—as a means for knowledge transfer, where more experienced weaponeers can train newer staff on weapons design and maintenance. Both science campaigns and life extension programs require long-term planning to ensure that the necessary resources are available. According to NNSA and M&O contractor officials, funding for science campaigns and life extension programs has varied over the years. M&O contractor officials at both plants and laboratories told us their knowledge transfer plans have been adversely affected in years when funding has been reduced. In recent years, plans for certain life extension programs and science campaigns have been scaled back after plans have been made and contractor resources allocated. According to M&O contractors at the laboratories, reduced funding for life extension programs diminishes their opportunities to give their newer weaponeers hands-on experience. For example, weapons staff at Lawrence Livermore National Laboratory told us that they made knowledge transfer plans based on their approved warhead life extension projects, and that when those projects were sidelined; newer weaponeers were denied significant training opportunities. However, because funding decisions are beyond the M&O contractors’ purview, M&O contractor officials told us there is little they can do to prepare for or mitigate this challenge. NNSA and its M&O contractors reported that they are taking actions to address their human capital challenges where possible. Specifically, NNSA and M&O contractor officials told us they engaged in workforce planning to avoid potential critical skill gaps in the enterprise. NNSA-wide workforce plans are not expected to be completed until 2013 according to NNSA officials, but certain components are already in practice at various sites, such as streamlined hiring and security clearance practices and “pipeline” building for critically skilled employees. Streamlined hiring and security clearance processes. NNSA and its M&O contractors have streamlined human capital processes to attract and hire new critically skilled workers. In the past, federal hiring processes have caused longer waits, both for candidates awaiting a decision and for human capital officials awaiting security clearances for new hires. M&O contractor staff reported that delays had previously allowed strong candidates to find other opportunities, or if candidates were hired and waiting for a clearance, they could lose interest in the position before they started. M&O contractor staff told us that finding work for hired-but- uncleared staff to complete was frustrating for both the new staff and their supervisors. NNSA has made reducing cycle time a priority, and officials from several sites reported that they have been able to hire and obtain clearances for employees more quickly in recent years. Building a pipeline of critically skilled employees. Both NNSA and its M&O contractor officials acknowledge that, due to the long period required for developing some critical skills employees, they need to anticipate their critical skills needs for multiple years in the future. All sites have recruiting and development plans to preserve critical skills in their workforce, which they refer to as a pipeline. Sites use pipelines in two ways to avoid critical skills gaps. First, they use training and project assignments to ensure that critical skills are being developed and preserved in newer employees. For example, Lawrence Livermore has assessed its employees’ skill sets and experience, so it knows which are currently performing essential operations more than 25 percent of the time––called core employees–– and which are being prepared to perform those operations––called pipe employees. They can augment a pipe employee’s expertise in an area if management sees a shortage of core employees in that skill set. Second, in recruiting activities, human resources staff may maintain information about potential future candidates for weapons programs, either with contacts made in internship, fellowship, and coop programs or by keeping records of interested candidates who were not hired. For example, Sandia is building a database of potential candidates, so that in the future it is not relying exclusively on that year’s graduating class from the top science and engineering programs. Succession planning can also inform pipeline decisions. M&O contractor officials at some sites said that they have begun to analyze potential skills gaps if a specific retirement or separation were to occur. Those M&O contractors who are undertaking these analyses can rely on managers’ assessments of their employees or software packages designed to facilitate succession planning. M&O contractors told us that this kind of planning is currently used in management or leadership capacities, but in the future it could be applied to other areas such as critical skills capacities. Each M&O contractor has a unique way of implementing its pipeline, but M&O contractor officials from all sites told us they all realize the need to consider future retirements and mission requirements in their current hiring and development plans. For example, a senior M&O contractor manager at Sandia National Laboratories responsible for building the laboratories’ talent pipeline told us that Sandia is facing unprecedented hiring needs due in part to expected increases in retirements. He expects to experience 33 to 50 percent attrition in the next 4 to 5 years, while the total number of Sandia employees will need to remain about the same. Accordingly, Sandia officials told us they expect to have hired approximately 3,100 new employees in the 3 years ending in 2012—about 800 in 2010, 1,100 in 2011, and 1,200 in 2012. Some of the human capital challenges facing the enterprise are beyond the control of NNSA and its M&O contractors, and in these cases, NNSA has authorized increased compensation to help the sites acquire or retain the personnel they require. The site locations are fixed, and site staff cannot change the number of U.S. citizens completing graduate science and technology programs. Similarly, NNSA and its contractors have no choice but to adapt to the increased mobility of their staff resulting from the shift to a defined contribution retirement systems. To mitigate these challenges, NNSA and its contractors continue to offer financial incentives to recruit and retain critically skilled employees, with competitive starting salaries. The scale of these financial incentives can vary by location and position, but NNSA reported that this strategy has thus far been adequate for recruiting and retaining the talent they need. NNSA and its M&O contractors have taken a number of useful steps to sustain critical skills in the enterprise in the face of several challenges. NNSA has begun to implement the recommendation we made in our February 2011 report to 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. However, while contractor efforts may be effective at a specific site, they do not provide NNSA with the information needed to make enterprisewide decisions that have implications on human capital. Without this information, NNSA’s ability to monitor the effectiveness of its and its M&O contractors’ strategies to recruit, develop, and retain the workforces needed to preserve critical skills may be hindered. In particular, without common enterprisewide definitions of human capital performance metrics, NNSA may not be able to collect consistent and comparable M&O contractor human capital data across all eight sites in the enterprise. Since NNSA is now considering developing a more comprehensive enterprisewide system to track data on critical skills through its Enterprise Modeling Consortium, this may be an opportune time to explore establishing common, uniform definitions for the human capital metrics used in this system. To improve NNSA’s ability to monitor the effectiveness of its strategies–– and its M&O contractors’ strategies––to recruit, develop, and retain the workforces needed to preserve critical skills in the enterprise, we recommend that the Administrator of NNSA take the following action: As it develops its Enterprise Modeling Consortium and other enterprisewide systems for tracking M&O contractor human capital performance metrics, NNSA should consider developing standardized definitions across the enterprise, especially across M&O contractors, to ensure they gather consistent data using human capital metrics with consistent, uniform definitions. We provided NNSA with a draft of this report for their review and comment. NNSA provided written comments, which are reproduced in appendix I. NNSA stated that it appreciated GAO’s recognition of the significant challenges NNSA faces in sustaining critical skills in its workforce and the efforts NNSA is taking to identify critical human capital skills, competencies, and levels needed to maintain the nation’s nuclear weapons strategy. In addition, NNSA stated that it agreed with the GAO’s recommendation that NNSA should consider developing standardized definitions for human capital metrics across the enterprise to help ensure consistent and comparable data. NNSA also provided other additional technical information, which we incorporated where appropriate. We are sending copies of this report to the Secretary of Energy, the Administrator of NNSA, the appropriate congressional committees, and other interested parties. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, Ned Woodward, Assistant Director; Dr. Timothy Persons, Chief Scientist; Don Cowan; Hayley Landes; and Kevin Tarmann made key contributions to this report. Yvonne Jones, Alison O’Neill, Cheryl Peterson, Rebecca Shea, Kiki Theodoropoulos, and Greg Wilmoth provided technical assistance. | NNSA has primary responsibility for ensuring the safety, security, and reliability of the nations nuclear weapons stockpile. NNSA carries out these activities at three national labs, four production sites, and one test sitecollectively known as the nuclear security enterprise. Contractors operate these sites under management and operations (M&O) contracts. The enterprise workforces often possess certain critical skills that can only be developed through a minimum of 3 years of experience working in a secure, classified environment. Because NNSA could have difficulty maintaining the critically skilled workforces necessary to ensure the safety, security, and reliability of the nations nuclear weapons, GAO was asked to examine: (1) strategies NNSA and its M&O contractors use to recruit, develop, and retain critically skilled workforces; (2) how NNSA assesses the effectiveness of these strategies; and (3) challenges in recruiting, retaining, and developing this specialized workforce and efforts to mitigate these challenges. GAO reviewed NNSAs and its M&O contractors human capital documents and interviewed officials. The National Nuclear Security Administration (NNSA) and its M&O contractors have developed and implemented multifaceted strategies to recruit, develop, and retain both the federal and contractor workforces needed to preserve critical skills in the enterprise. NNSAs recruiting and retention efforts for its federal staff focus on attracting early career hires with competitive pay and development opportunities. Its development efforts generally rely on two key programs to develop its critically skilled workforceone that identifies needs and another that identifies the qualifications necessary to meet them. For strategic planning purposes, NNSA is also undertaking a comprehensive reassessment and analysis of staffing requirements to ascertain future federal workforce requirements. M&O contractors recruitment and retention strategies vary from site to site, but each site focuses on maintaining competitive compensation packages. Their development efforts vary in approach and scope and face some challengesparticularly in preserving underground nuclear testing skills. To assess the effectiveness of its ownand its M&O contractorsstrategies for recruiting, developing, and retaining the workforces needed to preserve critical skills, NNSA monitors key human capital metrics. NNSA focuses on two key metrics in assessing its own strategiesthe time it takes to hire a new employee and its attrition rates. To assess the effectiveness of its contractors strategies, NNSA monitors key human capital metrics using data that M&O contractors collect, including acceptance rates, attrition rates, comparability of pay and benefits with peer institutions, and the ability to fill a critical skills position within a certain number of days. M&O contractors assess key human capital performance measures, but these metrics do not have standardized definitions. For example, one of the M&O contractors key metricsacceptance rates for offers of employmentmay not be consistently measured across the enterprise. Without this information, NNSAs ability to monitor the effectiveness of its and its M&O contractors strategies to recruit, develop, and retain the workforces needed to preserve critical skills may be hindered. In particular, without common enterprisewide definitions of human capital performance metrics, NNSA may not be able to collect consistent and comparable data across all eight sites in the enterprise. The enterprises work environments and site locations pose recruiting challenges, and NNSA and its M&O contractors face shortages of qualified candidates, among other challenges. For example, staff must often work in secure areas that prohibit the use of personal cell phones, e-mail, and social media, which is a disadvantage in attracting younger skilled candidates. In addition, many sites are geographically isolated and may offer limited career opportunities for candidates spouses. Critically skilled positions also require security clearancesand therefore U.S. citizenshipand a large percentage of students graduating from top science, technology, and engineering programs are foreign nationals. The pool of qualified candidates is also attractive to high technology firms in the private sector, which may offer more desirable work environments. NNSA and its M&O contractors are taking actions to address these challenges where possible, including streamlining hiring and security clearance processes and taking actions to proactively identify new scientists and engineers to build a pipeline of critically skilled candidates. GAO recommends that NNSA consider developing standardized definitions for human capital metrics across the enterprise to ensure NNSA and its M&O contractors gather consistent contractor data. NNSA concurred with GAOs recommendation. |
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Fuel for nuclear power plants consists of fingernail-sized pellets of uranium dioxide, a radioactive compound. The pellets are fitted into hollow metal rods, typically constructed of zirconium alloy, and the rods are then gas pressurized. The rods are generally 12 to 14 feet in length and are bundled together into assemblies. A portion of the assemblies must be replaced every 1 to 2 years as the fuel in the reactor expends energy, becoming less efficient at producing heat. As part of the process of expending energy during a nuclear reaction, the fuel becomes highly radioactive and thermally hot. Spent fuel emits radiation as a consequence of radioactive decay. Barriers such as thick walls, sealed containers, and water are used to shield individuals from exposure to this radiation. NRC regulates not only the construction and operation of commercial nuclear power plants but also the storage, transportation (together with the Department of Transportation), and disposal of spent fuel. NRC requires each operating nuclear power plant to have safety and security programs. For example, NRC requires protective shielding and security systems, including armed guards, at nuclear power plants. When spent fuel assemblies are removed from a reactor, they are stored in large pools of cooling water. These pools are constructed according to NRC’s requirements, typically with 4- to 6-foot thick steel-lined concrete walls and floors. Pools are typically 30 to 60 feet long, 20 to 40 feet wide, and 40 feet deep. The location of these pools is dependent on the type of reactor. Essentially, all commercial power reactors in the United States are one of two types, either a boiling water reactor or a pressurized water reactor. For most boiling water reactors, the pools are located close to the reactors, several stories above ground. For pressurized water reactors, the pools are located in structures outside the reactor building, on the ground or partially embedded in the ground. Regardless of reactor type, these pools are required by NRC to be constructed to protect public health against radiation exposure, even after a natural disaster, such as an earthquake. The water in the pool is constantly cooled and circulated, and the fuel assemblies are generally 20 feet below the surface of the water. In 1982, through the Nuclear Waste Policy Act, the Congress directed DOE to construct an underground repository for disposal of spent fuel and other high-level radioactive waste. The Congress amended the act in 1987 and required DOE to only consider Yucca Mountain, Nevada, as a potential site for a repository. In 2002, the President recommended to the Congress, and the Congress approved, Yucca Mountain as a suitable site for the development of a permanent high-level waste repository. As we reported in 2001, for a variety of reasons, DOE is unlikely to open the repository as planned in 2010. Lacking a long-term disposal option now, some nuclear utilities must move a portion of their spent fuel into dry storage or face shutting down their plants because their wet pools are reaching capacity. Currently, 25 of the 72 storage sites use dry storage, and 11 other sites have plans to move some of their inventory of spent fuel into dry storage. Dry storage facilities for spent fuel typically consist of steel containers that are placed inside concrete vaults or bunkers where the fuel is cooled by air rather than water. These storage systems are required by NRC to be capable of protecting against radiation exposure and of surviving natural disasters. Because the move to dry storage is time-consuming and expensive, utilities are, wherever possible, modifying wet pool storage capacity so they can store larger quantities of spent fuel in these pools. To expose a large number of people to the harmful effects of radiation from spent fuel, the fuel would have to be released from its protective containers and dispersed over a wide or densely populated area. However, unlike many other hazardous materials, spent fuel is a hard, heavy ceramic material that is neither explosive nor volatile. To achieve a wide dispersal, some portion of the spent fuel assemblies would have to be pulverized into small particles by an external force—such as a high-speed impact or a violent explosion—or some portion of the spent fuel assemblies would have to burn in a sustained, high-temperature fire. According to NRC, the redundancy and robustness of the designs of the fuel containers make wide dispersal highly unlikely. In the event of a dispersal, the most significant health effects would involve persons who inhaled very small (respirable) particles—10 microns or less in diameter. Such particles would be absorbed into the body and possibly remain there for many years. In addition, these particles could be deposited on buildings and the ground where, in the absence of a costly cleanup effort, they could expose people to elevated levels of radiation. The transportation of spent fuel to Yucca Mountain—most likely by both truck and rail, but with a preference for using mostly rail—will be a major undertaking, spanning 20 to 30 years. According to DOE, more than 50,000 tons of the spent fuel have accumulated at 72 sites in 33 states, many located near urban areas in the Midwest and the East. DOE has estimated that the accumulated inventory will have grown to 69,000 tons by 2010 and that moving this volume could require approximately 175 shipments per year over 24 years, relying on a combination of truck and rail shipments. For the transportation of spent fuel, NRC has certification and inspection requirements for shipping containers to ensure that the containers protect against radioactive releases under accident scenarios. NRC has certified a number of shipping container designs for use on trucks and rail. The Nuclear Waste Policy Act of 1982, as amended, requires DOE to ship spent nuclear fuel and high-level radioactive waste to Yucca Mountain in containers that have been certified by NRC. The act also requires DOE to notify NRC in advance of spent fuel and high-level radioactive waste shipments. In addition to NRC, the Department of Transportation plays a role in regulating the transportation of spent fuel and other high-level waste. The department’s Research and Special Programs Administration sets certain safety standards for the transportation of hazardous materials, including spent fuel. These standards include, among other things, documentation and labeling of containers, including placards identifying the shipment, and requirements for separating certain radioactive materials while in transit. The Federal Motor Carrier Safety Administration oversees the safety of shipments by highway, and the Federal Railroad Administration oversees the safety of shipments by rail. The U.S. Coast Guard oversees the safety of shipments that may be made by barge. Studies conducted by NRC and DOE have consistently found that the likelihood of widespread harm to human health from a terrorist attack or a severe accident involving spent fuel is very low. None of the studies involving the transportation of spent fuel or dry storage of spent fuel identified a scenario resulting in widespread harm—largely because of the protective containers required by NRC. For example, these studies repeatedly found that transportation containers would be very difficult to penetrate, and in the worst-case scenarios where they may be penetrated, only a small fraction of the material would be released. Some studies involving spent fuel stored in pools of water found that widespread harm is possible under severe but unlikely accident conditions. Such conditions may include a catastrophic earthquake or a severe but unlikely accident that could uncover the fuel for several hours, possibly allowing it to spontaneously ignite and scatter radioactive material over a wide area. To respond to increased security concerns stemming from the September 11, 2001, terrorist attacks, NRC is further studying the safety and security of spent fuel in transit and in wet or dry storage, including the potential effects of more extreme attack scenarios such as deliberate aircraft crashes. Since the late 1970s, federal studies have examined the effects of both terrorist acts of sabotage and severe accidents involving shipping containers for spent fuel. Sabotage studies have sought to determine whether radioactive material could be released from shipping containers in specific sabotage scenarios, while accident studies have assessed whether radioactive material could be released in a variety of accidents, and the overall probability of their occurrence. Some of these studies were commissioned by NRC, and others by DOE, and many of them were conducted through DOE’s Sandia National Laboratory and other DOE laboratories. These studies collectively indicate that the construction of the shipping containers helps to limit releases. Although NRC is confident in these results, it is sponsoring assessments to further validate computer models and address heightened security concerns. The most recent sabotage study—conducted by DOE’s Sandia National Laboratory for DOE in 1999—estimated the amounts and characteristics of releases of radioactive materials from truck and rail spent fuel containers subjected to two different types of weapons. The results of this study confirmed the findings of earlier studies that armor-piercing weapons could penetrate shipping containers and release small quantities of radioactive material. The study found that, under a worst-case scenario, the weapon could penetrate a shipping container and release a small amount of material—equal to about 0.016 of 1 percent of the spent fuel in the container—as small, respirable particles. These small, respirable particles could become airborne and spread beyond the immediate vicinity of the attack. A subsequent DOE-sponsored report used the results of the 1999 Sandia National Laboratory study to estimate the human health impact of the most severe release. Using a computer-based analytic model and conservative assumptions, DOE’s contractor found that the predicted release from a truck container would cause about 48 cancer deaths over the long term and that a predicted release from a rail container would cause about 9 cancer deaths over the long term. DOE’s contractor’s analysis explained that these cancer deaths should be considered against a backdrop of an expected 1.1 million cancer deaths among the same population expected from other causes. This analysis assumed that the release would occur in an urban area with a population projected to the year 2035 under stable weather conditions. The analysis also assumed that the spent fuel release would contain twice the radioactive content of a typical spent fuel shipment and that there would be no evacuation or cleanup of the affected area for 1 year after the incident. These studies are the most recent in a series of studies dating back to the 1970s. According to NRC and DOE officials, confidence in the results of these studies has increased significantly as better data and more sophisticated analytic techniques have been used. Appendix II contains a fuller description of the methodology of these recent studies and the results of previous studies. Since the 1970s NRC has also sponsored a series of studies examining the risk that spent fuel could be released during transportation accidents. NRC’s most recent assessment of spent fuel transportation accident risks was conducted for NRC by Sandia National Laboratory and was published in 2000. The 2000 Sandia National Laboratory study, like preceding accident studies, found that an accidental release of spent fuel in transit is very unlikely and that significant human health impacts are even less likely. The study estimated that in over 99.9 percent of all truck and rail accidents, the shipping container would experience no significant damage, and no radioactive material would be released. In fact, the analysis found that only 7 in 100,000 (0.007 of 1 percent) truck accidents and 4 in 100,000 (0.004 of 1 percent) rail accidents would involve spent fuel casks in impacts or fires that might cause a release of radioactive material. While this study did not project the human health impacts of particular accident scenarios, it concluded that the overall risk of human exposure to accidental releases of spent fuel was far less than that estimated in the 1977 study, which confirmed that NRC’s safety and security regulations then in place were adequate. A subsequent DOE-sponsored study used the results of the 2000 Sandia National Laboratory study to determine the potential health effects of the estimated quantity of material released. DOE’s contractor used the estimated amount of material released in what DOE determined as the most severe reasonably foreseeable accident to estimate the number of latent cancer fatalities that could result from severe accidents while shipping spent fuel to the Yucca Mountain repository. From this study, DOE concluded that this type of accident—having a probability of occurring about 2.8 times in 10 million accidents per year—could cause about 5 long-term latent cancer fatalities—far less than its estimate of 48 latent cancer deaths in the event of a successful sabotage attack with armor-piercing weaponry. Apart from this type accident, DOE found that the probability of any deaths due to an accidental release of radiation was quite small. DOE’s final environmental impact statement for Yucca Mountain projected that accidents over 24 years of shipping would cause fewer than 0.001 latent cancer fatalities. In contrast, DOE projected that these same shipments had a much greater probability of resulting in deaths due to normal traffic accidents—between 2.3 and 4.9 traffic fatalities over the same 24-year period. As with the sabotage studies, these studies of accident scenarios are the most recent in a series of studies dating back to the 1970s. According to NRC and DOE officials, confidence in the results of these studies has increased significantly as better data and more sophisticated analytic techniques have been used. Appendix II contains a fuller description of the methodology of these recent studies and the results of previous studies. Although NRC believes that the results of the federally sponsored studies are valid, it has several evaluations ongoing and planned to further assess its security and safety measures. To assess its existing security measures following the September 11, 2001, terrorist attacks, NRC initiated a commissionwide review. As part of this review, NRC commissioned Sandia National Laboratory to examine more severe terrorist attack scenarios involving spent fuel shipping containers. For example, the laboratory will assess the effects of (1) a 20-passenger aircraft loaded with explosives crashing into shipping containers and (2) a sustained attack on these containers using a variety of weapons in combination. As part of an ongoing process to assess its safety measures, NRC has a number of ongoing and planned studies. NRC commissioned Sandia National Laboratory for further validation of computer models used to evaluate the safety of shipping containers. To solicit comments on the scope of its evaluation, NRC held a series of public meetings beginning in 1999. It considered comments obtained during these meetings and issued an interim report in 2002 that recommended several additional studies. Although these studies are still being designed, their preliminary objectives include (1) validating past computer-based predictions of damage to containers resulting from collisions, (2) validating past computer-based predictions of how well containers withstand fires, and (3) identifying the response of fuel pellets, fuel rods, and fuel assemblies in severe impacts. In contrast to past analyses of severe accident scenarios, the studies are to include physical tests of full-scale current model shipping containers. The results of these physical tests will be compared to the predictions of past computer-based analyses and serve to either validate or to correct those results. The studies are also to address some of the technical issues that were not adequately addressed by past accident analyses. For example, while past studies relied on expert judgment to assess the complex chain of variables involved in releasing respirable spent fuel from containers—including fracturing spent fuel rods and pellets—the planned studies will examine these events experimentally. According to NRC officials, the studies are expected to be completed by 2006. NRC studies have reported that a risk of widespread harm to human health from spent fuel arises from the remote possibility of a sustained loss of coolant in a spent fuel pool. Such a loss could potentially lead to a fire that would disperse radioactive material across a wide area. NRC’s most recent published study of this risk, released in 2001, found that, though the potential consequences of such a fire could be severe—nearly 200 early fatalities and thousands of latent cancer fatalities—the likelihood of such a fire is low. The study estimated that a catastrophic earthquake or a severe but unlikely accident, such as dropping a 100- to 150-ton storage container into the pool, could precipitate a pool fire. The study was conducted to assess the risks associated with accidents at nuclear reactors that have been permanently shut down. According to NRC, once the fuel is removed from the reactors, there is a risk associated with the fuel stored in pools. NRC designed the study with conservative assumptions to identify the most severe possible impact on public health. The study assessed a variety of natural disasters and accidents that could drain coolant and cause a fire. These events included loss of electrical power, which would shut down the pool cooling system; an event that would significantly damage the pool cooling system; a drop of a heavy load, which could damage the pool wall or floor; a severe earthquake; and an accidental aircraft crash. The study found that a catastrophic earthquake and a heavy load drop were the events most likely to significantly damage the pool, leading to sustained loss of coolant and potentially causing a fire. The study then calculated the amount of radioactive material that might be released by a fire and the possible human health effects stemming from exposure to this material. In making these calculations, the study made various conservative assumptions to ensure that NRC identified the most severe consequences possible. For example, the study assumed that a pool fire would involve 100 percent of the spent fuel assemblies in the pool, releasing large amounts of radioactive material into the atmosphere. Two of the authors of the study noted that it was not certain how many spent fuel assemblies would actually burn in a fire. The uncertainty in the amount of radioactive material released depends on the fuel age and distribution in the pool and the characteristics of the accident scenario. The authors noted that some spent fuel assemblies might not reach the high temperatures required to burn and that some of the radioactive material might remain trapped in the pool or building. Because spent fuel decays and thus becomes less dangerous over time, the study evaluated scenarios in which the reactor had been shut down for 30 days, 90 days, 1 year, 2 years, 5 years, and 10 years. For each scenario, the study evaluated two levels of radioactivity released from the fuel. NRC used the results of this study to calculate the potential health effects of a fire in a spent fuel pool. These results are shown in table 1. The study noted that the results are based on a natural disaster or an accident severe enough to lead to a pool fire and that the risk of such an event occurring is very low. NRC also noted that part of the reason for the low probability is NRC’s defense-in-depth policy, which states that NRC establishes requirements to ensure that safety will not be wholly dependent on any single system. Instead, NRC’s requirements ensure multiple or redundant safety systems. In the case of the storage pool studied in the 2001 report, NRC noted that several factors combine to make a pool fire unlikely, including the robust design of the pool; the simple nature of the pool support systems; and the long time required to heat up the fuel, which allows time for operators to respond. For example, according to the 2001 report, heating the least-decayed spent fuel to the ignition point—were it to occur at all—would take hours, perhaps even days. Thus, NRC officials explained that even if a massive loss of coolant occurred, plant operators might still have time to react, depending on the extent of the damage. NRC requires that nuclear power plants have a backup water supply that can cool fuel in case of an accident, so, depending on the extent of damage, plant operators might be able to keep the fuel submerged. The risk of a pool fire is also limited by the ability of some of the fuel to be cooled by simple air ventilation if the coolant drains out. According to NRC, completely draining a pool may allow enough air ventilation among the stored fuel assemblies so that the spent fuel would stay below the ignition point of a self-sustaining fire (about 1,650 degrees Fahrenheit). Furthermore, even if a fire did begin in one assembly, there is considerable uncertainty about whether the fire would spread to other assemblies. A 1987 study of spent fuel pools found that spent fuel in pools with fewer assemblies, after being cooled for just a few weeks, would not ignite if subjected to loss of coolant. Under the dense storage conditions characterized by most spent fuel pools today, however, air ventilation becomes less effective. To begin addressing some of the uncertainties regarding the risks of storing spent fuel in wet storage pools, NRC has some ongoing work, and recently completed some initial evaluations of sabotage attacks on these pools, and has more work planned and ongoing at two DOE national laboratories. Following the terrorist attacks of September 11, 2001, NRC commissioned the U.S. Army Corps of Engineers to examine potential effects of sabotage directed at spent fuel pools. The Corps conducted several computer-based analyses of the potential effects of armor-piercing weapons and high explosives on typical spent fuel pools. The analyses found that the penetration of armor-piercing weapons and high explosives could vary considerably, depending, among other things, on the size of the weapon or explosive and the sophistication of the attacker. NRC is also conducting studies with less conservative assumptions to more realistically evaluate the risks of spent fuel in a drained pool. NRC has contracted with Argonne National Laboratory to study the conditions necessary to ignite a pool fire. NRC has also contracted with Sandia National Laboratory for a series of studies to define potential threats, and to identify potential vulnerabilities, regulatory improvements or legislative initiatives to improve security and safety and better protect public health. The studies by Sandia National Laboratory include a review of a variety of terrorist scenarios, including attacks on fuel pools with aircraft and high explosives. According to NRC, preliminary results of these studies indicate that spent fuel may be more easily cooled than has been predicted in some past studies and that off-site radiological releases may be substantially reduced from previous worst-case estimates. Predicted public health effects might also be substantially reduced for the worst scenarios where coolant is lost and recovery actions are not successful in cooling the fuel. Dry storage containers, like shipping containers, pose a considerable barrier to releasing spent fuel. Used to store spent fuel when it is removed from wet storage, dry storage containers are constructed of layers of steel and radiation barriers such as concrete. In establishing regulations for dry storage of spent fuel, NRC stated in 1998 that dry storage containers are structurally similar to shipping containers and that the results of sabotage studies on shipping containers could reasonably be applied to dry storage containers. Nevertheless, NRC is continuing to study potential risks of releases from dry storage containers. Studies by DOE and the Corps on dry storage containers have generally reached the same conclusion—that the thick walls of the containers, consisting of an inner steel container and an outer steel or concrete container, could not be penetrated by airplane crashes and would result in no significant release of radiation when attacked with advanced weapons. Two DOE-sponsored reports, released in 1998 and 2001, found that airplane crashes would not penetrate dry storage containers. The reports focused on the most penetrating components of the commercial jet aircraft: the engines and landing gear. Both reports concluded that although airplane crashes could damage the containers, no radioactive material would be released. The analysis showed that the containers would break up the airplane, spreading jet fuel over a wide area, causing the jet fuel to dissipate or burn without affecting the spent fuel in the containers. Two other studies, performed in 2001 by the Corps, found that the containers would not release significant amounts of radioactive material when attacked by armor-piercing weapons or high explosives. The study examining the effect of armor-piercing weapons found that the penetration to the containers was very limited. NRC and DOE officials and independent experts told us that, based on a previous analysis and similar studies involving shipping containers, the weapons would not likely cause a significant release. The study examining the effects of high explosives found that the explosives would not completely penetrate the container. The study showed extensive exterior damage, but no penetration to the spent fuel. NRC is continuing to study potential risks to dry storage. NRC has contracted with Sandia National Laboratory to assess the vulnerability of dry storage containers to terrorist attacks, including a further analysis of aircraft crashes and the effects of high explosives. In addition, the laboratory will investigate measures to mitigate any vulnerability identified through the assessment. As DOE develops its plans for shipping spent fuel to the Yucca Mountain repository, the agency has several potential options for enhancing the security of spent fuel during the Yucca Mountain shipping campaign. Specifically, DOE could potentially minimize its total number of spent fuel shipments, ship the fuel in an order that reduces risk, or transport the fuel on railroad trains dedicated exclusively to hauling spent fuel. Not all of these options may be feasible under the terms of DOE’s contracts with spent fuel owners, and some options for shipping in a particular order would conflict with one another. DOE could enhance the overall security of spent fuel by minimizing the total number of shipments. Fewer shipments would present fewer potential targets for terrorists and could also enhance safety because there would be fewer chances for an accident. Representatives of the nuclear power industry and nuclear safety experts that we contacted agreed on these points. For example, a representative of a consortium of nuclear utilities told us that shipping spent fuel by rail is preferable to shipment by truck because spent fuel containers designed for rail can carry about 5 times more spent fuel than truck containers. This larger capacity translates to fewer shipments overall. Similarly, a frequent critic of the safety of spent fuel shipments agreed that fewer shipments would be better, noting that fewer, large shipments are easier to protect and track. Beyond expressing a preference for shipping spent fuel to Yucca Mountain mostly by rail, DOE has not yet developed its plans to implement the shipping campaign. In addition to providing security advantages, minimizing the number of shipments by using rail provides safety and efficiency benefits. According to a 1998 Department of Transportation report, rail was the safer mode for shipping large amounts of spent fuel. The report states that minimizing trips usually reduces total risk by reducing risks associated with routine radiation exposure—such as the incidental exposure experienced by transportation and plant workers while shipping containers are being prepared—as well as accident-related exposure and other nonradiation accident consequences. DOE’s ability to minimize the total number of shipments may be limited by its contracts with owners of spent fuel. Under the contracts, DOE is to establish a shipping queue, in which each utility has shipping rights based on the date and quantity of fuel removed from a reactor. In many cases, the places in the queue correspond to quantities of spent fuel that would fill less than three large rail containers—an amount that, according to the Association of American Railroads, would be a reasonable size for a single rail shipment. If strictly followed, the queue could result in many more shipments than necessary. For example, the 12 spent fuel owners with the largest quantities of spent fuel would make approximately 576 shipments based on the shipping queue. On the other hand, if these 12 owners consolidated all their shipments into rail containers and used 3 containers per shipment, they could reduce their total shipments to 479, a 17 percent reduction. If these same owners consolidated shipments into 5 rail containers per shipment, which according to DOE is another possible option, total shipments could be reduced to 287—a nearly 50 percent reduction. DOE could also enhance security by shipping spent fuel in an order that minimizes risk. There are at least three shipping orders that would potentially reduce risk: (1) shipping fuel from shutdown nuclear reactors first, reducing the number of sites storing spent fuel; (2) shipping the oldest and least radiologically dangerous fuel first to reduce transportation risk; or (3) shipping fuel from storage pools first, reducing the likelihood of a pool fire. Shipping fuel first from shutdown nuclear reactors would be permissible under DOE’s contracts with fuel owners, but the contracts might preclude the other two options. Further, to some extent, these options conflict with one another. For example, an emphasis on shipping fuel from spent fuel pools first could leave some older fuel in dry storage at current storage facilities. Data are not available to determine which order would provide the greatest risk reduction. DOE could potentially enhance the overall security of spent fuel by first shipping fuel currently stored at shutdown nuclear reactor sites. Currently, about 4,100 tons of spent fuel—about 8 percent of the total stored nationwide—are stored at 14 shutdown nuclear reactors. Because nine of these sites will not be accumulating additional spent fuel, clearing their spent fuel inventory would eliminate them as potential targets of a terrorist attack. DOE recognized the potential importance of removing spent fuel from shutdown reactors when it established its contracts for disposal of spent fuel. Although the contracts establish a shipping queue, the contracts allow DOE to override the queue to make an exception for spent fuel from shutdown reactors. Specifically, the contracts provide that, notwithstanding the age of spent fuel, priority may be accorded any spent fuel removed from a civilian nuclear power reactor that has reached the end of its useful life or has been shut down for whatever reason. DOE could lower the risk of transporting spent fuel by shipping the oldest spent fuel first. Radioactivity emitted by some components of spent fuel declines significantly over comparatively short periods of time. For example, one of the more radioactive elements in spent fuel—cobalt— accounts for about 90 percent of the gamma radiation emitted by spent fuel when it is first removed from the reactor. However, after about 25 years, cobalt, a comparatively volatile element that would be a major component of any accidental or deliberate release, declines by half after 30 years. Shipping older spent fuel first could therefore be preferable in the event of a deliberate or accidental release during transit. For example, a release of spent fuel that is 25 or 30 years old would be a lesser—though still significant—threat to public health than fuel that is only 5 or 10 years old. Analyses performed for DOE’s environmental impact statement for the Yucca Mountain repository illustrate the reduced impact that a release of older spent fuel can have on public health. In the draft environmental impact statement, DOE estimated that a particular release due to a sabotage attack could result in about 16 latent cancer fatalities. This scenario assumed that the shipped fuel was about 23 years old, which is approximately the average age of the inventory of spent fuel. The final environmental impact statement analyzed the same scenario, except that it assumed that the shipped fuel was about 15 years old. This analysis found that such a release would cause about 48 latent cancer deaths—3 times as many as the older fuel. The age of the fuel was one of two major factors that resulted in the higher estimate of latent cancer fatalities in the final statement. DOE noted that the younger, more dangerous fuel, such as spent fuel discharged 5 years or less from a reactor, makes up a small percentage of the total inventory of spent fuel. As a result, the youngest, hottest fuel would be less likely to be shipped or would represent a small fraction of the fuel that is shipped. requires about 704 million years for its radiation output to be cut in half. shipping older spent fuel first. An analyst under contract with the state of Nevada noted that shipping the oldest fuel first would be the most important factor in protecting public health during transit. Not only would older fuel have lower consequences if released in an accident or a terrorist event, but it also would be safer for transportation workers—drivers and handlers at intermodal transfer points—and the general public. A representative of the National Research Council’s Board on Radioactive Waste Management told us that shipping the oldest fuel first would help minimize potential human health consequences in the event of a release during transit. However, this representative said that if one assumes that the robust shipping containers make a release unlikely, the potential risk reduction associated with the age of the fuel becomes less important. Regardless of the potential transportation-related security benefits, DOE’s contracts with spent fuel owners limit its ability to ship the oldest fuel first. In addition to establishing a shipping queue, the contracts allow each fuel owner discretion to decide which of its spent fuel is actually delivered to DOE, commensurate with the quantity of fuel associated with a particular spot in the queue. For example, the Exelon company—the nation’s largest nuclear power company—has a place in the queue for about 35 tons of spent fuel removed from a reactor located at its plant in Zion, Illinois. When the time comes to ship this fuel to the repository, Exelon may deliver either this fuel or an equal quantity of fuel—possibly much younger and more radioactive fuel—from any of its facilities located at sites in Illinois and sites in Pennsylvania and New Jersey. Because owners have discretion to choose which fuel they will actually ship under the terms of the contract, DOE does not have the ability under the contract to require that oldest fuel be shipped first. Fuel owners will likely select spent fuel for shipment based on their operational needs. For example, representatives of Progress Energy, a fuel owner with reactors in the Southeast, said they would will likely ship from their pools first because their pools are reaching capacity. Similarly, an Exelon official said that shipping from pools first would minimize the need for dry storage facilities. As discussed in the first section of this report, a fire in a wet storage pool, while highly unlikely, is theoretically possible. Shipping spent fuel from densely packed spent fuel pools first could have security benefits. Because DOE has not yet opened a permanent repository, spent fuel has accumulated in quantities that pools were not originally designed to contain. NRC officials noted that while a few spent fuel pools have low density in at least part of the pools, nearly all pools are densely packed. These densely packed pools contain as much as 3.5 times more spent fuel on average than the pools were originally designed to store. Reducing the density of spent fuel in the pools would reduce the likelihood of a fire. Recent NRC and independent studies show that lower-density configurations allow for greater spacing between assemblies, which allows air to more efficiently circulate in the event of coolant loss. According to these reports, greater spacing could also help prevent a fire from spreading among assemblies. Also, in the unlikely event of a fire, fewer assemblies in the pool could result in reduced consequences. As noted earlier, DOE’s contracts limit its ability to influence the order in which spent fuel is shipped. Some owners may prefer to ship fuel from densely packed pools first because when the pools reach full capacity, the fuel must be removed or the plant must shut down. To the extent that, as Exelon and Progress Energy officials stated, utilities are likely to ship from their wet pools first, the threat would be reduced earliest at these pools. This would, however, result in a relatively higher threat during transport from relatively younger, more radioactive, spent fuel. It is not clear whether this will be a common preference. According to some analysts, DOE could enhance the security of spent fuel shipments by using trains dedicated to carrying only spent fuel. Such trains would typically consist of three to five rail cars, carrying one container of spent fuel per car. A truck shipment can carry 1 to 2 tons of spent fuel. In contrast, depending on the containers used, a 3-car train can carry from 50 to 65 tons of spent fuel and a 5-car train can carry from about 80 to 110 tons of spent fuel. Although dedicated trains could enhance the security and safety of spent fuel shipments, these benefits would have to be weighed against potential drawbacks. The benefits would also have to be weighed against constructing a rail line to Yucca Mountain. Currently, no rail line extends to Yucca Mountain. Advocates of dedicated trains told us that such trains offer two primary security and safety advantages. First, the use of dedicated trains would significantly reduce the exposure of spent fuel shipments to a terrorist attack by significantly shortening the trip duration from its point of origin to the repository. A representative of the Association of American Railroads, which recommended that DOE use dedicated trains for the shipment of spent fuel, explained that a spent fuel shipment from the East Coast to Nevada would take about 3 to 4 days by dedicated rail, while the same trip by regular rail would take about 8 to 10 days. Specifically, spent fuel transported by regular rail would spend significant amounts of time in rail yards where trains are broken up and reconfigured. While in the rail yards, spent fuel containers could be stationary targets. Second, using dedicated trains would ensure that spent fuel was not shipped with flammable hazardous materials. If spent fuel were released from its containers in an accident or a terrorist attack, a fire fueled by flammable materials could spread radioactive material over a wide area. For example, NRC recently issued an analysis regarding a rail tunnel fire that occurred in Baltimore in July 2001 that involved more than 28,000 gallons of a flammable solvent. NRC estimated that temperatures as high as 1,800 degrees Fahrenheit were reached at certain locations in the tunnel during the course of the fire but found that temperatures averaged 900 degrees in other parts of the fire. NRC studied the potential effects of this fire on a spent fuel transportation container carrying spent fuel and concluded that, when subjected to similar fire conditions, the container would not release radioactive material. According to transportation officials we spoke to, dedicated trains can also have safety and other benefits beyond sabotage prevention. For example, officials of the Union Pacific Railroad and the Association of American Railroads said that combining cars carrying fully loaded spent fuel containers on trains with those carrying other cargo raises operational and safety issues. Rail cars carrying spent fuel rail containers are extraordinarily heavy—such a car weighs about 470,000 pounds compared to about 200,000 pounds for a standard loaded rail car. This weight differential introduces difficulties in the physical dynamics of a train carrying spent fuel and other cargo, making derailments more likely. On the other hand, it is not clear that the advantages of dedicated trains outweigh the additional costs. In 1980, while considering amendments to its security regulations, NRC examined the case for requiring dedicated trains for rail shipments of spent fuel. NRC noted the advantages of dedicated trains but also noted that dedicated trains are no more capable of avoiding high-population areas than are regular trains, that a regular train in a rail yard would be under surveillance by escorts and railroad police, and that the necessary physical protection measures can be as easily implemented on regular trains as on dedicated trains. For these and other considerations, NRC declined to require dedicated trains. Further, although DOE recognized the possible advantages of shipping spent nuclear fuel by dedicated trains, DOE also concluded in its final environmental impact statement that available information does not indicate a clear advantage for the use of either dedicated trains or general freight service. The events of September 11, 2001, elevated lingering public concerns about the security of spent fuel, and in particular the security and safety of large-scale shipping of spent fuel. NRC and DOE studies show a low likelihood of widespread harm to human health from terrorist attacks or severe accidents involving spent fuel. Nonetheless, DOE could potentially take a number of measures to further enhance the security and safety of the shipping campaign to Yucca Mountain. It is not clear whether the additional security and safety benefits such measures offer are worth the additional costs and effort—possibly including a renegotiation of contracts that DOE has established with the nation’s utilities—that they would entail. In addition, it is not clear which of these measures—some of which conflict with each other—would provide the greatest safety and security benefit. However, we believe they should be explored. To ensure that all reasonable options to further enhance the security and safety of spent fuel in storage at nuclear power plants and in transit are explored, we recommend that the Secretary of Energy assess the potential benefits and costs of (1) minimizing the total number of shipments of spent fuel by consolidating shipments where possible, (2) shipping spent fuel in an order that further minimizes risk, and (3) emphasizing the use of trains dedicated to hauling spent fuel. We provided DOE and NRC with drafts of this report for review and comment. DOE generally concurred with the facts of the report, noting that the information on transit was accurate and well balanced. DOE also concurred with our recommendations, with one exception. DOE noted that the Department of Transportation was expected to release a study later this year on the safety and security implications of transporting spent fuel by dedicated train. DOE stated that it preferred to wait for the outcome of the study before beginning its own review. DOE also provided technical comments, which we incorporated into the report. NRC also generally concurred with the facts of the report, noting that the information provides a reasonable characterization of the current understanding of risks associated with spent fuel storage. However, NRC stated that it does not consider the results of its most recently published studies on spent fuel in a pool and spent fuel in transit, as quoted in the report, to accurately reflect the consequences of a potential terrorist attack. Rather, NRC indicated that the studies started with overly conservative assumptions, resulting in “unrealistically conservative” results. NRC noted that it is currently conducting studies to assess the potential consequences of a terrorist attack that use more realistic assumptions. NRC also noted in its technical comments that preliminary results from these ongoing studies show that potential consequences may be far less severe than reported in the current publications. We revised our report to account for NRC’s preliminary findings from ongoing work involving the risk associated with spent fuel pools. As our report states, these findings indicate that risks from spent fuel pools may be substantially reduced from previous estimates. We used NRC’s February 2001 report, Technical Study of Spent Fuel Pool Accident Risk at Decommissioning Nuclear Power Plants, with the understanding that the report received a high level of scrutiny both within and outside NRC prior to its publication. As stated in the report, “Preliminary drafts of this study were issued for public comments and technical reviews in June 1999 and February 2000. Comments from interested stakeholders, the Advisory Committee on Reactor Safeguards, and other technical reviewers have been taken into account in preparing this study. A broad quality review was also carried out at the Idaho National Engineering and Environment Laboratory, and a panel of human reliability analysis experts evaluated the report’s assumptions, methods, and modeling.” The report also states that, based on the comments received, “staff did further analyses and also added sensitivity studies on evacuation timing to assess the risk significance of relaxed offsite emergency preparedness requirements during decommissioning.” Given this level of review, we believe it to be appropriate to report the results of this study. NRC also took issue with our use of its report, Reexamination of Spent Fuel Shipment Risk Estimates. NRC explained that the analyses in this document are similarly overly conservative. This March 2000 study was conducted by Sandia National Laboratory at the request of NRC to reexamine the conclusions reached in previous studies regarding the risks of spent fuel shipments. As with its February 2001 report, this report also indicated a high level of review prior to publication. Specifically, the report mentions a number of individuals who provided comments to the report, including staff at Sandia National Laboratory, Lawrence Livermore National Laboratory, and “a number of technical experts at the NRC.” Given the intent of this study and its level of review, we believe it to also be appropriate to report the results of this study. We performed our review at DOE and NRC headquarters in Washington, D.C., at NRC’s Region III office near Chicago, Illinois, and at DOE’s Yucca Mountain Project office in Las Vegas, Nevada. We visited several sites where spent fuel is stored, including operating nuclear power plants, a decommissioned nuclear power plant, and independent spent fuel storage sites. We conducted our review from April 2002 to June 2003 in accordance with generally accepted government auditing standards. To determine the potential health effects of a terrorist attack or a severe accident involving commercial spent nuclear fuel, we examined a variety of federally sponsored studies, primarily conducted or sponsored by DOE and NRC. We examined critiques of these studies prepared by a variety of groups and individuals. We also spoke to many of the authors of these federal studies, authors of critiques of these studies, nuclear energy representatives, and other individuals representing a variety of backgrounds, including academia and special interest groups. To identify options for DOE to enhance the security of spent fuel as it develops its plans to ship the fuel to Yucca Mountain, we reviewed documents analyzing DOE’s plans and preferred alternatives, including the environmental impact statement and many of its supporting documents. We also interviewed DOE, NRC, and Department of Transportation officials responsible for developing and coordinating safe shipments of spent nuclear fuel. We also spoke to state and local government officials in a number states, including Nevada; nuclear energy representatives; and a variety of groups and individuals representing a spectrum of viewpoints on the shipment of spent nuclear fuel. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to other interested parties and make copies available to others who request them. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov/. If you or your staff have any questions about this report, please call me at (202) 512-3841. Key contributors to this report are listed in appendix V. As the regulating agency responsible for spent fuel, the Nuclear Regulatory Commission (NRC) must adequately protect the public health and safety against accidents or acts of sabotage. To provide this assurance, NRC uses a “defense-in-depth” philosophy. Consistent with this philosophy, NRC designs its safety and security requirements to ensure that public safety and health are not wholly dependent on any single element of the design, construction, maintenance, or operation of a nuclear facility. More specifically, NRC designs multiple or redundant measures to mitigate areas of known risk or to increase confidence in areas of uncertainty. Listed below are some of the primary requirements NRC has recognized as protecting spent fuel while in transit, in wet storage, and in dry storage. NRC requires that transporters of spent fuel (1) contain the fuel in NRC-certified shipping containers that must meet stringent durability performance requirements and (2) comply with requirements designed to impede an act of sabotage on the fuel. NRC regulations for spent fuel shipping containers dictate that the containers prevent releases of significant amounts of radiation under both normal operating conditions and in hypothetical accident scenarios. The containers include shielding to ensure that persons near a container are not exposed to significant amounts of radiation. In addition, the containers must remain intact after a series of simulated accident conditions, including an impact test, in which containers are dropped from 30 feet onto a flat, a puncture test, in which containers are dropped from 40 inches onto a 6-inch diameter steel bar at least 8 inches long; a fire test, in which containers are engulfed in a 1,475-degree Fahrenheit fire for 30 minutes; and an immersion test in which containers are submerged in 3 feet of water for 8 hours. The containers must survive each of these tests in succession, without significant levels of surface radiation or release of spent fuel. Containers must also be shown to survive water pressure equivalent to immersion under nearly 670 feet of water for 1 hour. Because of these requirements and the dimensions of the spent fuel assemblies they contain, spent fuel shipping containers are massive and robust. A typical train container is about 25 feet long and 11 feet in diameter, weighs about 100 tons empty, and about 120 tons fully loaded— thus the container can account for over 80 percent of the total weight of a shipment. Though truck containers have significantly less capacity than rail containers, both types have similar basic designs. As figure 2 indicates, they are generally composed of several layers of shielding material, totaling about 5 to 15 inches in thickness, including a radiation barrier consisting of lead or depleted uranium. When in transit, each end of the container is made of material that is designed to absorb much of the force of an impact. Figures 3 and 4 show a spent fuel rail container and a truck container, respectively. Although the shipping container is the most important component in preventing release and dispersal of spent fuel in transit, NRC also requires transporters of the spent fuel to implement measures designed to further protect spent fuel shipments from sabotage. For example, transporters of spent fuel must ensure that shipments are under surveillance, that arrangements have been made with local law enforcement agencies for their response in the event of an emergency, and that rail and highway routes have been approved by NRC. NRC had also required that armed escorts be either aboard the shipping vehicle or in a following vehicle in areas of high population; NRC has since strengthened the security required of shipments following the September 11, 2001, terrorist attacks. Spent fuel pool designs must meet specific performance criteria before NRC can issue a license for construction or operation. The requirements focus on ensuring that the safety features of the pool survive certain natural phenomena or accidents to ensure that, among other things, the pool will retain water and keep the stored fuel sufficiently cool. Spent fuel in wet storage is also protected by the physical security measures in place at the storage site. As part of the licensing process prior to construction and operation, utilities must submit reports that analyze the likelihood of certain natural phenomena, such as earthquakes, hurricanes, floods, and tidal waves. Using probability analyses, historical information, and current information on seismology, geology, meteorology, and hydrology, the utilities must determine the risks of certain types of natural phenomena. Then the utilities must show that the proposed pool designs would survive the most severe natural phenomena or combinations of less severe phenomena expected for that particular area. The utilities must also perform the same exercise for the likelihood and severity of certain accidents, including airplane crashes. For example, pools constructed near airports may have to be designed to withstand certain types of accidental airplane crashes. Consequently, although the specific designs of wet storage pools vary from site to site, they are massive, robust structures. Pools are typically 30 to 60 feet long, 20 to 40 feet wide, and 40 feet deep. Pools could nearly hold three semi-truck tractor-trailers parked side-by-side and stacked three deep. The pool is contained by a structure consisting of a 1/8 inch to 1/4 inch stainless steel liner, and 4- to 6-foot thick walls of steel-reinforced concrete. Generally, the pools are contained in other buildings. The roofs of some of these buildings may be made from industrial-type corrugated steel. The assemblies, stored vertically in racks, must be immersed at least 20 feet below the surface of the water in order to keep the fuel cool and to provide a sufficient radiation barrier. See figure 5 for a photograph of a wet storage pool. Spent fuel pools are also protected by the physical security measures in place at the facilities where they are located. About 95 percent of the spent fuel inventory is stored in pools, most of which are located at operating nuclear reactors. The perimeters of these reactor sites are secured by fences topped with barbed wire, vehicle barriers, and intrusion detection systems—including perimeter cameras and motion detection technology— that are monitored 24 hours per day. Access to the building containing the wet storage pools is impeded by locked steel doors capable of surviving armed assault and security checkpoints where a person’s identity must be verified and where security searches take place. Finally, these facilities are manned by a force of armed guards. In addition, nuclear power plants are required to coordinate an emergency response to the site in the event of a terrorist or sabotage event. The coordination requires contingency plans and joint exercises with local law enforcement agencies to ensure an adequate and timely response to an event. Since the terrorist attacks of September 11, 2001, NRC has added additional requirements, including additional armed guards and vehicle barriers. NRC requires that spent fuel in dry storage be stored in containers that protect workers and other nearby persons from significant amounts of radiation, and that can survive operational accidents at the storage site, as well as extreme meteorological and other natural events. In addition, fuel in dry storage is protected by physical security measures in place at the storage site. Among other things, dry storage containers must be capable of surviving a drop test, in which containers are tested by a drop from the height to which it would be lifted to during operations; a tip-over test, testing containers against seismic, weather, and other forces or accidents that could knock over 100- to 150-ton containers, an explosion test, in which containers are tested against nearby explosions and the resulting pressures created by the blasts; a tornado and tornado missile test, in which high winds and tornado a seismic test, in which containers are tested against the seismic motions that might be expected to occur in its geologic area (certification requirements may differ from region to region); a flood test, in which containers are analyzed for floods; and a fire test, in which containers are engulfed at temperatures up to 1,475 degrees Fahrenheit for 30 minutes. Manufacturers must provide NRC with information on how well a container design meets these performance requirements. NRC does not require physical tests of the containers, but it accepts information derived from scaled physical tests and computer modeling. As with shipping containers, to meet these performance requirements, certified dry storage containers are massive and robust. A typical dry storage container consists of a 1-inch thick steel container housing the spent fuel. At some facilities, the containers are placed horizontally in garage-sized bunkers constructed of concrete. The concrete protects nearby workers and the public from radiation. At other facilities, the container is encased in an outer cask. The outer cask typically is constructed of steel-reinforced concrete, 18 or more inches thick. Like the concrete bunkers, the outer cask shields workers and the public from radiation. The free-standing, upright units, stored on concrete pads, can weigh from 100 to 150 tons each with nearly 90 percent of that consisting of the container weight. A dry storage container can store between 7 and 68 assemblies, depending on the size of the container. See figure 6 for an illustration of a dry storage container. In addition to the physical performance requirements of dry storage containers, the containers are protected by the physical security measures in place at the facilities where they are stored. Dry storage containers at operating nuclear power plants generally benefit from the physical security measures already in place at the sites. The large majority of spent fuel in dry storage is located at operating nuclear power plants. For dry storage containers situated away from a reactor site, NRC requires vehicle barriers, fences, intrusion detection systems, and guards. The guards are also able to contact local law enforcement agencies for assistance, if required. NRC requires that dry storage facilities coordinate response plans with local law enforcement agencies to ensure assistance can be readily provided, if needed. In the wake of the September 11, 2001, terrorist attacks, NRC issued orders to dry storage facility licensees that required enhanced security measures, including additional protections against a vehicle bomb threat. The human health implications of sabotage events and accidents involving spent nuclear fuel shipments described in the report are based on computer-based engineering and other analytic models that rely, in part, on physical experiments. In addition, these studies are the most recent in a series of studies that date back to the 1970s. According to NRC and DOE, better data and improved analytic tools over the years have significantly enhanced the agencies’ confidence in the results of these studies. This appendix provides an overview of the methodology of the most recent studies, as well as the approach and results of previous studies. Methodology of Most Recent Studies. The 1999 Sandia National Laboratory study was undertaken at the request of DOE for use in its preparation of an environmental impact statement for the Yucca Mountain repository. The study relied on computer models to estimate how the two selected armor-piercing missiles would damage shipping containers. Although no physical tests or experiments were conducted in this study, the study used computer models that were validated using the results of previous studies that included experimental data. Two of the most important factors considered in designing the study were the types of shipping containers and the weapons selected for analysis. For the shipping containers, the study used truck and rail containers considered representative of those that would be used to transport the spent fuel likely to be shipped in the early decades of the 21st Century. NRC’s performance standard for these containers requires that they prevent release of significant amounts of radiation under normal operating conditions and in accident scenarios. For example, radiation levels at the exterior of the container must remain below specified minimal levels after a series of tests to simulate accident conditions, including an impact test, in which the container is dropped from 30 feet onto a flat, unyielding surface. In selecting the weapons used in the analysis, the authors researched the latest information available and chose weapons they believed represented the two weapons that would penetrate spent fuel shipping containers, and which could also be available to terrorists. To ensure that the analysis would represent the upper limit of possible damage, the authors made conservative assumptions, including the following: No security measures were in place, such as armed guards who travel with spent fuel shipments and who are required to have the capability to contact local law enforcement personnel in the event of an attack. The weapons would be employed at a distance from these containers that would result in maximum damage to the container and that the weapon would strike the container dead center; if the missile were to strike higher or lower, it could be deflected by the cylindrical shape of most containers, and penetration of the container would be lessened or not occur at all. Previous Studies. The 1999 Sandia study is the most recent in a series of federally sponsored studies dating back to the 1970s that have examined the ability of armor-piercing weapons to penetrate spent fuel containers. A draft version of a Sandia study from 1978, for example, concluded that a successful sabotage attack on a spent fuel container would not cause prompt fatalities but could cause several hundred latent cancer fatalities in a densely populated urban area. The final version of this study reduced the total latent cancer fatalities to fewer than 100, based on a re-evaluation of the quantity of radioactive material released. Based largely on the initial draft of this study, NRC established its regulations for security of spent fuel in transit. Because this study was based on a conservative set of analytical assumptions instead of on experimental data, there was a high degree of uncertainty regarding the quantities of radioactive material released, and the human health consequences. Consequently, in 1983, DOE commissioned Sandia National Laboratory to conduct physical tests, in which armor-penetrating missiles were fired at shipping containers containing mock spent fuel assemblies. The study found that, under the worst-case scenario, about 24 ten-thousandths (0.0024) of 1 percent of the total solid fuel inventory in the container could be released as respirable particles. To estimate the human health impact, the study included conservative assumptions, including that the attacks occurred in Manhattan, in New York City, on a business day, that the fuel had been removed from the reactor for only 150 days (and thus was comparatively more radiologically dangerous), and that no evacuation took place to limit human exposure. Based on these results and assumptions, the study predicted no early deaths and between two and seven long-term latent cancer fatalities. Methodology of Most Recent Studies. According to NRC, the 2000 Sandia National Laboratory study was conducted to address three developments—the likelihood that spent fuel shipments would be increasing as a result of the progress on the Yucca Mountain repository, the use of containers and transportation routes that differed from those considered in previous studies, and the increased effectiveness in risk assessment and computer modeling of spent fuel containers. The overall objective of the study was to determine the degree of risk involved in shipping spent fuel by truck and rail. The study examined the effects of severe collisions and fires on four types of shipping containers—a lead-lined steel truck container, a depleted uranium-lined steel truck container, a lead-lined steel rail container, and a monolithic steel container. The study relied on computer analysis to estimate the probability of such events and the quantity of radioactive material that might be released. The analysis developed 19 representative truck accidents and 21 representative rail accidents. The study simulated the effect on each of the truck and rail containers after slamming them into a rigid surface from a variety of angles at 30, 60, 90, and 120 miles per hour. None of the cases modeled showed that the body of the container would fail. Moreover, the modeling showed that the seals around the lid at each end of the truck container would not allow a release at 30, 60, and 90 miles per hour, although they may leak at 120 miles per hour. The results from modeling the two different rail containers, however, showed that the seals may leak, for some collisions at a speed of 60 miles per hour, depending on the angle of impact. DOE’s study that predicted the health effects of these releases used a computer code. The code calculated the dispersion of radioactive particles and the resultant dose to the population. To estimate latent cancer deaths, DOE made a number of key assumptions. DOE’s analysis assumed the accident occurred in the most populous center of an urban area and that the population distribution from the accident site in the urban center to the outer fringes was similar to the average populations—projected to the year 2035—of the 20 largest U.S. metropolitan areas, plus Las Vegas, Nevada. Stable weather conditions—with comparatively slow wind speeds—were assumed to prevail at the time of the accident. Finally, the population was assumed to be exposed to remnants of the release for 1 year after the accident, with no evacuation or cleanup. Previous Studies. The 2000 Sandia study reexamined the risks associated with the transport of spent fuel by truck and rail and compared the results to two previous studies—one conducted by NRC in 1977 and one performed by DOE’s Lawrence Livermore National Laboratory in 1987. According to NRC, the 2000 Sandia study extended the methods used in the 1987 report for container analysis and used improved risk assessment methods. The 2000 Sandia study found that previous NRC-commissioned studies overestimated the risks of human exposure due to transportation accidents. According to NRC and Sandia officials, they have become more confident in their results as analytical techniques and data have improved. In 1977, NRC examined the risks of shipping a variety of radioactive materials, including spent fuel. At that time, NRC determined that the risks of accidental releases involved in shipping spent fuel and other radioactive materials were quite small—specifically, the study estimated latent cancer deaths to be about 3 in 200 years of shipping spent fuel at estimated rates for 1985. The study concluded that the existing NRC requirements were adequate to protect public health. Partly because this study was based on conservative engineering judgments and did not include physical tests of shipping containers in severe accidents, NRC subsequently commissioned a study published in 1987 that found that the risks of spent fuel releases under transportation accident conditions were much smaller. Performed by Lawrence Livermore National Laboratory for NRC, this study included a more sophisticated analysis than the 1977 study, using historical data on past transportation accidents to determine the likelihood of specific accident scenarios. The study then used a computer-based analysis of accident scenarios involving collisions and fire temperatures exceeding NRC standards. The 1987 study found that in 99.4 percent of all rail and truck accidents, the container would experience no significant damage, and no radioactive material would be released. In addition to the individual named above, Doreen Feldman, Michael Hartnett, Gary Jones, Cynthia Norris, Robert Sanchez, Amy Stewart, Barbara Timmerman, and Dwayne Weigel made key contributions to this report. | Spent nuclear fuel, the used fuel periodically removed from nuclear power reactors, is one of the most hazardous materials made by man. Nuclear power companies currently store 50,000 tons of spent fuel at 72 sites in 33 states. That amount will increase through 2010, when the Department of Energy (DOE) expects to open a permanent repository for this fuel at Yucca Mountain, Nevada. Concerns have been raised since September 11, 2001, that terrorists might target spent fuel. GAO was asked to (1) review federally sponsored studies that assessed the potential health effects of a terrorist attack or a severe accident on spent fuel, either in transit or in storage, and (2) identify options for DOE to further enhance the security of spent fuel during shipping to Yucca Mountain. The likelihood of widespread harm from a terrorist attack or a severe accident involving commercial spent nuclear fuel is low, according to studies conducted by DOE and NRC. Largely because spent fuel is hard to disperse and is stored in protective containers, these studies found that most terrorist or accident scenarios would cause little or no release of spent fuel, with little harm to human health. Some assessments found widespread harm is possible under certain severe but extremely unlikely conditions involving spent fuel stored in storage pools. As part of its ongoing research program and to respond to increased security concerns, NRC has ongoing and planned studies of the safety and security of spent fuel, including the potential effects of more extreme attack scenarios, including deliberate aircraft crashes. While NRC and DOE have found that spent fuel may be relatively safe and secure, DOE could potentially enhance the security of this fuel through options such as minimizing the number of shipments and picking up fuel in an order that would reduce risk, such as moving older less dangerous fuel first. These options could reduce the risk during transport and at some locations where the fuel is currently stored. However, contractual agreements between DOE and owners of spent fuel may limit DOE's ability to choose among these options. In addition, it is not clear that the benefits of these measures would justify the potential costs, including a possible renegotiation of the contracts between DOE and the spent fuel owners. |
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Our April 2014 report noted that VA has experienced substantial delays in executing new outpatient-clinic lease projects; nearly all of the delays occurred in the planning stages prior to entering into a lease agreement with the developer. Specifically, we found that 39 of the 41 outpatient- clinic projects for which a prospectus was submitted experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years, while 2 projects experienced schedule time decreases. Our data analysis showed that 94 percent of these delays occurred in the planning stages prior to entering into the lease agreement. For all but one of the projects that experienced a delay, the delay occurred during the pre-lease agreement stage. We also compared the length of delays that occurred during the pre-lease agreement stage to the length of delays that occurred once a lease agreement was entered into with the development firm. We found that the average delay during the pre-lease agreement stages for all 41 projects totaled nearly 3.1 years. Conversely, the average project delay once a lease agreement was finalized totaled approximately 2.5 months, and 11 outpatient-clinic projects actually experienced schedule decreases during this stage. VA officials at 6 of the 11 outpatient-clinic projects selected for detailed review mentioned that the large majority of schedule delays occur during the planning stages prior to entering into a lease agreement. For the 41 lease projects we reviewed, we found that several factors contributed to delays: VHA’s late or changing requirements: According to data we analyzed and VA officials we interviewed, late or changing VHA requirements were the most common reasons for delays. Requirements can pertain to facility size, types of treatment rooms, types of medical equipment, electrical voltage needs, and other details. We found in many instances, either that CFM either did not receive VHA’s requirements on time or that VHA changed its requirements during the solicitation of offers, necessitating a re-design that affected the schedule. In evaluating VA data, we found that 23 of the 41 leasing projects (56 percent) experienced delays because VHA was late in submitting space requirements to CFM, or VHA changed space requirements and thus the scope of the project. For example, the size of the Jacksonville outpatient clinic had increased by 29 percent, and the Austin outpatient-clinic site we visited had increased by 36 percent from the time the prospectuses for these projects were submitted to Congress to the time they were completed. Site Selection Challenges: In analyzing VA data, we found that 20 of the 41 outpatient-clinic projects we reviewed (49 percent) experienced delays due to difficulties in locating or securing a suitable site. For example, an increase in scope to the Jacksonville project resulted in a larger building design that then required more land. To accommodate these changes, the landowner worked to acquire additional properties around the already selected site. Although the developer was ultimately successful in obtaining additional land for the project, this process led to delays. According to VA officials, prior to entering into the lease agreement, there were delays associated with difficult negotiations with the developer. However, the officials said that the negotiations resulted in keeping project costs lower. In addition, there were significant environmental clean-up requirements at the site, requirements that needed to be satisfied before construction began. The original site’s location was obtained in December 2002, but the larger site was not obtained until December 2009, a delay of 7 years. Outdated Guidance: At the sites we reviewed, we found that outdated policy and guidelines resulted in challenges for VA staff to complete leasing projects on time. For example, officials from the four Las Vegas outpatient sites we visited stated that VA’s policies for managing leases seem to change for each project, creating uncertainty regarding CFM job responsibilities. In addition to substantial delays, our April 2014 report noted that VA also experienced cost increases to its outpatient-clinic projects when compared to the costs in the projects’ prospectuses. VA provided cost data for its outpatient-clinic lease projects in January 2014. For the 31 projects with complete cost data, we found that “total first-year costs,” when compared to the prospectus costs, increased from $153.4 million to $172.2 million, an increase of nearly $19 million (12 percent). However, for the 31 projects, the total “prospectus first-year rent” was estimated at $58.2 million, but the total awarded first-year rent for these projects equaled $92.7 million as of January 2014, an increase of $34.5 million (59 percent).because the department must pay the higher rent over the lifetime of the lease agreement. For example, all 31 VA lease projects included in this cost analysis have lease terms of 20 years, and the increase in rent must be paid for the duration of the contract. Although first year’s rents increased for the 31 projects—increasing overall total costs—VA’s total “build-out” costs were lower than reported in the projects’ prospectuses. Build-out costs are one-time, lump-sum payments VA makes to developers for special purpose, medically related improvements to buildings when VA accepts the projects as completed. VA officials said the decrease in build-out costs from those originally estimated in the prospectuses was due to the national downturn in the commercial real estate market starting in 2008. The downturn created more competition among developers and helped VA realize more competitive pricing on its medical build-out requirements than was anticipated in the prospectuses. Such increases in rent have long- term implications for VA, The causes of the total cost increase can be attributed primarily to increases in the projects’ awarded first-year rent due to the schedule delays and changes to the design or scope of a project that we discussed previously. Schedule delays can increase costs because of changes in the local leasing market during the period of the delay. Therefore, when VA estimates costs as part of the prospectuses submitted to Congress in the annual budget request, an automatic annual escalation is applied to each project to account for rising costs and market forces that make construction and leased space more expensive over time. VA officials said the escalation ensures that the authorized cost of the project is in line with the realities of the real estate and construction markets. Because VA annually adjusts a project’s cost by an increase of 4 percent for each year the project is delayed, project delays directly result in cost increases. Additionally, we found that projects we reviewed increased in total size by 203,000 square feet. Changes in a project’s size expand the scope of the project, requiring design changes, which can result in schedule delays, further adding to costs. Our April 2014 report found that VA has made some progress in addressing issues with its major medical-facilities leasing program. Specifically, in April 2012, VA formed a high level council, the Construction Review Council, to oversee the department’s capital asset program, including leasing. Based on the findings of the council and our work for the April 2012 report on VA’s major leased outpatient clinics, VA is planning the following improvements to the major medical-facilities- leasing program: requiring detailed design requirements earlier in the design process to help avoid the delays, scope changes, and cost increases. However, these improvements were in the early stages, and their success will depend on how quickly and effectively VA implements them. Requiring detailed design requirements earlier in the facility-leasing process. VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress: Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost; Plans to provide Congress with clearer information on the limitations associated with costs of proposed projects. VA’s 2014 budget submission did not clarify that its estimates for future lease projects included only one year’s rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA’s 2015 budget submission. However, we also found that while VA has updated and refined some guidance for specific aspects of lease projects—including design guidance for the construction of outpatient clinics—to better support VA’s leasing staff and prevent project delays, it has not updated its VHA guidance for clinic leasing (used by staff involved with projects) since 2004. We reviewed VHA’s 2004 Handbook 1006.1, Planning and Activating Community-Based Outpatient Clinics, VHA’s overall guidance for leasing outpatient clinics. This Planning Handbook is intended to establish consistent planning criteria and standardized expectations. The Planning Handbook is widely used by VA officials and provides important guidance, in particular, clarifying the differing responsibilities of officials and departments and the legal authorities of the leasing process. However, this guidance is out of date and no longer adequately reflects the roles and responsibilities of the various VA organizations involved in major medical-facilities-leasing projects. According to VA officials, the close collaboration of these organizations is necessary for a successful lease project. As of November 2013, VHA’s leasing program has a long-term liability of $5.5 billion, but its guidance on outpatient clinics is a decade old and no longer relevant. Standards for Internal Control in the Federal Government calls for federal agencies to develop and maintain internal control activities, which include policies and procedures, to enforce management’s directives and help ensure that actions are taken to address risks. Such activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and for achieving effective results. The lack of updated guidance can affect coordination among stakeholders and could contribute to schedule delays and cost increases. Using outdated guidance can lead to miscommunications and errors in the planning and implementing of veterans’ leased clinics. Furthermore, the policy, planning criteria, and business plan format in the Planning Handbook were developed based on an old planning methodology that VA no longer uses; thus, the guidance does not reflect VA’s current process. In our April 2014 report, we recommended that the Secretary of Veterans Affairs update VHA’s guidance for leasing outpatient clinics to better reflect the roles and responsibilities of all VA staff involved in leasing projects. VA concurred with our recommendation and reported that it had created a VHA Lease Handbook that was in the concurrence process to address the roles and responsibilities of staff involving in leasing projects. In October 2014, VA reported that it had revised its clinic leasing guidance in response to GAO’s recommendation and that its leasing authority was now under the General Services Administration (GSA) and the handbook was undergoing further revisions to incorporate GSA leasing processes. Chairman DeSantis and Ranking Member Lynch, 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 have any questions about matters discussed in this testimony, please contact Dave Wise, (202) 512-2834 or [email protected]. Other key contributors to this testimony include Ed Laughlin, Assistant Director; Nelsie Alcoser; George Depaoli; Jessica Du; Raymond Griffith; Amy Rosewarne; and Crystal Wesco. 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. | VA operates one of the nation's largest health-care delivery systems. To help meet the changing medical needs of the veteran population, VA has increasingly leased medical facilities to provide health care to veterans. In April 2014, GAO reported that VHA's leasing program had long-term liability of $5.5 billion and was growing. This statement discusses VA outpatient clinic lease issues, specifically, (1) the extent to which schedule and costs changed for selected VA outpatient clinics' leased projects since they were first submitted to Congress and factors contributing to the changes and (2) actions VA has taken to improve its leasing practices for outpatient clinics and any opportunities for VA to improve its project management. It is based on GAO's April 2014 report ( GAO-14-300 ) along with selected updates conducted in August and October 2014 to obtain information from VA on actions it has taken to address GAO's prior recommendation. For that report, GAO reviewed all 41 major medical leases that were associated with outpatient clinic projects for which a prospectus had been submitted to Congress, as required by law. In its April 2014 report, GAO found that schedules were delayed and costs increased for the majority of the Department of Veterans Affairs' (VA) leased outpatient projects reviewed. As of January 2014, GAO found that 39 of the 41 projects reviewed—with a contract value of about $2.5 billion—experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years. The large majority of delays occurred prior to entering into a lease agreement, in part due to VA's Veterans Health Administration (VHA): 1) providing project requirements late or changing them or 2) using outdated guidance. Costs also increased for all 31 lease projects for which VA had complete cost data, primarily due to delays and changes to the scope of a project. For example, first-year rents increased a total of $34.5 million—an annual cost which will extend for 20 years (the life of these leases). GAO's report also found that VA had taken some actions to address problems managing clinic-leased projects. First, it established the Construction Review Council in April 2012 to oversee the department's capital asset programs, including the leasing program. Second, consistent with the council's findings and previous GAO work, VA was planning the following improvements: Requiring detailed design requirements earlier in the facility-leasing process . VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress. Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost. Plans to provide Congress with clearer information on the limitations associated with costs of proposed projects. VA's 2014 budget submission did not clarify that its estimates for future lease projects included only one year's rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA's 2015 budget submission. However, these improvements were in the early stages, and their success will depend on how quickly and effectively VA implements them. Finally, GAO reported that VA was also taking steps to refine and update guidance on some aspects of the leasing process, for example the VA's design guides, but VHA has not updated the overall guidance for clinic leasing (used by staff involved with projects) since 2004. In October 2014, VA reported that it was in the process of revising its clinic leasing guidance in response to GAO's recommendation and that its leasing authority was now under the General Services Administration (GSA) and the handbook was undergoing further revisions to incorporate GSA leasing processes. In its April 2014 report, GAO recommended that VA update VHA's guidance for the leasing of outpatient clinics. VA concurred with GAO's recommendation and is taking actions to implement the recommendation. |
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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. | 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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The Great Lakes Basin is a large area that extends well beyond the five lakes proper to include their watersheds, tributaries, connecting channels, and a portion of the St. Lawrence River. The basin encompasses nearly all of the state of Michigan and parts of Illinois, Indiana, Minnesota, New York, Ohio, Pennsylvania, Wisconsin, and the Canadian province of Ontario. The lakes form the largest freshwater system on earth, accounting for 20 percent of the world’s fresh surface water and over 95 percent of the U.S. fresh surface water supply for the contiguous 48 states. Millions of people in the United States and Canada rely on the five Great Lakes—Superior, Michigan, Erie, Huron, and Ontario—as a principal source of their drinking water, recreation, and economic livelihood. Over time, industrial, agricultural, and residential development on lands adjacent to the lakes have seriously degraded the lakes’ water quality, posing threats to human health and the environment, and forcing restrictions on activities, such as swimming and fish consumption. To protect the Great Lakes Basin and to address water quality problems, the governments of the United States and Canada entered into the bilateral Great Lakes Water Quality Agreement in 1972. In the agreement, the United States and Canada agreed to restore and maintain the chemical, physical, and biological integrity of the Great Lakes Basin. A new agreement with the same name was reached in 1978, and amended in 1983 and 1987. The agreement prescribes prevention and cleanup measures to improve environmental conditions in the Great Lakes. The agreement obligates the International Joint Commission (IJC), an international body, to assist and to report on the implementation of the agreement. The Clean Water Act directs EPA to lead efforts to meet the goals of the Great Lakes Water Quality Agreement and establishes GLNPO within EPA, charging it with, among other things, cooperating with federal, state, tribal, and international agencies to develop action plans to carry out the U.S. responsibilities under the agreement. GLNPO is further responsible for coordinating the agency’s actions both in headquarters and in the regions to improve Great Lakes’ water quality. In addition to GLNPO, numerous federal, state, binational, and nonprofit organizations conduct activities that focus on improving the overall Great Lakes Basin environment or some specific environmental issue within the basin. About 200 programs—148 federal and 51 state—fund restoration activities within the Great Lakes Basin. Most of these programs, however, involve the localized application of national or state environmental initiatives and do not specifically focus on basin concerns. Officials from 11 federal agencies identified 115 of these broadly scoped federal programs, and officials from seven of the eight Great Lakes states identified 34 similar state programs. EPA administers the majority of the federal programs that provide a broad range of environmental activities involving research, cleanup, restoration, and pollution prevention. For example, EPA’s nationwide Superfund program funds cleanup activities at contaminated areas throughout the basin. While these broadly scoped federal and state programs contribute to basin restoration, program officials do not track or try to isolate the portion of funding going to specific areas like the basin, making it difficult to determine their contribution to total Great Lakes spending. However, basin-specific information was available on some of these programs. Specifically, basin related expenditures for 53 of the 115 broadly scoped federal programs totaled about $1.8 billion in fiscal years 1992 through 2001. Expenditures for 14 broadly scoped state funded programs totaled $461.3 million during approximately the same time period. Several federal and state programs were specifically designed to focus on environmental conditions across the Great Lakes Basin. Officials from seven federal agencies identified 33 Great Lakes-specific programs that had expenditures of $387 million in fiscal years 1992 through 2001. Most of these programs funded a variety of activities, such as research, cleanup, or pollution prevention. An additional $358 million was expended for legislatively directed Corps of Engineers projects in the basin, such as a $93.8 million project to restore Chicago’s shoreline. Officials from seven states reported 17 Great Lakes specific programs that expended about $956 million in 1992 through 2001, with Michigan’s programs accounting for 96 percent of this amount. State programs focused on unique state needs, such as Ohio’s program to control shoreline erosion along Lake Erie, and Michigan’s program to provide bond funding for environmental activities. Besides federal and state government agencies, other organizations, such as foundations, fund a variety of restoration activities in the Great Lakes Basin by approving grants to nonprofit and other organizations. Other governmental and nongovernmental organizations fund restoration activities. For example, individual municipalities, township governments, counties, and conservation districts are involved in various restoration activities. Restoration of the Great Lakes Basin is a major endeavor involving many environmental programs and organizations. The magnitude of the area comprising the basin and the numerous environmental programs operating within it require the development of one overarching strategy to address and manage the complex undertaking of restoring the basin’s environmental health. The Great Lakes region cannot hope to successfully receive support as a national priority without a comprehensive, overarching plan for restoring the Great Lakes. In lieu of such a plan, organizations at the binational, federal, and state levels have developed their own strategies for the Great Lakes, which have inadvertently made the coordination of various programs operating in the basin more challenging. The Great Lakes Basin needs a comprehensive strategy or plan similar to those developed for other large ecosystem restoration efforts, such as the ones for the South Florida ecosystem and the Chesapeake Bay. In South Florida, federal, state, local and tribal organizations joined forces to participate on a centralized task force formalized in the Water Resource Development Act of 1996. The strategic plan developed for the South Florida ecosystem by the task force made substantial progress in guiding the restoration activities. The plan identifies the resources needed to achieve restoration and assigns accountability for specific actions for the extensive restoration effort estimated to cost $14.8 billion. The Chesapeake Bay watershed also has an overarching restoration strategy stemming from a 1983 agreement signed by the states of Maryland, Virginia, and Pennsylvania; the District of Columbia; the Chesapeake Bay Commission; and EPA. This agreement was the basis for a program to protect and restore this ecosystem. The implementation of this strategy has resulted in improvements in habitat restoration and aquatic life, such as increased forested buffer zone and shad population. Several organizations have developed strategies for the basin at the binational, federal, or state levels that address either the entire basin or the specific problems in the Great Lakes. EPA’s Great Lakes Strategy 2002, developed by a committee of federal and state officials, is the most recent of these strategies. While this strategy identified restoration objectives and planned actions by various federal and state agencies, it is largely a description of existing program activity relating to basin restoration. State officials told us that the states had already planned the actions described in it, but that these actions were contingent on funding for specific environmental programs. The strategy included a statement that it should not be construed as a commitment for additional funding or resources, and it did not provide a basis for prioritizing activities. In addition, we identified other strategies that addressed particular contaminants, restoration of individual lakes, or cleanup of contaminated areas. Ad hoc coordination takes place among federal agencies, states, and other environmental organizations in developing these strategies or when programmatic activity calls for coordination. Other Great Lakes strategies address unique environmental problems or specific geographical areas. For example, a strategy for each lake addresses the open lake waters through Lakewide Management Plans (LaMP), which EPA is responsible for developing. Toward this end, EPA formed working groups for each lake to identify and address restoration activities. For example, the LaMP for Lake Michigan, issued in 2002, includes a summary of the lake’s ecosystem status and addresses progress in achieving the goals described in the previous plan, with examples of significant activities completed and other relevant topics. However, EPA has not used the LaMPs to assess the overall health of the ecosystem. The Binational Executive Committee for the United States and Canada issued its Great Lakes Binational Toxics Strategy in 1997 that established a collaborative process by which EPA and Environment Canada, in consultation with other federal departments and agencies, states, the province of Ontario, and tribes, work toward the goal of the virtual elimination of persistent toxic substances in the Great Lakes. The strategy was designed to address particular substances that bioaccumulate in fish or animals and pose a human health risk. Michigan developed a strategy for environmental cleanup called the Clean Michigan Initiative. This initiative provides funding for a variety of environmental, parks, and redevelopment programs. It includes nine components, including Brownfields redevelopment and environmental cleanups, nonpoint source pollution control, clean water, cleanup of contaminated sediments, and pollution prevention. The initiative is funded by a $675 million general obligation bond and as of early 2003; most of the funds had not been distributed. Although there are many strategies and coordination efforts ongoing, no one organization coordinates restoration efforts. We found that extensive strategizing, planning, and coordinating have not resulted in significant restoration. Thus, the ecosystem remains compromised and contaminated sediments in the lakes produce health problems, as reported by the IJC. In addition to the absence of a coordinating agency, federal and state officials cited a lack of funding commitments as a principal barrier impeding restoration progress. Inadequate funding has also contributed to the failure to restore and protect the Great Lakes, according to the IJC biennial report on Great Lakes water quality issued in July 2000. The IJC restated this position in a 2002 report, concluding that any progress to restore the Great Lakes would continue at a slow incremental pace without increased funding. In its 1993 biennial report, the IJC concluded that remediation of contaminated areas could not be accomplished unless government officials came to grips with the magnitude of cleanup costs and started the process of securing the necessary resources. Despite this warning, however, as we reported in 2002, EPA reduced the funding available for ensuring the cleanup of contaminated areas under the assumption that the states would fill the funding void. States, however, did not increase their funding, and restoration progress slowed or stopped altogether. Officials for 24 of 33 federal programs and for 3 of 17 state programs reported insufficient funding for federal and state Great Lakes specific programs. Ultimate responsibility for coordinating Great Lakes restoration programs rests with GLNPO; however, GLNPO has not fully exercised this authority. Other organizations or committees have formed to assume coordination and strategy development roles. The Clean Water Act provides GLNPO with the authority to fulfill the U.S. responsibilities under the GLWQA. Specifically, the act directs EPA to coordinate the actions of EPA’s headquarters and regional offices aimed at improving Great Lakes water quality. It also provides GLNPO authority to coordinate EPA’s actions with the actions of other federal agencies and state and local authorities for obtaining input in developing water quality strategies and obtaining support in achieving the objectives of the GLWQA. The act also provides that the EPA Administrator shall ensure that GLNPO enters into agreements with the various organizational elements of the agency engaged in Great Lakes activities and with appropriate state agencies. The agreements should specifically delineate the duties and responsibilities, time periods for carrying out duties, and resources committed to these duties. GLNPO officials stated that they do not enter into formal agreements with other EPA offices, but rather fulfill their responsibilities under the act by having federal agencies and state officials agree to the restoration activities contained in the Great Lakes Strategy 2002. However, the strategy does not represent formal agreements to conduct specific duties and responsibilities with committed resources. EPA’s Office of Inspector General reported the absence of these agreements in September 1999. The report stated that GLNPO did not have agreements as required by the act and recommended that such agreements be made to improve working relationships and coordination. To improve coordination of Great Lakes activities and ensure that federal dollars are effectively spent, we recommended that the Administrator, EPA, ensure that GLNPO fulfills its responsibility for coordinating programs within the Great Lakes Basin; charge GLNPO with developing, in consultation with the governors of the Great Lakes states, federal agencies, and other organizations, an overarching strategy that, clearly defines the roles and responsibilities for coordinating and prioritizing funding for projects; and submit a time-phased funding requirement proposal to the Congress necessary to implement the strategy. The Great Lakes Water Quality Agreement, as amended in 1987, calls for establishing a monitoring system to measure restoration progress and assess the degree that the United States and Canada are complying with the goals and objectives of the agreement. However, implementation of this provision has not progressed to the point that overall restoration progress can be measured or determined based on quantitative information. Recent assessments of overall progress, which rely on a mix of quantitative data and subjective judgments, do not provide an adequate basis for making an overall assessment. The current assessment process has emerged from a series of biennial State of the Lakes Ecosystem Conferences (SOLEC) initiated in 1994 for developing indicators agreed upon by conference participants. Prior to the 1987 amendments to the GLWQA, the 1978 agreement between the two countries also contained a requirement for surveillance and monitoring and for the development of a Great Lakes International Surveillance Plan. The IJC Water Quality Board was involved in managing and developing the program until the 1987 amendments placed this responsibility on the United States and Canada. This change resulted in a significant reduction in the two countries’ support for surveillance and monitoring. In fact, the organizational structure to implement the surveillance plan was abandoned in 1990, leaving only one initiative in place—the International Atmospheric Deposition Network (IADN), a network of 15 air-monitoring stations located throughout the basin. With the surveillance and monitoring efforts languishing, IJC established the Indicators for Evaluation Task Force in 1993 to identify the appropriate framework to evaluate progress in the Great Lakes. In 1996, the task force proposed that nine desired measurements and outcomes be used to develop indicators for measuring progress in the Great Lakes. Shortly before the task force began its work, the United States and Canada had agreed to hold conferences every 2 years to assess the environmental conditions in the Great Lakes in order to develop binational reports on the environmental conditions to measure progress under the agreement. Besides assessing environmental conditions the conferences were focused on achieving three other objectives, including providing a forum for communication and networking among stakeholders. Conference participants included U.S. and Canadian representatives from federal, state, provincial, and tribal agencies, as well as other organizations with environmental restoration or pollution prevention interests in the Great Lakes Basin. The 1994 SOLEC conference culminated in a “State of the Great Lakes 1995” report, which provided an overview of the Great Lakes ecosystem at the end of 1994 and concluded that overall the aquatic community health was mixed or improving. The same assessment was echoed in the 1997 state of the lakes report. Meanwhile the IJC agreed that the nine desired outcome areas recommended by the task force would help assess overall progress. It recommended that SOLEC, during the conference in 2000, establish environmental indicators that would allow the IJC to evaluate what had been accomplished and what needed to be done for three of the nine indicators—the public’s ability to eat the fish, drink the water, and swim in the water without any restrictions. However, the indicators developed through the SOLEC process and the accomplishments reported by federal and state program managers do not provide an adequate basis for making an overall assessment for Great Lakes restoration progress. The SOLEC process is ongoing and the indicators still being developed are not generally supported by sufficient underlying data for making progress assessments. The number of indicators considered during the SOLEC conferences has been pared down from more than 850 indicators in 1998 to 80 indicators in 2000, although data were available for only 33 of them. After the SOLEC 2000 conference, IJC staff assessed the indicators supported by data that measured the desired outcomes of swimmability, drinkability, and the edibility of fish in the Great Lakes. Overall, the IJC commended SOLEC’s quick response that brought together information regarding the outcomes and SOLEC’s ongoing efforts. The IJC, however, recognized that sufficient data were not being collected throughout the Great Lakes Basin and that the methods of collection, the data collection time frames, the lack of uniform protocols, and the incompatible nature of some data jeopardized their use as indicators. Specifically, for the desired outcome of swimmability, the IJC concurred that it was not always safe to swim at certain beaches, but noted that progress for this desired outcome was limited because beaches were sampled by local jurisdictions without uniform sampling or reporting methods. At the 2002 SOLEC conference, the number of indicators assessed by conference participants increased from 33 to 45. The IJC expressed concern that there are too many indicators, insufficient supporting backup data, and a lack of commitment and funding from EPA to implement and make operational the agreed upon SOLEC baseline data collection and monitoring techniques. The IJC recommended in its last biennial report in September 2002 that any new indicators should be developed only where resources are sufficient to access scientifically valid and reliable information. The information from the 2002 SOLEC conference culminated in the “State of the Great Lakes 2003” report, which concluded that the chemical, physical, and biological integrity of the basin is mixed based on assessments of 43 indicators. This conclusion was based on five positive signs of recovery, such as persistent toxic substances are continuing to decline, and seven negative signs, such as phosphorous levels are increasing in Lake Erie. The ultimate successful development and assessment of indicators for the Great Lakes through the SOLEC process are uncertain because insufficient resources have been committed to the process, no plan provides completion dates for indicator development and implementation, and no entity is coordinating the data collection. Even though the SOLEC process has successfully engaged a wide range of binational parties in developing indicators, the resources devoted to this process are largely provided on a volunteer basis without firm commitments to continue in the future. GLNPO officials described the SOLEC process as a professional, collaborative process dependent on the voluntary participation of officials from federal and state agencies, academic institutions, and other organizations attending SOLEC and developing information on specific indicators. Because SOLEC is a voluntary process, the indicator data resides in a diverse number of sources with limited control by SOLEC organizers. GLNPO officials stated that EPA does not have either the authority or the responsibility to direct the data collection activities of federal, state, and local agencies as they relate to surveillance and monitoring of technical data elements that are needed to develop, implement, and assess Great Lakes environmental indicators. Efforts are underway for the various federal and state agencies to take ownership for collecting and reporting data outputs from their respective areas of responsibility and for SOLEC to be sustained and implemented; each indicator must have a sponsor. However, any breakdown in submission of this information would leave a gap in the SOLEC indicator process. EPA supports the development of environmental indicators as evidenced by the fact that, since 1994, GLNPO has provided about $100,000 annually to sponsor the SOLEC conferences. Additionally, GLNPO spends over $4 million per year to collect surveillance data for its open-lake water quality monitoring program, which also provides supporting data for some of the indicators addressed by SOLEC. A significant portion of these funds, however, supports the operation of GLNPO’s research vessel, the Lake Guardian, an offshore supply vessel converted for use as a research vessel. GLNPO also supports activities that are linked or otherwise feed information into the SOLEC process, including the following: collecting information on plankton and benthic communities in the Great Lakes for open water indicator development; sampling various chemicals in the open-lake waters, such as phosphorus for the total phosphorus indicator; monitoring fish contaminants in the open waters, directly supporting the indicator for contaminants in whole fish and a separate monitoring effort for contaminants in popular sport fish species that supports the indicator for chemical contaminants in edible fish tissue; and operating 15 air-monitoring stations with Environment Canada comprising the IADN that provides information for establishing trends in concentrations of certain chemicals and loadings of chemicals into the lakes. EPA uses information from the network to take actions to control the chemicals and track progress toward environmental goals. To better coordinate monitoring activities GLNPO and Environment Canada began developing a web-based inventory of monitoring activities in the Great Lakes Basin. The first workshop on developing this system was held in January 2002. Once development of this system is complete, organizations conducting monitoring activities will be requested to provide descriptive information about these monitoring activities and contact points for obtaining specific monitoring data. We are currently conducting a review for 20 members of Congress serving on the Great Lakes Task Force that further examines monitoring activities in the Great Lakes Basin. In this review we hope to identify some of the major challenges to developing a Great Lakes Basin monitoring system. Program officials frequently cite output data as measures of success rather than actual program accomplishments in improving environmental conditions in the basin. As a rule, program output data describe activities, such as projects funded, and are of limited value in determining environmental progress. For example, in reporting the accomplishments for Michigan’s Great Lakes Protection Fund, officials noted that the program had funded 125 research projects over an 11-year period and publicized its project results at an annual forum and on a Web site. Similarly, the Lake Ontario Atlantic Salmon Reintroduction Program administered by the Department of Interior’s Fish and Wildlife Service listed under its accomplishments the completion of a pilot study and technical assistance provided to a Native American tribe. Of the 50 federal and state programs created specifically to address conditions in the basin, 27 reported accomplishments in terms of outputs, such as reports or studies prepared or presentations made to groups. Because research and capacity building programs largely support other activities, it is particularly difficult to relate reported program accomplishments to outcomes. The federal and state environmental program officials responding to our evaluation generally provided output data or, as reported for 15 programs, reported that the accomplishments had not been measured for the programs. Only eight of the federal or state Great Lakes-specific programs reported outcome information, much of which generally described how effective the programs’ activity or action had been in improving environmental conditions. For example, EPA’s Region II program for reducing toxic chemical inputs into the Niagara River, which connects Lake Erie to Lake Ontario, reported reductions in priority toxics from 1986 through 2002 from ambient water quality monitoring. Other significant outcomes reported as accomplishments for the Great Lakes included (1) reducing phosphorus loadings by waste treatment plants and limiting phosphorus use in household detergents; (2) prohibiting the release of some toxicants into the Great Lakes, and reducing to an acceptable level the amount of some other toxicants that could be input; (3) effectively reducing the sea lamprey population in several invasive species infested watersheds; and (4) restocking the fish-depleted populations in some watersheds. To fulfill the need for a monitoring system called for in the GLWQA and to ensure that the limited funds available are optimally spent, we recommended that the Administrator, EPA, in coordination with Canadian officials and as part of an overarching Great Lakes strategy, (1) develop environmental indicators and a monitoring system for the Great Lakes Basin that can be used to measure overall restoration progress and (2) require that these indicators be used to evaluate, prioritize, and make funding decisions on the merits of alternative restoration projects. Mr. Chairman, this completes my prepared statement. I would be happy to answer any questions that you or other members of the Subcommittee may have at this time. For further information, please contact John B. Stephenson at (202) 512-3841. Individuals making key contributions to this testimony were Willie Bailey, Greg Carroll, Karen Keegan, Jonathan McMurray, and John Wanska. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The five Great Lakes, which comprise the largest system of freshwater in the world, are threatened on many environmental fronts. To address the extent of progress made in restoring the Great Lakes Basin, which includes the lakes and surrounding area, GAO (1) identified the federal and state environmental programs operating in the basin and funding devoted to them, (2) evaluated the restoration strategies used and how they are coordinated, and (3) assessed overall environmental progress made in the basin restoration effort. There are 148 federal and 51 state programs funding environmental restoration activities in the Great Lakes Basin. Most of these programs are nationwide or statewide programs that do not specifically focus on the Great Lakes. However, GAO identified 33 federal Great Lakes specific programs, and 17 additional unique Great Lakes specific programs funded by states. Although Great Lakes funding is not routinely tracked for many of these programs, we identified a total of about $3.6 billion in basin-specific projects for fiscal years 1992 through 2001. Several disparate Great Lakes environmental strategies are being used at the binational, federal, and state levels. Currently, these strategies are not coordinated in a way that ensures effective use of limited resources. Without such coordination it is difficult to determine the overall progress of restoration efforts. The Water Quality Act of 1987 charged EPA's Great Lakes National Program Office with the responsibility for coordinating federal actions for improving Great Lakes' water quality; however, the office has not fully exercised this authority to this point. With available information, current environmental indicators do not allow a comprehensive assessment of restoration progress in the Great Lakes. Current indicators rely on limited quantitative data and subjective judgments to determine whether conditions are improving, such as whether fish are safe to eat. The ultimate success of an ongoing binational effort to develop a set of overall indicators for the Great Lakes is uncertain because it relies on the resources voluntarily provided by several organizations. Further, no date for completing a final list of indicators has been established. |
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The use of computer technology in schools has grown dramatically in the past several years. Surveys conducted by one marketing research firmestimated that in 1983 schools had 1 computer for every 125 students; in 1997, the ratio had increased to 1 computer for every 9 students. Meanwhile, many education technology experts believe that current levels of school technology do not give students enough access to realize technology’s full potential. For example, schools should have a ratio of four to five students for every computer or five students for every multimedia computer, many studies suggest. In addition, concern has been expressed that aging school computers may not be able to run newer computer programs, use multimedia technology, and access the Internet. A computer-based education technology program has many components, as figure 1 shows, which range from the computer hardware and software to the maintenance and technical support needed to keep the system running. Although technology programs may define the components differently, they generally cover the same combination of equipment and support elements. Computer-based technology can be used to augment learning in a number of ways. These include drill-and-practice programs to improve basic skills; programs providing students with the tools to write and produce multimedia projects that combine text, sound, graphics, and video; programs providing access to information resources, such as on the Internet; and networks that support collaborative and active learning. Research on school technology has not, however, provided clear and comprehensive conclusions about its impact on student achievement. Although some studies have shown measurable improvements in some areas, less research data exist on the impact of the more complex uses of technology. Our work focused on funding for school technology. We did not evaluate district goals or accomplishments or assess the value of technology in education. Each of the districts we visited used a combination of funding sources to support technology in its schools (see table 1). At the local level, districts allocated funds from their district operating budgets, levied special taxes, or both. Districts also obtained funds from federal and state programs specifically designated to support school technology or from federal and state programs that could be used for this and other purposes. Finally, districts obtained private grants and solicited contributions from businesses. Although some individual schools in the districts we visited raised some funds, obtaining technology funding was more a district-level function than a school-level function, according to our study. Although districts tapped many sources, nearly all of them obtained the majority of their funding from one main source. The source, however, varied by district. For example, in Seattle, a 1991 local capital levy has provided the majority of the district’s education technology funding to date. In Gahanna, the district operating budget has provided the majority of technology funding. All five districts chose to allocate funds for technology from their operating budgets. The portions allocated ranged widely from 16 to 77 percent of their total technology funding. Two districts—Seattle and Roswell—also raised significant portions of their technology funding using local bonds or special levies. Manchester and Seattle won highly competitive 5-year Technology Innovation Challenge Grants for $2.8 million and $7 million, respectively. The grant provided the major source of funding for Manchester’s technology program—about 66 percent of the funding. The $1.5 million in grant funding Seattle has received so far accounted for about 4 percent of the district’s technology funding. All five districts reported using federal and state program funding that was not specifically designated for technology but could be used for this purpose if it fulfilled program goals. For example, four districts reported using federal title I funds for technology. In Manchester, a schoolwide program at a title I elementary school we visited had funded many of its 27 computers as part of its title I program. Three districts used state program funds, such as textbook or instructional materials funds, to support their technology programs. In Davidson County, for example, the district has directed about $2 million in such funds, including those for exceptional and at-risk children as well as vocational education, to education technology. All districts received assistance, such as grants and monetary and in-kind donations, from businesses, foundations, and individuals. Such funding constituted about 3 percent or less of their technology funding. It is important to note, however, that our selection criteria excluded districts that had benefited from extraordinary assistance such as those receiving the majority of their funding from a company or individual. Officials we spoke with attributed the limited business contributions in their districts to a variety of reasons, including businesses not fully understanding the extent of the schools’ needs and businesses feeling overburdened by the large number of requests from the community for assistance. Some said their district simply had few businesses from which to solicit help. Nonetheless, all five districts noted the importance of business’ contribution and were cultivating their ties with business. teacher organization activities and other school fund-raisers. Such supplemental funding amounted to generally less than $7,000 annually but did range as high as $84,000 over 4 years at one school. Staff at two schools reported that teachers and other staff used their personal funds to support technology in amounts ranging from $100 to over $1,000. Officials in the districts we visited identified a variety of barriers to obtaining technology funding. Four types of barriers were common to most districts and considered by some to be especially significant. (See table 2.) Officials in all of the districts we visited reported that district-level funding was difficult to obtain for technology because it was just one of many important needs that competed for limited district resources. For example, a Gahanna official reported that his district’s student population had grown, and the district needed to hire more teachers. A Seattle official reported that his district had $275 million in deferred maintenance needs. Some districts had mandates to meet certain needs before making funding available for other expenditures like technology. Manchester officials noted, for example, that required special education spending constituted 26 percent of their 1997 district operating budget, a figure expected to rise to 27.5 percent in fiscal year 1998. Officials from all districts said that resistance to higher taxes affected their ability to increase district operating revenue to help meet their technology goals. For example, in Davidson County, the local property tax rate is among the lowest in the state, and officials reported that many county residents were attracted to the area because of the tax rates. In addition, two districts—Roswell and Seattle—did not have the ability to increase the local portion of their operating budgets because of state school finance systems that—to improve equity—limited the amount of funds districts could raise locally. Officials in three districts reported that the antitax sentiment also affected their ability to pass special technology levies and bond measures. Although all districts identified an environment of tax resistance in their communities, most said they believed the community generally supported education. Many officials reported that they did not have the time to search for technology funding in addition to performing their other job responsibilities. They said that they need considerable time to develop funding proposals or apply for grants. For example, one technology director with previous grant-writing experience said she would need an uninterrupted month to submit a good application for a Department of Commerce telecommunications infrastructure grant. As a result, she did not apply for this grant. The technology director in Manchester said that when the district applied for a Technology Innovation Challenge Grant, two district staff had to drop all other duties to complete the application within the 4-week time frame available. corporations and foundations typically like to give funds to schools where they can make a dramatic difference. Districts have employed general strategies to overcome funding barriers rather than address specific barriers. The strategies have involved two main approaches—efforts to inform decisionmakers about the importance of and need for technology and leadership efforts to secure support for technology initiatives. In their information efforts, district officials have addressed a broad range of audiences about the importance of and need for technology. These audiences have included school board members, city council representatives, service group members, parents, community taxpayers, and state officials. These presentations have included technology demonstrations, parent information nights, lobbying efforts with state officials, and grassroots efforts to encourage voter participation in levy or bond elections. Roswell, for example, set up a model technology school and used it to demonstrate the use of technology in school classrooms. In the districts we visited, both district officials and the business community provided leadership to support school technology. In all districts, district technology directors played a central leadership role in envisioning, funding, and implementing their respective technology programs over multiyear periods and continued to be consulted for expertise and guidance. In some districts, the superintendent also assumed a role in garnering support and funding for the technology program. Beyond the district office, business community members sometimes assumed leadership roles to support technology by entering into partnerships with the districts to help in technology development efforts as well as in obtaining funding. All five districts we visited had developed such partnerships with local businesses. In Roswell and Seattle, education foundations comprising business community leaders had helped their school districts’ efforts to plan and implement technology, providing both leadership and funding for technology. Other districts we visited continued to cultivate their ties with the business community through organizations such as a business advisory council and a community consortium. Nearly all districts reported maintenance, technical support, and training— components often dependent on staff—as more difficult to fund than other components. Officials we interviewed cited several limitations associated with funding sources that affected their use for staff costs. First, some sources simply could not be used to pay for staff. Officials in Roswell and Seattle noted that special levy and bond monies, their main sources of technology funds, could not be used to support staff because the funds were restricted to capital expenditures. Second, some funding sources do not suit the ongoing nature of staff costs. Officials noted, for example, that grants and other sources provided for a limited time or that fluctuate from year to year are not suited to supporting staff. Most districts funded technology staff primarily from district operating budgets. Several officials noted that competing needs and the limited size of district budgets make it difficult to increase technology staff positions. Officials in all five districts reported having fewer staff than needed. Some technology directors and trainers reported performing maintenance or technical support at the expense of their other duties because of a lack of sufficient support staff. One result was lengthy periods—up to 2 weeks in some cases—when computers and other equipment were unavailable. Several officials observed that this can be frustrating to teachers and discourage them from using the equipment. Teacher training was also affected by limited funding for staff costs, according to officials. In one district, for example, an official said that the number of district trainers was insufficient to provide the desired in-depth training to all teachers. Most district officials expressed a desire for more technology training capability, noting that teacher training promoted the most effective use of the equipment. A number of districts had developed mitigating approaches to a lack of technology support staff. These included purchasing extended warranties on new equipment, training students to provide technical support in their schools, and designating teachers to help with technical support and training. and (2) periodic costs of upgrading and replacing hardware, software, and infrastructure to sustain programs. Most districts planned to continue funding ongoing maintenance, technical support, training, and telecommunications costs primarily from their operating budgets and to sustain at least current levels of support. Nonetheless, most districts believed that current levels of maintenance and technical support were not adequate and that demand for staff would likely grow. Some officials talked about hiring staff in small increments but were unsure to what extent future district budgets would support this growing need. The periodic costs to upgrade and replace hardware, software, or infrastructure can be substantial, and most districts faced uncertainty in continuing to fund them with current sources. For example, Davidson County and Gahanna funded significant portions of their hardware with state technology funding. However, officials told us that in the past, the level of state technology funding had been significantly reduced due to the changing priorities of their state legislatures. In Seattle, special levies are the district’s primary funding source, but passing these initiatives is unpredictable. Officials in all districts underscored the need for stable funding sources and for technology to be considered a basic education expenditure rather than an added expense. They also suggested ways to accomplish this. Some proposed including a line item in the district operating budget to demonstrate district commitment to technology as well as provide a more stable funding source. One official said that technology is increasingly considered part of basic education and as such should be included in the state’s formula funding. Without such funding, he said districts would be divided into those that could “sell” technology to voters and those that could not. technology supporters in the districts we studied not only had to garner support at the start for the district’s technology, but they also had to continue making that case year after year. To develop support for technology, leaders in these five school districts used a broad informational approach to educate the community, and they formed local partnerships with business. Each district has developed some ties with business. Nonetheless, funding from private sources, including business, for each district, constituted no more than about 3 percent of what the district has spent on its technology program. Other districts like these may need to continue depending mainly on special local bonds and levies, state assistance, and federal grants for initially buying and replacing equipment and on their operating budgets for other technology needs. Lack of staff for seeking and applying for funding and the difficulty of funding technology support staff were major concerns of officials in all the districts we studied. Too few staff to maintain equipment and support technology users in the schools could lead to extensive computer downtime, teacher frustration, and, ultimately, to reduced use of a significant technology investment. The technology program in each of the five districts we visited had not yet secured a clearly defined and relatively stable funding source, such as a line item in the operating budget or a part of the state’s education funding formula. As a result, district officials for the foreseeable future will continue trying to piece together funding from various sources to maintain their technology programs and keep them viable. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or members of the Task Force may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed how school districts obtain funds for the acquisition of education technology, focusing on: (1) sources of funding school districts have used to develop and fund their technology programs; (2) barriers districts have faced in funding the technology goals they set, and how they attempted to deal with these barriers; (3) components of districts' technology programs that have been the most difficult to fund, and what the consequences have been; and (4) districts' plans to deal with the ongoing costs of the technology they have acquired. GAO noted that: (1) the five districts it studied used a variety of ways to fund their technology programs; (2) four types of barriers seemed to be common to several districts: (a) technology was just one of a number of competing needs and priorities, such as upkeep of school buildings; (b) local community resistance to higher taxes limited districts' ability to raise more revenue; (c) officials said they did not have enough staff for fund-raising efforts and therefore had difficulty obtaining grants and funding from other sources such as business; and (d) some funding sources had restrictive conditions or requirements that made funding difficult to obtain; (3) to overcome these barriers, officials reported that their districts used a variety of methods to educate and inform the school board and the community about the value of technology; (4) these ranged from presentations to parent groups to the establishment of a model program at one school to showcase the value of technology; (5) the parts of the technology program that were hardest to fund, according to those GAO interviewed, were components such as maintenance, training, and technical support, which depend heavily on staff positions; (6) for example, in two locations special levy and bond funding could be used only for capital expenditures--not for staff; (7) in several districts GAO visited, officials said that staffing shortfalls in maintenance and technical support had resulted in large workloads for existing staff and in maintenance backlogs; (8) most said this resulted in reduced computer use because computers were out of service; and (9) as these districts looked to the future to support the ongoing and periodic costs of their technology programs, they typically planned to continue using a variety of funding sources despite uncertainties associated with many of these sources. |
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Older adults are considered among the transportation-disadvantaged population, or those millions of Americans who are unable to provide their own transportation or have difficulty accessing public transportation because of age, disability, or income. The total number of transportation- disadvantaged older adults is unknown, and groups of transit dependent riders can overlap because some older adults may also be disabled or low income, or both. However, the older adult population is growing more rapidly than any other age group in the United States. Specifically, according to 2010 U.S. Census data, the population aged 65 and older grew 15 percent from 2000 to 2010, compared to about a 10 percent growth in the overall population, and by 2030, older adults are expected to comprise about 20 percent of the overall population. In 2012, the estimated population of veterans 65 and older was 9.6 million. Although about 83 percent of older adults are licensed drivers, approximately 20 percent of older adults no longer drive, according to the Federal Highway Administration’s 2009 National Household Travel Survey. A range of mobility options can allow older adults to maintain their independence and age in place in their communities. For example, for those older adults who no longer drive, some may walk, bike, or use public transportation to meet their mobility needs. Others, including those with disabilities, may require more specialized transportation, such as paratransit in order to access services. According to 2010 U.S. Census data, 50 percent of adults 65 and older had a disability. Paratransit service, broadly defined, is accessible, origin-to-destination transportation service that operates in response to calls or requests from riders. It is an alternative to fixed-route transit service, which operates according to regular schedules along prescribed routes with designated stops. The Older Americans Act of 1965 (OAA) was enacted to provide services to older adults to help them remain in their homes and communities for as long as possible. authorizes federal funding for a variety of home- and community-based supportive services that allow older adults to maintain independence. For example, Part B of Title III provides funding for a variety of supportive services, including transportation for older adults with and without mobility impairments. In fiscal year 2014, about $1.2 billion in Title III grants were provided to states, of which $344 million were grants for supportive services. The OAA, as amended, established the Administration on Aging (AoA) within HHS as the chief federal advocate for older Americans and assigned responsibility for home- and community-based services to AoA. In 2012, HHS established the Administration for Community Living (ACL), which brought together AoA, the Office on Disability, and the Administration on Developmental Disabilities—within HHS—to better align the federal programs that address the community living service and support needs of both the aging and disability populations, among other things. AoA distributes funding through grants to state units on aging, which allocate these funds to AAAs that either directly provide services, or contract with local service providers. 42 U.S.C. §§ 3001 and 3003. include private nonprofit and government organizations; 244 tribal and Native American organizations; and 2 organizations serving Native Hawaiians. Nearly 20,000 local organizations provide services through this network. The state units on aging and AAAs are responsible for the planning, development, and coordination of an array of home- and community-based services within each state. In particular, the OAA requires state units on aging to submit plans to the AoA for 2, 3, or 4 years. Among other types of information, the plans must evaluate older adults’ needs for home- and community-based services, which may include transportation. In addition, the OAA requires that state units on aging develop a standardized process to determine the extent to which public or private resources (including volunteers and programs and services of voluntary organizations) are capable of meeting needs. MAP-21, Pub. L. No. 112-141, § 20028, 126 Stat. 405, 726, codified at 49 U.S.C. § 5338 (a)(2)(D). include activities previously eligible under the New Freedom program and to public transportation projects that improve access to fixed-route service and decrease reliance by individuals with disabilities on complementary paratransit. In particular, Enhanced Mobility program funds can be used for capital planning and operations: 55 percent of all allocations for each grant recipient must be used for public transportation projects where traditional services are unavailable, inappropriate, or insufficient, while the remaining 45 percent can be used for other eligible services, including capital and operating expenses and projects previously eligible under the New Freedom program. States typically distribute these funds to local nonprofit human service agencies to buy vehicles that transport older adults and people with disabilities, and the agencies funded may provide transportation to support a range of activities, such as visiting friends. The Enhanced Mobility program requires grantees to develop coordinated public transit-human services plans. development and approval process that includes seniors, people with disabilities, and transportation providers, among others, and is coordinated to the maximum extent possible with transportation services assisted by other federal departments and agencies. The program also allows other federal non-DOT funds, such as Title III Part B funds, to be used as matching funds in order to better meet the transportation needs of older adults and promote federal coordination. Human-service transportation refers to transportation services provided by or on behalf of a human service agency to provide access to agency services and to meet the basic, day-to-day mobility needs of transportation-disadvantaged populations, especially individuals with disabilities, seniors, and people with low incomes. income individuals. Medicaid programs, which are administered by each state subject to the oversight of CMS, are required to assure that program beneficiaries—such as low-income children, people with disabilities, and older adults, among others—have access to necessary Medicaid providers when the beneficiaries cannot transport themselves to these providers. Under federal regulations, VA also provides transportation to medical services for those veterans who have service connected injuries or disabilities and meet certain eligibility criteria. Our past work on transportation-disadvantaged populations has found that federal coordination has the potential to reduce federal transportation program costs by clustering passengers; using fewer one-way trips; and sharing the use of personnel, equipment, and facilities. Federal efforts to coordinate transportation for the disadvantaged, including older adults, began in 1986 when DOT and HHS formed what is now known as the Coordinating Council. The Coordinating Council is chaired by the Secretary of Transportation and is charged with improving the efficiency and effectiveness of human service transportation by coordinating related programs at the federal level and promoting the maximum feasible coordination at the state and local levels. In 2003, the Coordinating Council launched the “United We Ride” initiative to act as a forum for interagency communication and to help states and communities overcome obstacles to coordination. The Coordinating Council’s actions have included issuing publications such as policy statements and progress reports on efforts taken. However, our June 2012 report on transportation-disadvantaged populations concluded that insufficient federal leadership and a lack of guidance for furthering collaborative efforts might hinder coordination efforts among state and local providers. To promote and enhance federal coordination efforts, we therefore recommended in 2012 that the Secretary of Transportation, as the Chair of the Coordinating Council, along with the council’s 11 member agencies, should meet and complete and publish a strategic plan outlining agency roles and responsibilities and articulate a strategy to help strengthen interagency collaboration and communication. In response to our recommendations, the Coordinating Council’s member agencies issued a strategic plan for 2011 to 2013, which established agency roles and responsibilities and identified a shared strategy to reinforce cooperation. Our prior work has shown that coordination can lead to improved quality and cost-effectiveness of transportation-disadvantaged services. In addition, we have previously identified key features and issues to consider when federal agencies collaborate and implement collaborative mechanisms, such as an interagency group or council. These key features include defining outcomes; monitoring progress to show accountability; establishing clear leadership; and determining key resources, such as funding. For example, various approaches can help enhance and sustain collaboration among federal agencies, such as developing a plan to identify short- and long-term outcomes and tracking progress toward those outcomes. We identified two key federal agency programs, AoA’s Title III Part B Supportive Services and FTA’s Enhanced Mobility program, and six other federal agency programs that can provide funding or transportation services for older adults. These eight identified programs are not an exhaustive list of all existing programs, but rather we focused on programs administered by the three primary Coordinating Council member agencies that provide transportation funding or services that may benefit older adults. Not all of the programs we identified focus solely on the older adult population. (For additional information on how we identified these, see appendix I. Also, see appendix II for the complete program list, including program descriptions.) In addition, as we reported in 2012, total federal spending on transportation services for transportation-disadvantaged populations is unknown because in many cases federal agencies do not separately track spending for these services. As such, transportation spending for older adults is also unknown because the funds are used to provide transportation services for a broader population. Of the eight federal programs we identified, the only programs that specifically provide funding exclusively for older adults were established in the OAA, which includes Title III Part B Supportive Services. Specifically, Title III Part B provides funds to 11 categories of supportive services for older adults, including transportation and assisted According to HHS officials, transportation can include a transportation.range of services such as shared rides and public transportation access, while assisted transportation serves eligible older adults who have difficulties using regular vehicular transportation and involves providing assistance, such as an escort, to those adults. Because this program targets services for older adults—including transportation—spending information for that population is available, as states are required to annually report their Title III Part B spending across the different supportive services. In fiscal year 2012, states reported spending a total of $68.8 million on transportation and $3.3 million on assisted transportation. Overall, states reported spending a total of $330 million on supportive services in 2012, making transportation and assisted transportation about 22 percent of total reported expenditures. This is similar to what states have previously reported spending on these two supportive service categories from 2010 and 2011 (see table 1). In addition, AoA collects information on the number of transportation service rides provided through Title III Part B, as well as both the number of rides and people receiving assisted transportation services through their programs. FTA’s Enhanced Mobility program also targets older adults as one of its primary populations and is focused on improving the mobility of seniors and people with disabilities. According to FTA officials, the agency obligated about $180.6 million in Enhanced Mobility program funds in fiscal year 2013. FTA officials stated that they do not track the proportion of funds going to transportation projects and services for older adults versus those with disabilities, and said that in many cases, the project to be funded would benefit both populations by responding to the same functional needs, whether the need is derived from age or a disability. For example, the cost to ride in taxicabs that meet the Americans with Disabilities Act (ADA) accessibility requirements are an eligible expense under the Enhanced Mobility program. Accessible taxis offer communities flexibility, and cost savings, compared to traditional ADA paratransit service,disabilities regardless of age. and can benefit older adults and persons with The remaining programs within CMS and VA do not specifically target older adults, but provide funds for transportation services that qualified older adults could benefit from. These programs are primarily focused on nonemergency medical transportation (NEMT). Specifically, CMS’s programs such as Medicaid NEMT and 1915(c) Home and Community Based Services waiver programs can provide transportation to eligible older adults. The Medicaid program provided health services to NEMT eligible populations. For example, it provided service to more than 4.6- million low-income seniors, compared to 11-million non-disabled adults, 8.8-million individuals with disabilities, and more than 31-million children. In addition, VA programs, including Veteran’s Medical Care Benefits (Beneficiary Travel) and Veteran’s Transportation Program can benefit eligible older adult veterans. For example, in 2013, VA officials told us that the Beneficiary Travel program reimbursed approximately 5- million claims for mileage costs totaling about $168 million to veterans aged 65 or older. Federal agency involvement in the Coordinating Council varies, with coordination on older adult transportation primarily occurring between FTA and AoA, the two primary agencies involved in human services transportation planning activities. The Coordinating Council’s Executive Committee has not met since 2007, but Coordinating Council officials told us that the lack of meetings is not a sign of inactivity, as working groups comprised of staff-level program officials from some of the 11 member agencies have developed initiatives intended to further federal coordination efforts. According to Coordinating Council officials, working groups are activated in response to specific needs that arise for collaboration between partner agencies. For example, current working group initiatives have focused on mobility management tools, such as one-call one-click centers, to better connect transportation service providers and riders. In particular, Coordinating Council officials stated that the Health, Wellness and Transportation working group, which includes participation from DOT, VA, HHS, and the Department of Laboris the focal point for current coordination activities and has incorporated earlier initiatives, such as veterans transportation efforts, into this group. This research and demonstration program also included contributions from the Community Transportation Association of America, Easter Seals, and the National Association of Area Agencies for Aging—industry associations representing transportation providers, older adults, and people with disabilities, as well as the aging services network, respectively. as well as new and innovative models for addressing the needs of older adults and those with disabilities. According to DOT officials, the Small Grants program was initially funded in fiscal year 2012 for $1 million, about $950,000 in fiscal year 2013, and $1 million in fiscal year 2014. The program has finished its first phase and is currently funding its second phase of grant projects. One such grant was awarded to Montgomery County, Maryland to help increase participation by older adults in a local transportation advisory committee, and to train high school and community college students to assist older adults and persons with disabilities in accessing and navigating public transportation systems. The second initiative was the Veterans Transportation and Community Living Initiative (VTCLI) grant, a coordinated effort by the Departments of Defense, HHS, Labor, DOT, and VA.help veterans and others identify and access locally available transportation services that connect them with work, education, health care, and other vital services in their communities. While the primary goal was to support veterans and military families, the grants are structured to fund transportation projects that will potentially benefit anyone living within the jurisdiction of a grant recipient—including older adults. The program only awarded grants in fiscal years 2011 and 2012. In that period, VTCLI awarded approximately $64 million for 119 grant projects for a wide range of activities and technology improvements, including mobility management tools, such as one-call or one-click centers. VTCLI grants were intended to Mobility management was also identified as an objective in the Coordinating Council’s 2011 to 2013 strategic plan, with an emphasis on increasing the use of cost-effective and efficient mobility management principles, in part by expanding training for state and local officials. According to Coordinating Council officials, FTA’s Enhanced Mobility program, which includes allowing mobility management as an eligible expense, provides opportunities for innovative programs and practices at the state and local level, such as helping support mobility manager positions or other mobility management tools. According to these officials, mobility managers are seen as a key position that can help connect the various stakeholders in a coordinated transportation system. In addition to supporting mobility management activities, the Coordinating Council’s strategic plan highlights the importance of providing technical assistance to support Coordinating Council coordination goals and strengthen state- and local-coordination efforts. Coordinating Council officials highlighted three national technical assistance centers that receive funding from FTA and are affiliated with other Coordinating Council agencies, and have been established to share coordination information and resources with state and local entities. Easter Seals Project ACTION (Project ACTION) provides technical assistance related to accessible community transportation for persons with disabilities and older adults through research, online training, and outreach efforts to individuals or communities. For example, a Project ACTION white paper for FTA on access to public transit found that increased coordination of healthcare and transportation programs can produce reduced costs, increased accessibility to transportation options, and more positive health outcomes for older adults and persons with disabilities. The National Center for Mobility Management provides support to FTA grantees, with a focus on direct technical assistance and sharing information with state and local entities. As a part of its efforts, the center is collecting data on transportation coordination plans and mobility management approaches from state and local providers for inclusion in a database and as case studies published on its website. For example, the center has developed publications identifying promising practices in mobility management areas, including coordinated transportation planning and technology use in transportation coordination. The National Center for Senior Transportation facilitates local partnerships that help provide transportation to older adults, administers grant programs, and provides information and technical assistance support to communities. FTA is the primary funding agency, and according to center officials, AoA has been a primary partner in program development and activities. The center’s technical assistance activities have included administering a series of grants intended to encourage aging organizations and public and private transportation providers to involve older adults and people with disabilities in the public-transit planning process. For example, the center implemented a grant program under a cooperative agreement with FTA that focuses on person-centered mobility management. In 2012, NCST awarded 9 grants totaling about $500,000 to local communities, which included grants to provide travel training and counseling on travel options for older adults. We found that some agencies are more engaged in coordinating transportation for older adults than others. In particular, AoA and FTA have shown continuing coordination through Coordinating Council working groups, initiatives, and technical assistance efforts as described above. Both agencies also help facilitate coordination through their respective programs. Specifically, the planning requirements and funding flexibility in both the Title III Part B and the Enhanced Mobility programs help involve stakeholders and coordinate federal resources for human service transportation by, for example, allowing Title III Part B funds to be used as the non-federal match for Enhanced Mobility program funds. However other agencies, such as VA and CMS, have not been as active in federal coordination efforts that affect the transportation- disadvantaged. For example, the Coordinating Council’s activities have been limited to staff-level working group activities that do not involve all member agencies, and lack participation by key players, such as those primarily involved in NEMT. As we previously found, agencies can use their strategic plans as tools to drive collaboration with other agencies and partners by ensuring consistent and complementary goals and strategies. Our concurrent report related to the coordination of NEMT services recommended that the Council update its strategic plan, which covered the period from 2011 through 2013. An updated strategic plan could be used to outline a strategy for coordinating NEMT across all federal agencies funding this type of service, which could benefit all transportation-disadvantaged populations, including older adults. In addition, current federal coordination efforts do not identify or incorporate clear short- and long-term desired outcomes, a key issue to consider when implementing interagency collaborative mechanisms to ensure participation from all member agencies. The Coordinating Council identified high-level strategies, related objectives, and proposed performance indicators supporting these objectives in the 2011 to 2013 strategic plan as a guide for the council’s activities over the two-year period. However, the Coordinating Council did not clearly define desired outcomes, measures to track progress towards achieving its objectives, or timeframes for implementing its strategies and communicating results. For example, the strategic plan identifies deploying mobility management as one of the objectives for implementing the strategy to expand coordinated human-service transportation infrastructure in order to improve the capacity of communities to deliver integrated transportation and improved customer service. The objective identifies action steps and performance indicators, including tracking the number of mobility managers and the number of mobility managers receiving training and technical assistance. However, according to Coordinating Council officials, no data associated with these indicators are currently being collected that would help the council determine whether its efforts to deploy mobility management are resulting in an increased use of cost- effective and efficient mobility management principles in local communities. Additionally, because Coordinating Council officials said there are currently no plans to renew or revise the now-expired strategic plan, it is not clear which, if any, of the proposed objectives are applicable to current Coordinating Council activities or whether the performance indicators will be tracked. Coordinating Council officials said the objectives and performance indicators outlined in the strategic plan were intended to demonstrate potential outcomes and ways of measuring progress, and officials plan to explore specific measures and opportunities for data collection through the technical assistance centers in the future. However, the Coordinating Council has not yet established a specific time frame for doing so. We have previously found that monitoring and evaluating federal collaborative efforts to identify areas of improvement can help key decision makers within the agencies, as well as clients and stakeholders obtain feedback for improving both policy and Without clearly defined outcomes and related operational effectiveness.performance measures, it is difficult to assess the effectiveness of activities related to transportation for older adults currently under way in improving mobility options and access to transportation services or to make decisions about future coordination efforts. Additionally, without a clear method to collect and track information and data to demonstrate progress, it is difficult to show the benefits of coordination, and whether current Coordinating Council efforts are achieving the outcomes intended to improve transportation coordination for transportation-disadvantaged populations, including older adults. State and local transportation agencies and aging network organizations in the four states we selected used a variety of different mechanisms to coordinate transportation services for older adults. These mechanisms are similar to those we previously found are being used by a number of other regions, states, or localities for coordinating transportation. In our selected states, they were also being used to help older adults access transportation services (see table 2). For example, state level coordination councils may be created by statute, executive order, or governor initiative to oversee coordinated transportation for transportation-disadvantaged populations within a given state. In addition, mobility management efforts—which include individual level education and counseling on transportation options and systems level coordination among transportation and human service providers—are being promoted nationwide, including in our selected states. Building from the efforts described above, some selected transportation and aging network organizations have implemented or are piloting more extensive or innovative approaches to coordination intended to help older adults access transportation services, such as offering a wide range of volunteer transportation and expanded mobility management services. For example, Ride Connection—a transportation provider operating in Oregon—relies heavily on volunteers and a network of service partners throughout the region to provide over 400,000 rides a year to older adults, people with disabilities, and those living in rural areas through a range of programs. These include travel training and coaches, community shuttles, a shared vehicle program, as well as fare assistance and relief programs. According to Ride Connection officials, approximately two thirds of the organization’s 600 drivers are volunteers, and the officials view the volunteer model as an important component of helping older adults age in place. Transportation organizations in other areas of the country are also seeking to leverage volunteer networks. The Independent Transportation Network America, an organization created to help expand the range of services available to older adults needing transportation, has explored innovative approaches and a volunteer network specifically targeted at serving older adults. Founded in Maine, this organization has 26 affiliate locations nationwide, offering rides 24 hours a day, 7 days a week, for any purpose. As members, the individuals also have the option to trade in their vehicles in exchange for credits that can be used to pay for future rides. The Independent Transportation Network also provides door- through-door service to better meet the mobility needs of frail older adults. All of the states we selected were also pursuing pilot projects to refine long-standing services or conducting research to better assess unmet needs and potential additional coordination mechanisms. For example, the Pennsylvania Department of Transportation and stakeholders, including AAA officials, have begun a pilot project to explore adjustments and alternative approaches for the state’s lottery-funded Shared-Ride program. In part, this is an effort to use stakeholder input to address issues with many counties’ inability to cover the full cost of the senior transportation service. Other selected states have engaged in research and assessments to better identify unmet needs and potential approaches for furthering coordination efforts among transportation- disadvantaged groups, including older adults. For example, officials at the Florida Commission for the Transportation Disadvantaged worked with academic researchers to define the unmet and latent travel demand to better understand the mobility needs of the transportation-disadvantaged population in the state. Oregon and Texas have also undertaken initiatives to further explore opportunities for increased coordination. Both states completed reports in 2013 that included recommendations for developing performance metrics and both reports highlighted the need to collect and share information on gaps in service and unmet need, efforts that officials in these states continue to pursue. For example, the Texas coordination report proposed that state and regional stakeholders collaborate to develop statewide performance indicators for demonstrating that individuals throughout the state have improved access to an effective and efficient network of public transportation services, especially for seniors and people with disabilities. Some of the transportation agencies and aging network organizations we met with described examples of areas where existing coordination efforts have been particularly helpful, but data or information quantifying the effects of coordination are lacking. For example, officials involved in regional coordination efforts in Texas told us that standard performance measures may not adequately capture the complexity of successful transportation coordination efforts, and they are working on developing performance measures to help identify geographic service gaps, which they know are issues in the region. Generally, examples of the benefits of coordination in our selected states, including those below, were limited to anecdotal examples. Ride Solution officials in Florida noted their county-level coordinated system was designed to deliver any type of rider to any location— serving the general public, human service agencies, and transportation-disadvantaged populations with the same fleet of vehicles. Ride Solution officials also designed their own vehicle, which can accommodate 5 wheelchairs, 25 passengers, and has a low floor feature eliminating the need for stairs, which can be difficult for older adults to navigate (see fig.1). According to Ride Solution officials, the overall level of coordination resulting from their deviated-route format combining different types of riders has enabled them to provide over double the trips than the state paratransit average for many years. Others noted that coordination can help improve the logistics necessary for coordination by offering, for example, one shared call center and scheduling system. One Oregon transportation provider we met with, Lane Transit District, described operational efficiencies and benefits to the customer resulting from coordination. For example, this provider established a one-stop call center for human service transportation, which handles requests for transportation for a variety of programs including ADA paratransit, Medicaid NEMT, as well as senior and disabled services community transportation. According to officials, this simplified one-stop access to transportation breaks down what was once a complex administration of programs, putting individuals in direct contact with resources to help identify transportation options available to them. We identified funding eligibility and reporting requirements for different programs, geographic boundaries, and limited data on the extent of need given the growing population of older adults as challenges at the state and local levels that may inhibit coordination in our selected states. For example, a number of state and local officials in each of our four selected states told us that it is difficult to co-mingle funds from different federal funding streams because of eligibility requirements, including both programmatic requirements on how funds can be used (i.e., certain beneficiaries) as well as perceptions about how funds can be used within those requirements. We previously found there is a disconnect between transportation providers and human service agencies. In other words, transportation providers are generally focused on making transportation services available for a wide population, including the general public, older adults, and people with disabilities. In contrast, human service agencies are often focused on meeting the specific needs of a narrower population (i.e., an eligible program beneficiary). For example, a transportation provider we met with in Florida said there is a perception in Northeast Florida, including the Jacksonville area, that OAA funding can only be used to provide a specific service, transporting older adults to congregate meal sites. These officials stressed that these perceptions need to be overcome so the region can pursue additional opportunities to coordinate transportation services and share resources. Similarly, in the locations we visited, VA officials were generally not involved in regional or local coordination efforts. In Pennsylvania, for example, VA NEMT programs operate outside the coordinated transportation planning process. According to VA officials we met with, from the agency’s perspective, if veterans are not eligible for VA-provided NEMT, they are essentially on their own in finding transportation. In certain circumstances for a specific patient, VA officials may reach out to local entities to try to identify transportation alternatives, but the officials said there is no formal structure or process in place for this type of activity. Pittsburgh’s VA Medical Center currently does not participate in any type of coordination with non-VA transportation planning or human service-transportation coordination, according to Medical Center officials. Coordination among providers serving different geographic boundaries can be challenging in both rural and urban areas. Officials in Oregon and Florida identified transportation to medical centers in other counties as a transportation need. For example, transportation officials in Oregon told us that in areas outside the urban core or in more rural areas, a rider may need to access more than one transportation provider to make such a trip and cross county lines in order to access that service. This situation may be further complicated for older adults, because it can be more difficult to physically manage transfers or long waits. In addition, available service days and hours may be limited in rural areas, further affecting older adults’ ability to access different types of activities. Officials in all four of our selected states noted that rural areas often have very few transportation options available to serve older adults and other residents. For example, an AAA in rural Pennsylvania noted that the lack of transportation service options on Sundays has a direct impact on older adults’ ability to get to church, which can be a very important outing for some riders. Another challenge that may hinder coordination is limited data on the extent of older adults’ transportation needs given the growing population of older adults. While recipients of Enhanced Mobility program funding are required to develop coordinated public transit-human service plans and aging network organizations are required to develop plans that include planned strategies and priorities to address the growing number of older adults, state and regional transportation and aging plans include limited systematically-collected data on unmet needs or projected future needs. For example, one selected state’s aging plan indicated that it does not have a formal needs-assessment process. According to the plan, other sources, such as focus groups and interviews with providers, helped identify transportation as a service need. Another plan we reviewed stated that satisfaction surveys and focus groups were used to help determine needs and ways in which services—including transportation—could be improved. AAA officials in Florida, Pennsylvania, and Oregon also told us there is very little concrete data identifying the extent of unmet transportation needs beyond anecdotal information, and there is no systematic data collection to identify unmet needs at the local level. As a result, limited data and information are available to help determine whether the coordination that is occurring is meeting additional needs or filling gaps in the provision of transportation services for older adults. For example, officials at an AAA in Florida explained that there is no repository of information for collecting data to identify the extent of all older adults’ needs, but noted that transportation is always raised as a major challenge in needs assessments and outreach conducted by the AAA. Older adults may require certain types of service to meet their specific mobility and daily living needs as illustrated by examples from the states and localities we visited. For example, an AAA in Pennsylvania discussed working with the primary transportation provider in the region to find ways to better meet older adults’ mobility needs. In this case, door-to-door transportation assistance is available, but the officials are interested in exploring opportunities to provide door-through-door service to better serve the older adult community. In addition, examples from our selected states suggest that transportation for life-sustaining needs in those states are being met (e.g., to access medical and nutrition services), but there is a significant gap in transportation for social and recreational purposes. As a transportation provider in Florida explained, demand for older adult rides in its service area always exceeds available funding, and there are limits on how the existing funds can be used. For example, the transportation provider prioritizes its state Transportation Disadvantaged Trust Fund dollars for life-sustaining activities, such as transportation to congregate meal sites or medical trip appointments. As a result, this provider stated that very little funding remains for social outings like going to church or shopping with friends, which officials noted are very important components to helping older adults age in place and remaining connected to their community. As the population of older adults continues to grow, having access to a variety of transportation options is critical to ensure older adults’ access to health care, social and recreational events, and other instrumental activities of daily living. When flexible transportation services exist and are accessible, older adults can more comfortably age in place in their homes and communities for as long as possible. Furthermore, when these transportation operations are coordinated, older adults may benefit from improved and more cost-effective services. A number of federal agencies provide funding that can be used for transportation for older adults, and FTA and AoA have been coordinating and are involved in facilitating initiatives, such as technical assistance efforts and community grants, to help meet older adults’ mobility needs. However, federal coordination efforts by the Coordinating Council lack clear, desired outcomes for its current coordination activities. In addition, there are no efforts under way to collect performance data that could help the Coordinating Council and its member agencies better plan and execute coordination strategies to ensure that its efforts are resulting in improved mobility and access to transportation services for transportation- disadvantaged populations, including older adults. In particular, defining desired outcomes could help the Coordinating Council determine whether its current activities are effective in facilitating coordination and help inform planning and decision-making about future coordination efforts. Furthermore, tracking performance data on its activities will help the Coordinating Council demonstrate the benefits of coordination and encourage more widespread participation. As we concluded in 2012, a comprehensive strategy that outlines goals and desired outcomes for federal coordination efforts is needed to ensure that relevant stakeholders are actively engaged and participating in coordination efforts. While the Coordinating Council developed a strategic plan for 2011 to 2013, it is now out of date, and little else is in place to provide overall strategic guidance for federal efforts to coordinate transportation for older adults. Coordinating Council officials said that there are no plans to update or renew the existing strategic plan. We continue to believe that a current strategic plan, as recommended in our concurrent report on NEMT, could enhance coordination and collaboration among the federal agencies that provide funding that can be used to meet older adults’ transportation needs. To promote and enhance federal, state, and local coordination activities, we recommend that the Secretary of Transportation, as the chair of the Coordinating Council, convene a meeting of the member agencies of the Coordinating Council and define and report on desired outcomes and collect related data to track and measure progress in achieving results, including the extent of coordination efforts that are under way, such as improved services for older adults. This effort could be conducted as a part of the Coordinating Council’s process to update its strategic plan, which we have also recommended in a concurrent report. We provided a draft of this report to DOT for review and comment. DOT partially concurred with our conclusions and recommendation in an email response. Specifically, DOT stated that the Coordinating Council’s working groups and affiliated technical assistance centers have ongoing activities related to coordination. DOT also stated that FTA is developing a 2-year implementation strategy for the Coordinating Council and will determine policy objectives and information that may be needed to measure progress and evaluate coordination efforts that are under way. While we agree that these are important steps toward improved coordination, we believe it is important that any framework FTA establishes for the Coordinating Council articulates clear, desired outcomes and measures that the Coordinating Council can use to collect data and assess the effectiveness of its coordination activities in improving access to and mobility options for transportation-disadvantaged populations, including older adults. We also provided a draft of this report to VA and HHS for review and comment. VA commented that the agency welcomes opportunities to participate in additional coordination efforts and supports the establishment of performance measures among federal, state, and local agency coordination efforts. VA also commented that the agency’s priority for its transportation programs is to ensure timely access to medical care for veterans. HHS did not have any comments on the draft report. We are sending copies of this report to the appropriate congressional committees and the Administrator of FTA, the Secretaries of the Department of Transportation, HHS, VA, and interested congressional committees. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This report addresses the following questions: 1. What federal programs provide funding for transportation services for older adults, and to what extent are the programs that fund these services coordinated? 2. How do state and local transportation agencies and aging network organizations in selected states coordinate transportation for older adults and what challenges do they face in coordinating or providing these services? To identify federal programs that provide funding for transportation services for older adults, we reviewed our 2012 report on transportation- disadvantaged populations, which identified federal programs that provide funding and services for transportation-disadvantaged populations, which includes older adults, a 2013 AARP report that that identified federal programs that provide funding for older adults, and conducted a search of the Catalog of Federal Domestic Assistance. These programs may fund infrastructure-related costs for transportation or transportation services. We limited our scope to federal agencies that are members of the Interagency Coordinating Council on Access and Mobility (Coordinating Council) because these agencies were identified by executive order to participate in coordination. Through these reviews, we identified three primary federal agencies—the Departments of Health and Human Services (HHS), Transportation (DOT), and Veterans Affairs (VA)—that administer programs that provide funds to older adults where transportation is an eligible expense or that target older adults among the eligible recipients for transportation funds. Other federal agencies may also have programs that provide funding for transportation for older adults. However, we did not systematically identify every program government-wide that could provide such funding as part of this review. We subsequently asked federal program officials from the three agencies to review and verify the programs identified and the program information collected, including if transportation for older adults was an allowable use of program funds, and program spending or obligations for fiscal 2013. For HHS’s Title III B program we asked for spending data from fiscal year 2010 to 2013. We also asked agency officials to include any relevant programs we may have missed in our search. Agency officials provided requested spending and obligation data when available, but we did not independently verify the data provided. To determine the extent to which these federal programs are coordinated, we reviewed policy and other guidance established to promote coordination of transportation services at the federal level and interviewed officials from HHS, DOT, and VA about the level of interagency coordination on transportation for older adults. For example, we met with DOT agency officials involved with Coordinating Council activities. We also reviewed Coordinating Council documents, such as the 2011 to 2013 strategic plan and the Council’s progress report on recommended actions for human service transportation coordination. We also interviewed officials from relevant stakeholder groups, academic researchers, and technical assistance centers, such as the National Association of Areas Agencies on Aging, AARP Public Policy Institute, Center for Urban Transportation Research at the University of South Florida, Easter Seals Project ACTION, the National Center for Senior Transportation, and the National Center for Mobility Management. In addition, we reviewed literature since 2009 on the coordination of transportation services for older adults, and interviewed staff from federal technical assistance centers and other stakeholder groups involved in transportation coordination efforts about federal coordination of services to meet the transportation needs of older adults. For example, we reviewed National Center for Senior Transportation grant programs and initiatives. We also compared coordination efforts against leading practices GAO has identified for successful interagency collaboration and collaborative mechanisms, such as interagency groups and councils. To determine how selected state and local transportation agencies and aging network organizations coordinate transportation for older adults and the challenges they face in coordinating or providing these services, we conducted site visits in four states—Florida, Oregon, Pennsylvania, and Texas—to discuss the coordination of transportation services between transportation agencies and aging network organizations. In particular, we interviewed officials from state and area agencies on aging, state transportation departments, metropolitan planning organizations, VA medical centers, and local transit providers about the coordination of transportation services for older adults, challenges to providing and coordinating services, and any gaps in the current services provided. We selected these four states as they were among those with the greatest overall population of and the largest proportion of older adults and received the largest amounts of DOT funding for transportation services that can be used for older adults. We also selected states with a mix of state coordination mandates and coordinating councils, and identified and visited metropolitan areas within the states that provided transportation services to older adults in both urban and rural portions of the states. Information obtained in the site visits is not generalizable to other states that coordinate transportation services for older adults. In addition, we interviewed federal agency officials within HHS, DOT, and VA as well as staff from the federal technical assistance centers about the challenges to coordination at the state and local levels. We also reviewed selected state and local aging plans and local and regional transportation coordination plans for selected sites. Table 3 provides more detailed information about the state and local entities we interviewed. We conducted this performance audit from March 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. Older Americans Act of 1965; 42 U.S.C. § 3030d(a)(2) Title III Part B is a formula grant program established in the Older Americans Act of 1965. Its purpose it to encourage state units on aging and area agencies on aging to concentrate resources to develop and implement comprehensive and coordinated community-based systems of service for older individuals via statewide planning and area planning and provision of supportive services. The program is intended to serve those aged 60 or older. There are a number of supportive services these funds can be applied to, including providing both transportation and assisted-transportation services. These funds are flexible and can be used for both medical and nonmedical transportation. Older Americans Act of 1965; 42 U.S.C. §§ 3057, 3030d (a)(2) Title VI Part A is a project grants program established in the Older Americans Act of 1965. Funds are available through grants to eligible Indian Tribal Organizations for services comparable to those provided under Title III. Services must include nutrition services and information and referral, and may include transportation and other services authorized under Title III. Grants also are available to private or nonprofit organizations having the capacity to provide services to older Native Hawaiians. Social Security Act: 42 U.S.C. §§ 1396a, 1396n(e)(1)(A) Federal law requires states to ensure that eligible Medicaid beneficiaries have transportation to and from health care services. The program is focused on those who cannot provide their own transportation to and from appointments. NEMT programs and ride scheduling procedures vary from state to state. Generally, beneficiaries must contact the Medicaid transportation provider in their area to arrange for rides. Medicaid NEMT rides can be provided through a number of methods such as through mass transit systems as well as taxis, cars, or vans. Social Security Act: 42 U.S.C. § 1396n(c)(3) The Medicaid Home and Community Based Services waiver program was authorized under Section 1915 (c) of the Social Security Act. Through this program, states can assist Medicaid beneficiaries by providing a wide array of services that permit them to live in their homes or community and avoid institutionalization in a nursing-home facility. Among the services that can be provided under the waiver are transportation services approved to help a beneficiary access a service that may not be a traditional Medicaid plan service. The Enhanced Mobility program is a formula grant program established in 1975 to provide financial assistance in meeting the transportation needs of elderly persons and persons with disabilities where public transportation services are unavailable, insufficient, or inappropriate. Funds can be used for capital planning and operations. The Enhanced Mobility program is designed to supplement the Federal Transit Administration’s other capital assistance programs by funding transportation projects for elderly persons and persons with disabilities in all areas—urbanized, small urban, and rural. The program was renamed under the Moving Ahead for Progress in the 21st Century Act and modified to include New Freedom Program activities as eligible projects. VA provides transportation funds and services to qualified veterans needing to access a VA medical facility. The program provides transportation through mileage reimbursement, purchase of transportation service contracts, or medically necessary specialized transportation. VA provides grants to eligible recipients to assist veterans in highly rural counties through innovative transportation services to travel to VA Medical Centers, and to otherwise assist in providing transportation services in connection with the provision of VA medical care to these veterans. VA provides funding for housing and services in the community to help veterans out of homelessness. Medicaid transportation for older adults is provided under the Nonemergency Medical Transportation program benefit. The Centers for Medicare and Medicaid Services’ 1915 (c) Home an Community Based Services waivers is a program within Medicaid. For the purposes of our report, as this is a program focused on assisting older adults in living independently and provides transportation funding and services, we have presented it separately from Medicaid NEMT. The Department of Transportation had other formula funding programs for transportation services, such as the Urbanized Area Formula program and formula grants for rural areas. These are general transit program funds that serve a number of populations, but they may also be applied to transportation for older adults. In addition to the individual named above, the following individuals made important contributions to this report: Lorelei St. James (Director), Nancy Lueke (Assistant Director), Lorraine Ettaro, Delwen Jones, Maria Wallace, Betsey Ward-Jenks, Cheryl Peterson, and Sarah Veale. | As the U.S. population ages, access to safe and reliable transportation alternatives is critical to helping older adults remain in their homes as long as possible. HHS, DOT, VA, and other federal agencies may provide funds to state and local entities to help older adults access transportation. GAO was asked to review access to transportation services for older adults. This report examines (1) the federal programs that provide funding for transportation services for older adults and the extent to which the programs that fund these services are coordinated, and (2) how state and local transportation agencies and aging network organizations in selected states coordinate transportation for older adults and the challenges they face in coordinating or providing these services. GAO reviewed past work on programs for transportation-disadvantaged populations, reviewed federal program information, and conducted interviews with HHS, DOT, and VA, as well as, state and local transportation agencies and aging organizations in selected states. GAO selected four states based on populations of older adults, federal funding received for transportation, and geography, among other factors. Two key federal programs and several other programs identified by GAO provide funding for transportation services for older adults. The Administration on Aging (AoA) within the Department of Health and Human Services (HHS) provides funding for supportive services—including transportation—to state and local agencies exclusively for older adults. Within the Department of Transportation (DOT), the Federal Transit Administration's (FTA) Enhanced Mobility of Seniors and Individuals with Disabilities program is focused on improving the mobility of older adults as one of its two primary populations. Other federal agency programs, including some within the Department of Veterans Affairs (VA), can fund access to transportation services for eligible older adults, among other beneficiaries. The Interagency Coordinating Council on Access and Mobility (Coordinating Council) is responsible for leading federal efforts to improve the efficiency and effectiveness of human service transportation by coordinating related programs. Federal agencies' involvement in the council and its activities varies, with coordination on older adult transportation primarily occurring between AoA and FTA through working groups, initiatives, and technical assistance efforts. While some federal coordination activities are ongoing, current efforts do not identify desired outcomes, a key feature GAO has identified to consider when implementing interagency collaborative mechanisms. Specifically, the Coordinating Council's latest strategic plan, which covers the period 2011 to 2013, lacks clearly defined outcomes and measures to track progress toward those outcomes. Without defined outcomes and a clear method to collect data to monitor progress, it is difficult to determine whether current efforts of the council are achieving their intended results and providing the benefits of coordination, such as improved access to transportation, for older adults. In a concurrent report ( GAO-15-110 ), GAO is recommending that the council update its plan. State and local transportation agencies and aging organizations in the four states GAO visited used a variety of mechanisms to coordinate transportation services for older adults. For example, many state and local activities are currently focused on mobility management approaches—such as travel training programs—to help older adults identify and access the various transportation resources available. Some organizations GAO interviewed have also implemented more extensive approaches to coordination that are intended to help older adults access transportation services, such as offering a wide range of volunteer transportation. For example, Ride Connection—a transportation provider operating in Oregon—relies heavily on volunteers and service partners to provide over 400,000 rides a year to older adults and others, through travel training, community shuttles, and other programs. However, funding eligibility and reporting requirements for different programs , geographic boundaries , and limited data on the extent of need were identified as challenges that, at the state and local level, may inhibit coordination in the selected states. For example, officials in all four of the selected states noted that rural areas often have very few transportation options available to serve older adults and other residents, particularly for social and recreational outings. Examples from the selected states also suggest that funding for these types of life-enhancing activities may be limited as states prioritize their funding to ensure life-sustaining trips, such as medical and nutrition services, are provided. GAO recommends that DOT define and report on desired outcomes and collect related data to track and measure progress in achieving results, including the extent of coordination efforts under way. DOT partially concurred with the recommendation and plans to consider what information may be needed to measure and evaluate ongoing coordination efforts. |
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Climate change is having a variety of impacts on natural resources in the United States, ranging from more severe drought to increased flooding, and is altering assumptions that have been central to water resource planning and management. Congress and the Executive Office of the President have directed federal agencies to address the potential impacts of climate change. The two key federal water resource management agencies included in this review—the Corps and Reclamation—have similar yet distinct roles in managing water for a wide variety of purposes. In addition to the water management challenges posed by climate change, both agencies are dealing with aging water management infrastructure with limited funding for maintenance and construction. According to the U.S. Global Change Research Program, changes in the climate in the United States and its coastal waters have altered—and will continue to alter—the water cycle, affecting where, when, and how much water is available for all uses. Changes in the climate—including warmer temperatures, changes in precipitation patterns, rising sea levels, and more frequent and intense storms—affect water resources in a number of ways such as increased flooding in some areas and drought in others, and inundation and erosion in coastal areas. Precisely how and to what extent changes in the climate will affect particular water resources in the future is uncertain, but climate-related changes are expected to continue and increase in intensity in some areas of the nation. Climate change has the potential to affect many aspects of the environment and society in which water resource management plays an active role. A 2011 federal interagency review of the potential impacts of climate change on water resources identified four interrelated areas of concern for water resource managers as follows: assuring an adequate water supply for multiple needs, such as drinking water, agriculture, energy production, industrial uses, navigation, and recreation; protecting life, health, and property in the face of risks posed by protecting the quality of freshwater resources, including the quality of surface water and groundwater, and the health of fisheries and aquatic habitat; and protecting coastal and ocean resources as rising sea levels and changes in storm frequency, intensity, and duration impact coastal infrastructure. Adaptation—defined by the National Research Council as adjustments in natural or human systems to a new or changing environment that exploits beneficial opportunities or moderates negative effects—is an element of the proposed responses to climate change that is gaining more attention. More specifically, policymakers are increasingly viewing adaptation as a risk-management strategy to protect vulnerable sectors and communities that might be affected. As we reported in our May 2013 report on land resource management agency adaptation efforts, climate change adaptation planning frameworks generally consist of four key elements that are reviewed and revised as needed as new information emerges. These four elements are the following: Establish a mandate to address climate change with clearly articulated adaptation goals, objectives, and measures of success toward meeting goals. Assess and understand the risks, vulnerabilities, and opportunities posed by climate change by determining (1) what aspects of the climate are changing and over what periods, (2) which resources will be most at risk, (3) why these resources are likely to be vulnerable, and (4) what uncertainties are associated with the predicted climate change impacts and how this may impact adaptation efforts. Develop and prioritize management adaptation actions; that is, determine how to respond to the identified risks by considering a wide array of possible adaptation measures and identifying the highest priority adaptation measures. Implement management options, evaluate the results to determine the actions’ effectiveness, and makes adjustments as necessary. As climate continues to change, adaptation actions need to be regularly monitored for effectiveness and plans need to incorporate new information about risks, lessons learned, and modified priorities. According to a 2009 study collaboratively produced by the Corps, NOAA, Reclamation, and USGS, a variety of water-management options might be considered to facilitate adaptation to climate change, including operational changes, demand management, and infrastructure changes. The study concluded that the options for responding to the effects of climate change will vary by location, and that evaluating options will likely require a partnership between federal, state, and local interests to attain consensus among water managers and users. In 2009, Congress passed the SECURE Water Act, requiring Reclamation to establish a climate change adaptation program to (1) assess the effect of and risk resulting from global climate change on the quantity of water resources and (2) develop strategies to address potential water shortages and other impacts. To assess the effect of climate change, the law requires Reclamation to analyze the extent to which changes in water supply will impact several areas, including Reclamation’s ability to deliver water to its customers, hydroelectric power generation, fish and wildlife habitat, and recreation. The law requires Reclamation to assess specific risks to the water supply of each of its major river basins, including risks related to, among other things, changes in snow cover and the timing and quantity of runoff. To develop strategies to address impacts, the law requires Reclamation, in consultation with nonfederal stakeholders such as appropriate state water resource agencies, to consider and develop appropriate strategies to mitigate the impacts of water supply changes, such as strategies for modifying reservoir storage or operating guidelines and water conservation. Also in 2009, the President signed Executive Order 13514, Federal Leadership in Environmental, Energy, and Economic Performance which, among other things, directs agencies to participate in the Interagency Climate Change Adaptation Task Force (Task Force), which was already developing a strategy for adaptation to climate change, and to develop approaches through which the policies and practices of the agencies can be made compatible with the Task Force’s strategy. In October 2010, the Task Force delivered a progress report to the President through the Council on Environmental Quality containing overarching policy goals to advance climate adaptation and recommending the development of a national action plan to strengthen climate change adaptation for freshwater resources. Based on the work of the Task Force, the Council on Environmental Quality subsequently issued detailed adaptation planning implementation instructions in March 2011. The instructions directed the agencies to issue an agency-wide climate change adaptation policy statement, complete a high-level analysis of agency vulnerability to climate change, and submit to the Council on Environmental Quality and the Office of Management and Budget their climate adaptation plans by June 4, 2012, for implementation in fiscal year 2013. For over 230 years, the Corps has led the development and stewardship of much of the nation’s public water resources. The Corps’ Civil Works Program plans and manages water for transportation, recreation, energy, wildlife habitat, aquatic ecosystems, and water supply, while reducing the impacts of flood damages and other natural disasters. Specifically, the Corps has constructed—and continues to operate, maintain, and rehabilitate—a large inventory and wide variety of water management infrastructure, including reservoirs, hydropower facilities, commercial inland waterways, harbors, and levee systems. In June 2011, in response to the implementing instructions for Executive Order 13514, the Corps established its adaptation policy statement for addressing the effects of climate change, which called for the integration of climate change adaptation in all Corps activities. Two Corps programmatic efforts—the Interagency Performance Evaluation Task Force/Hurricane Protection Decision Chronology Lessons Learned Implementation Team (also known as Actions for Change) and the Responses to Climate Change Program—support the Corps’ ongoing adaptation activities. Since 1902, Reclamation has carried out its mission to manage, develop, and protect water and related resources in 17 western states. The agency has led or provided assistance in constructing most of the large dams and water diversion structures in the West for the purpose of developing water supplies for irrigation—that is, “reclaiming” these lands for human use. In 2009, Reclamation directed its Office of Research and Development and its Office of Policy and Administration to take the lead in implementing the actions required by the SECURE Water Act. Reclamation’s climate adaptation efforts fall within the larger effort by Interior to, among other things, implement Executive Order 13514. In 2013, Interior adopted a policy directing the agency to integrate climate change adaptation strategies into its operations, policies, programs, and planning. See appendix I for more information on the Corps’ and Reclamation’s organization and infrastructure. In addition to each agency’s individual efforts, the Corps and Reclamation established a partnership in 2007—the Climate Change and Water Working Group (CCAWWG)—to address their mutual concerns about the potential effects of climate change on their agencies’ missions. In 2009, the CCAWWG partners jointly produced a preliminary assessment of how climate could impact federal water resources management, which explored strategies to improve water management by tracking, anticipating, and responding to climate change, and identified adaptation challenges. According to a 2012 National Research Council report on Corps infrastructure, large portions of the Corps’ water resources infrastructure were built over 50 years ago and are experiencing various stages of decay and disrepair, making project maintenance and rehabilitation a high priority. The report also found that federal funding over the past 20 years has consistently been inadequate to maintain the Corps’ infrastructure at acceptable levels of performance and efficiency. Similarly, most of Reclamation’s water infrastructure facilities are more than 50 years old and, according to a 2011 Congressional Research Service report, with limited budgetary resources and aging infrastructure, Reclamation’s maintenance needs are likely to increase, as is competition for limited funding. Despite the ongoing challenges of operating and maintaining aging infrastructure under budgetary constraints, it is important that the Corps and Reclamation address the challenge of managing climate change risk in order to limit the fiscal exposure of the federal government. As noted in our 2013 high-risk update, climate change poses a significant financial risk to the federal government, including, but not limited to its role as the owner or operator of extensive infrastructure vulnerable to climate impacts. State and local authorities are responsible for planning and implementing many types of infrastructure projects, and decisions at these levels of government can affect the federal government’s fiscal exposure. While implementing adaptive strategies to protect infrastructure may be costly, there is a growing recognition that the cost of inaction could be greater and—given the government’s precarious fiscal position—increasingly difficult to manage given expected budget pressures, which will constrain not just future ad hoc responses, but other federal programs as well. As stated in a 2010 National Research Council report, increasing the nation’s ability to respond to a changing climate can be viewed as an insurance policy against climate change risks. Since 2009, as directed by executive order or required by law, the Corps and Reclamation have taken steps to assess water resource and infrastructure vulnerabilities and develop guidance and strategies for adapting to climate change, as shown in table 2. Officials from both agencies told us that as they develop the necessary guidance, they plan to implement specific adaptation strategies and share costs with state and local partners. Since 2009, the Corps has broadly assessed how climate change could affect its missions. Specifically, a phased assessment of the vulnerability of coastal projects is under way, more refined watershed-level vulnerability assessments are being developed, and pilot studies are being conducted to develop adaptation guidance and strategies. In March 2012, responding to guidance for implementing Executive Order 13514, the Corps provided the President’s Council on Environmental Quality with a high-level analysis of the vulnerability of the Corps’ missions and operations to climate change. The Corps’ analysis included an assessment of whether the potential effects of climate change on the Corps’ business areas would likely be negative, positive, or a mix of both. The analysis found, for example, that increasing air temperatures may have an effect on glaciers that could negatively impact Corps business areas such as navigation, flood and coastal storm damage reduction, ecosystem restoration, and emergency management, but the effect of increasing air temperatures on river ice could have both positive and negative impacts on those same four business areas. As part of the high-level analysis, the Corps also identified a number of adaptation priorities. To address its priority of developing more refined vulnerability assessments, the Corps is currently undertaking coastal project vulnerability assessments and is developing and testing a methodology for nationwide, watershed-level vulnerability assessments of its inland missions, operations, programs, and projects. The nationwide watershed-level vulnerability assessments will, according to Corps officials, help them make initial screening-level determinations of where adaptation strategies are needed or not needed, and then to prioritize accordingly. The agency officials expect to complete the first phase of screening assessments in 2013, with more refined assessments to come in future years. Ultimately, the Corps plans to combine the coastal and inland assessments into a unified methodology. In addition, Corps Civil Works officials told us that they are developing syntheses of literature to provide up-to-date information about regional climate impacts in order to support project-specific planning and help implement adaptation strategies. As part of its efforts to address the adaptation priorities of developing a risk-informed decision-making framework for climate change adaptation and a portfolio of adaptation approaches, the Corps is conducting 15 pilot studies nationwide to test different methods and frameworks for adapting to climate change. The Corps has completed 5 of these studies and 10 others are ongoing. According to Corps Civil Works officials, the pilot studies were proposed by Corps district staff and selected by senior Corps staff in a competitive, internal process. The 15 pilots are led by 13 different Corps districts and address project planning, engineering, operations, and maintenance for 6 different Corps business areas, involving a variety of different infrastructure types, such as flood risk reduction projects, reservoirs, and canals. Some of the pilots are being conducted collaboratively with federal, state, and university partners. Taken together, Corps officials expect the pilot projects to provide a body of knowledge and tested methods that will serve as the foundation for its guidance and future adaptation efforts. See appendix II for additional information on the locations and results of the Corps’ pilot studies. Reclamation has broadly assessed how climate change may affect water resources in the western United States as part of the Basin Study Program it established to meet the requirements of the SECURE Water Act. Specifically, responding to the Act’s requirement to assess specific risks to water supplies, Reclamation reported to Congress in 2011 its assessments of the potential effects of climate change on water supplies in the major river basins in the West. The studies, known as West-Wide Climate Risk Assessments (WWCRA), are high-level, baseline assessments of the potential impacts of climate change on future water supplies—including impacts on Reclamation’s ability to deliver water and hydropower—for each of the major river basins where Reclamation owns and operates water management infrastructure. According to agency officials, Reclamation is now conducting WWCRAs that focus on future water demand and will combine this information with its water supply assessments to form a more complete picture of the potential impacts of climate change on its water infrastructure. Reclamation policy officials told us that these combined assessments will be included in Reclamation’s next SECURE Water Act report that is due in 2016. These assessments will also be updated based on the latest climate science as water uses and conditions change, and they will be included in future reports that are due to Congress every 5 years. In addition to its WWCRAs, Reclamation is partnering with nonfederal entities to conduct more focused assessments, known as Basin Studies, to identify specific water resources vulnerabilities and to implement the SECURE Water Act’s requirement that Reclamation consider and develop strategies to mitigate climate change impacts on water supplies. Reclamation selects the Basin Studies through a competitive process and shares their costs with nonfederal partners. Through the Basin Studies, Reclamation intends to identify basin-wide water supply vulnerabilities, project climate change’s impacts on the performance of water infrastructure, and develop adaptation strategies—such as operational or physical changes to existing water infrastructure or development of new facilities—to address these impacts. According to Reclamation guidance, the Basin Studies are to develop long-term projections of water supply and demand that take into account specific climate change risks identified in the SECURE Water Act. The studies will analyze how well existing water and power infrastructure are meeting current demands and then forecast their performance in light of projected water supply and demand. To address projected imbalances in supply and demand, the studies are to identify adaptation strategies that include strategies for nonstructural (i.e., management and operations) and structural (i.e., capital expenditures) changes. As of September 2013, 3 Basin Studies have been completed, and an additional 14 studies have been funded and are under way. Reclamation and its partners, including state water management agencies and local irrigation districts, completed the Yakima River Basin Study in 2011, and both the St. Mary River and Milk River Basins Study and Colorado River Basin Study in 2012. Some studies entirely cover the major river basins specified in the SECURE Water Act—such as the Colorado River Basin Study, while other studies cover subbasins or tributaries within the boundaries of the major river basins—such as the Yakima River Basin Study, covering a tributary of the Columbia River. Reclamation officials told us that they next intend to initiate feasibility studies for adaptation strategies identified in completed Basin Studies by making funds available to nonfederal partners, beginning with an initial feasibility study in 2013. See appendix II for additional information on the locations and results of Reclamation’s Basin Studies. As recommended by the Task Force in 2010, the Corps and Reclamation are taking a phased approach to climate adaptation, including developing agency-wide guidance for adaptation. Specifically, through broad climate vulnerability assessments, agency officials told us they have expanded their knowledge of climate change and its impacts, allowing them to assess, at a high level, how these impacts may affect agency missions, programs, and operations. These initial vulnerability assessments have informed the agencies in developing and conducting more detailed vulnerability assessments, while also identifying specific strategies for climate change adaptation through the pilots and basin studies. Both agencies have also begun integrating what they have learned into their policies and program guidance. For example, beginning in 2009 and updated in 2011, the Corps issued guidance requiring that potential sea- level changes be considered in all of the agency’s coastal planning, engineering, operations, and maintenance activities. The Corps is currently developing guidance for implementing coastal and inland adaptation strategies. Similarly, in 2013, Reclamation officials told us they began to incorporate climate change adaptation considerations into its policies and guidance for project feasibility studies and environmental impact studies, among other things, using information and lessons learned from its WWCRA and Basin Study vulnerability assessments. According to agency officials, as the Corps and Reclamation integrate climate adaptation considerations into their policies and program guidance, they will begin to take steps toward implementing the potential adaptation strategies that they have identified. According to the Corps’ 2012 adaptation plan, the agency’s goal is to create a policy and guidance framework that will support the implementation of practical, nationally consistent, legally justifiable, and cost-effective adaptation strategies. Accordingly, Corps Civil Works officials told us that the pilots conducted to date have been largely focused on informing the development of policy and guidance, and that no structural or operational adaptation strategies have been implemented. Similarly, Reclamation officials told us no structural or operational adaptation strategies have been implemented in response to the agency’s vulnerability assessments, and that its efforts to update guidance will be informed by the adaptation strategy feasibility studies as they are completed. Corps and Reclamation officials told us that because they are early in the adaptation process, the extent to which limited budgets and existing infrastructure maintenance backlogs will affect the implementation of adaptation strategies remains to be determined. However, the implementation of adaptation strategies by both agencies will likely rely on collaborative sharing of costs and resources with federal, state, local, and nongovernmental stakeholders. Both agencies have already initiated cost-sharing and resource-leveraging measures. For example, according to agency officials, the Corps is leveraging resources for adaptation pilot studies with state, local, and nongovernmental entities, and Reclamation is splitting the cost of Basin Studies with state and local partners. The agencies plan to continue such collaborative approaches going forward. For example, as required under the SECURE Water Act, Reclamation officials told us they intend to share the cost of the feasibility studies for adaptation strategies equally with nonfederal partners. In 2009, the Corps and Reclamation—with its CCAWWG partners NOAA and USGS—published a study, (referred to in this report as the CCAWWG study). This study identified several challenges that climate change poses for water resource managers, including (1) identifying the data and tools needed by water managers to address climate change, (2) ensuring the sustained collection of climate data, (3) incorporating climate science into water management tools, and (4) educating water managers to use climate data and tools. We found that the Corps and Reclamation are addressing these challenges, making collaboration a key element of their efforts, and doing so in a manner generally consistent with best practices for sustained collaboration. The CCAWWG study identified a number of challenges faced by the Corps and Reclamation in adapting to climate change, and the agencies have taken a variety of actions to address these challenges. Identifying the data and tools needed by water managers to address climate change: The CCAWWG agencies are collaborating to produce a series of four documents identifying their common data and tool needs and a strategy for meeting them, with the objective, among other things, of guiding and fostering federal and nonfederal research and technology investments toward meeting these needs. The first document, published in 2011, described the water management community’s needs for climate change information and tools to support long-term planning for time scales of 5 years and more. The second document, published in 2013, described the data and tools needed to support short-term planning of less than 5 years. For both documents, the Corps and Reclamation asked their water resource managers to identify the information and tools most relevant to their programs, and they also consulted with other federal, state, and local agencies and stakeholders with a role in water resource management about their needs. The documents summarized the information and tools needed into categories and identified the users’ most pressing needs within each category. According to these documents, the CCAWWG agencies plan next to prepare two companion documents to identify a scientific strategy for meeting the research needs identified in the two initial documents. The two completed documents note that USGS and NOAA will jointly prepare the companion documents, incorporating perspectives from other federal and nonfederal representatives of the scientific community. Ensuring the sustained collection of climate data: The Corps and Reclamation are coordinating with the data collecting agencies and sharing some costs associated with their efforts. According to the 2009 CCAWWG study, at the same time as the need for observational data to support climate adaptation is increasing, the observational networks crucial to increasing understanding are shrinking. For example, in recent decades, maintenance of long-term monitoring networks has declined because of a lack of funding—USGS alone has deactivated or discontinued almost 1,700 surface-water stream gauges. Corps Civil Works officials told us that stream gauge data is extremely important, not only to the Corps’ ongoing operations, but also because science agencies use the data to produce the climate change information upon which the Corps bases its adaptation planning. To ensure the needed data is collected, the Corps has a formal agreement to provide funding to USGS—about $18 million in fiscal year 2013 according to Corps officials—to operate stream gauges that provide data for the Corps’ water planning and management activities. This data is also available for use by all federal and state agencies, as well as others interested in water information. Reclamation policy officials told us, in response to a SECURE Water Act requirement to consult with federal and applicable state agencies to develop a monitoring plan for acquiring and maintaining water resources information, agency staff are currently identifying information needs and plans to work collaboratively with data collecting agencies, including NOAA, USGS, and the U.S. Department of Agriculture, to develop the plan. Reclamation policy officials stated that the Basin Study Program activities, including the WWCRAs and Basin Studies, are also contributing to the planning effort by providing valuable information about how the agency’s monitoring needs are changing as a result of climate change. Reclamation officials told us that they intend to work with the U.S. Department of Agriculture and USGS to initiate the required monitoring plan in 2014. These collaborative efforts can help ensure that the long-term water resource monitoring networks critical for detecting and quantifying climate change and its impacts—as well as measuring the effectiveness of future adaptation strategies—will be properly configured and continue to operate. Incorporating climate science into water management tools: The Corps, Reclamation, and others are collaborating in a number of efforts to incorporate climate science into water management tools. For example, Reclamation research and development, as well as policy officials told us that as part of their effort to enhance the capabilities of water resource managers to use climate data, the agency is coleading two of Interior’s Landscape Conservation Cooperatives in the Colorado River Basin area. Reclamation officials told us that the Landscape Conservation Cooperatives, which are partnerships of governmental and nongovernmental stakeholders, will focus on developing and communicating science to inform climate adaptation strategies for ecological regions, or “landscapes.” In collaboration with academia, other federal agencies, local and state partners, and the public, the Landscape Conservation Cooperatives will provide products and services, such as climate change computer models and vulnerability assessments, coordinate with Interior’s regional Climate Science Centers to synthesize existing climate change impact data and management strategies, and help resource managers put them into action on the ground. The Landscape Conservation Cooperatives will also coordinate with NOAA’s Regional Integrated Sciences and Assessment program. Similarly, the Corps is engaged in collaborative efforts with external partners to integrate climate science into planning tools for water resource managers. For example, the Corps partnered with NOAA’s National Ocean Service to create an online sea level change calculator. According to Corps officials, this collaboration allowed the rapid integration of climate science into engineering guidance for coastal projects. Corps Civil Works officials also told us that collaboration with the Federal Emergency Management Agency and NOAA’s Urban Northeast Regional Integrated Sciences and Assessment program contributed to the development of a post- Superstorm Sandy sea level rise tool to help affected communities, residents, and other stakeholders consider risks from future sea level rise in planning for reconstruction. In addition, the Corps and NOAA are coleading actions to implement the Task Force recommendation to develop a federal Internet portal to provide current, relevant, and high-quality information on water resources and climate change data applications and tools for assessing the vulnerability of water programs and facilities to climate change. As a result, the Corps-hosted Federal Support Toolbox is now publicly available online. According to Corps Civil Works officials, the website is a “one stop shop” for technical resources to support water management. The website states that the Toolbox is an evolving and comprehensive water resources data portal with direct links to valuable databases, innovative programs and initiatives, and state-of-the-art models and tools. Educating water managers to use climate data and tools: The Corps and Reclamation are collaborating as coleaders in developing and implementing a training program as recommended by the Task Force’s National Action Plan: Priorities for Managing Freshwater Resources in a Changing Environment. These agencies—joined by NOAA, USGS, and the Environmental Protection Agency—are collaborating with the University Corporation for Atmospheric Research’s COMET Program and the Western Water Assessment to produce training courses for federal and nonfederal resource management professionals who need to assess the impacts of climate change on water and related resources. Specifically, in 2012, the agencies implemented an online course on incorporating climate change into water resource planning, which was a prerequisite for participating in the first two pilot residence courses—addressing climate impacts on surface hydrology and on water demand for irrigated crops—offered in early 2013. According to the program’s website, the online course was designed to provide students with water resource planning knowledge, while the residence courses offer opportunities for gaining hands-on experience in applying that knowledge. According to the website, these courses and the numerous planned future classes are collectively designed to provide a professional development and training series that will help managers assess climate change impacts across the spectrum of natural resources. The Corps and Reclamation have collaborated with each other and other agencies in a manner that is generally consistent with practices that we have previously identified as important to helping enhance and sustain collaboration among federal agencies. In 2005, we reported that collaboration—broadly defined as any joint activity that is intended to produce more public value than could be produced when organizations act alone—can be enhanced and sustained by engaging in eight key practices: (1) defining and articulating a common outcome; (2) establishing mutually reinforcing or joint strategies; (3) identifying and addressing needs by leveraging resources; (4) agreeing on roles and responsibilities; (5) establishing compatible policies, procedures, and other means to operate across agency boundaries; (6) developing mechanisms to monitor, evaluate, and report on results; (7) reinforcing agency accountability for collaborative efforts through agency plans and reports; and (8) reinforcing individual accountability for collaborative efforts through performance management systems. Running throughout these practices are a number of factors, such as leadership, trust, and organizational culture, which are necessary elements for a collaborative working relationship. The Corps and Reclamation have made collaboration a key element of their adaptation policies and plans and have reinforced accountability for collaboration through agency performance management systems. For example, the Corps’ climate adaptation policy states that collaborations are the most effective way to develop strategies to identify and reduce vulnerabilities to potential future climate change, and it calls for continued collaborative adaptation efforts. As stated in the Corps’ 2012 Climate Adaptation Plan and Report, it is the objective of the agency to facilitate and promote closer and more fruitful interagency cooperation and to promote sharing of impact and adaptation data and information between federal, state, and local partners. Finally, to reinforce accountability, the draft performance metrics for climate adaptation in the Corps’ 2013 Army Campaign Plan includes a target for the number of products developed in collaboration with other water resource agencies for adaptation planning and action. Reclamation has similarly included collaboration as a key element of its adaptation policy, plans, and performance metrics. Under Interior’s 2013 Climate Change Adaptation Policy, Reclamation is to integrate climate change adaptation strategies into its policies and practices by, among other actions, collaborating with stakeholders through Landscape Conservation Cooperatives, Climate Science Centers, and other partnerships to increase understanding of climate change. Furthermore, Reclamation’s strategic plan for its adaptation and conservation programs states that collaborative partnerships must be developed to identify the adaptive strategies needed to address climate change. Finally, through its climate adaptation efforts, Reclamation is contributing to Interior’s goal of identifying resources that are particularly vulnerable to climate change and implementing coordinated adaptation responses for half of the nation by September 30, 2013. We also found that the Corps and Reclamation have collaborated together and with others in accordance with best practices for collaboration among agencies. For example, in their key collaborative effort—CCAWWG—each agency’s role is well defined; the Corps and Reclamation provide water engineering and management expertise, and their partner agencies provide climate science expertise. CCAWWG has clearly defined common objectives, including the development of working level relationships between federal water management and federal science agencies, and it leverages resources across agencies to meet common needs. The CCAWWG agencies also have mutually reinforcing strategies. For example, the operating needs of the Corps and Reclamation drive the direction of science inquiries by the science agencies, resulting in improved operations, while at the same time the data collected and compiled by the water management agencies for a specific purpose can be used by the science agencies for alternative objectives. Outside of CCAWWG, as mentioned elsewhere in this report, the agencies have also followed key collaborative practices, such as the Corps leveraging resources to fund maintenance of the USGS’s stream- flow monitoring networks, and Reclamation establishing joint strategies with state agencies and others to conduct Basin Studies. We provided a draft of this product for review and comment to the Departments of Defense and the Interior. The Department of Defense provided 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 Secretaries of Defense and the Interior; the appropriate congressional committees; 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 questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The U.S. Army Corps of Engineers (Corps)—an agency within the Department of Defense and a Major Command within the Army—is composed of four program areas including Civil Works, Military Construction, Real Estate, and Research and Development. To carry out its Civil Works missions nationwide, the program is organized into eight geographic divisions composed of 38 districts, as shown in figure 1. Division and district geographic boundaries are generally aligned with watershed boundaries. The Corps’ Civil Works Program is implemented through nine business areas that represent the diversity of the nation’s water resource management needs as follows: Navigation—provides safe and reliable commercial waterways; Flood and Coastal Storm Damage Reduction—reduces risks to people, homes, and communities from flooding and coastal storms; Environment—restores and protects wetlands and other aquatic Hydropower—generates hydroelectric power for distribution to Regulatory—regulates work in navigable rivers and the discharge of dredges and fill materials in U.S. waters; Recreation—provides recreational and educational opportunities; Emergency Management—prepares for natural disasters and acts Water Supply—provides water storage for multiple purposes; and Executive Direction and Management—provides leadership, strategic planning and performance measurement. To implement its responsibilities in the business areas, the Corps has constructed—and continues to operate, maintain, and rehabilitate—a large inventory and wide variety of water management infrastructure. For example, according to Corps records, as of September 2012, its inventory includes 702 reservoirs that, among other things, provide water supply storage and help reduce flood risk, and 75 hydropower facilities with 353 generating units that produce hydroelectric power for homes, businesses, and communities. In the area of navigation, the Corps’ inventory includes 12,000 miles of commercial inland waterways, 193 lock sites with 239 chambers, and 926 harbors. For flood reduction, the Corps inventory includes 14,501 miles of levee systems. For recreation, the Corps’ inventory includes 54,879 miles of lakeshore and recreation areas that support 370 million annual visitors, 270,000 jobs, and $16 billion of economic activity. In 2012, the National Research Council reported that the Corps’ infrastructure had an estimated value of approximately $164 billion. The Department of the Interior’s Bureau of Reclamation (Reclamation) is, according to agency records, the nation’s largest wholesale water supplier, providing water to over 31 million people and irrigation water to one out of five western farmers on 10 million acres of farm land, which produce 60 percent of the nation’s vegetables and one-quarter of its fresh fruit and nut crops. Reclamation is also the second largest producer of hydropower in the United States. To carry out its mission and operations, Reclamation is organized into five regions, as shown in figure 1. According to agency records as of 2011, Reclamation’s asset inventory includes 476 dams and dikes, creating 337 reservoirs with a total storage capacity of 245 million acre-feet of water. Reclamation’s inventory also includes 53 hydroelectric power plants that it owns and operates. These plants provide an average of more than 40 megawatt hours of energy per year. In 2011, Reclamation, estimated that the replacement value of its assets was approximately $90 billion. According to the Congressional Research Service, about two-thirds of the assets in Reclamation’s inventory are “transferred works”—facilities that it owns, but for which it has transferred operations and maintenance to nonfederal entities. The remaining one-third of these facilities are “reserved works”—facilities that are owned, operated, and maintained by Reclamation, where the nonfederal beneficiaries, such as irrigation districts, are responsible for repaying construction and maintenance costs. The Corps is conducting pilot studies nationwide to support the development of adaptation guidance and a portfolio of adaptation approaches. Reclamation is conducting Basin Studies—focused assessments within basins—to develop strategies to mitigate climate change impacts on water supplies. As part of its efforts to address the priorities of developing a risk-informed decision-making framework and a portfolio of adaptation approaches, the Corps is conducting 15 pilot studies nationwide to test different methods and frameworks for adapting to climate change (see fig. 3). As of September 2013, the Corps has completed 5 of these studies, and 10 others are ongoing. The Corps plans to initiate 1 additional pilot in 2013. According to the Corps’ September 2012 report on its climate change adaptation pilots, each study addresses a central question designed to help the Corps, according to officials, test new ideas, develop and utilize information at the project-level scale, and to collect information needed to develop policy and guidance for incorporating adaptation into all agency activities. For example, because the reliability of a planned flood reduction project could depend on how climate change affects future flooding, the Corps launched a pilot study with the goals of determining (1) whether tools and data are available for the Corps to provide reliable estimates of future flooding using climate projections and (2) how changes in precipitation patterns will affect flood events. This pilot study’s results supports the Corps’ effort to design an approximately $1.8 billion flood risk reduction project on the Red River of the North, where flooding has increased in magnitude and frequency since 1942. According to Corps officials, the pilot study successfully adapted existing tools and data to project future flooding, while also testing current guidance and contributing to the development of new guidance for future adaptation efforts. Specifically, Corps officials told us that climate data indicated a trend of flooding consistent with climate change projections. In accordance with existing Corps risk analysis guidance, the pilot study leader convened an expert panel to review the climate information. Based on the expert panel’s findings, the pilot team is integrating climate data into the Corps’ flood model to project future river conditions. In addition, a member of the pilot study team who is also responsible for developing the Corps’ guidance for inland adaptation activities told us that he is integrating his observations and experiences from this study—as well as from his participation in other Corps pilots—into the guidance. Corps officials told us that the information developed by the Corps’ climate change adaptation pilots is also contributing to subsequent Corps studies. For example, the climate change and modeling data for a pilot study of sediment impacts to Cochiti Dam and Lake in New Mexico is contributing to ongoing studies in the Corps’ Albuquerque District. One is the Santa Clara Pueblo Watershed Assessment, which is studying observed climate trends and projected climate changes to address likely future changes to watershed hydrology on the Pueblo’s lands, with particular attention to flood risk and water resources development. Reclamation is partnering with nonfederal entities to conduct focused assessments, known as Basin Studies, to identify specific water resources vulnerabilities and to implement the SECURE Water Act’s requirement that Reclamation consider and develop strategies to mitigate climate change impacts on water supplies. As of September 2013, 3 Basin Studies have been completed, and an additional 14 studies have been funded and are under way in western states (see fig. 4). All three of Reclamation’s completed Basin Studies projected climate change to result in warming and changes in precipitation that will alter the snow cover and runoff that supply water to the river basins, although the changes may be difficult to predict with certainty for any particular location and time. For example, the Colorado River Basin study projected that snow cover will decrease in the basin as more precipitation falls as rain, rather than snow, and warmer temperatures cause earlier melting. As a result, the runoff in the basin is generally projected to decrease—except in the northern Rockies. The study concluded that without additional water management actions, a wide range of future imbalances in supply and demand are plausible, primarily because of the uncertainty in future water supplies. The completed Basin Studies also found that climate change is expected to contribute to long-term imbalances in water supply and demand. The completed Basin Studies also identified, with varying degrees of specificity, possible adaptation strategies to address the projected effects of climate change on water resources. For example, the Colorado River Basin Study identified various combinations of potential adaptation strategies to address projected water supply and demand imbalances. The study noted that the purpose of identifying these strategies was not to select a single, best strategy, but rather to recognize that there are various ways to address projected water imbalances in the basin, and that each approach has positive and negative implications that should be considered in future planning efforts. Agency officials and study participants told us that Reclamation has formed workgroups to further refine the strategies and identify options that should then be evaluated through feasibility studies. In contrast, the Yakima River Basin Study identified a more specific set of adaptation strategies for which feasibility studies are planned. Nonfederal stakeholders, including those representing agricultural and the environmental interests, told us they are collaboratively pursuing state funding to initiate the feasibility studies. Reclamation policy officials and several other basin stakeholders— including state water managers, environmental advocates, and local water providers—told us that a key outcome of the completed Basins Studies is the establishment of a shared view of how climate change will impact the basins and their water management infrastructure. Reclamation policy officials, as well as basin stakeholders representing environmental and tribal interests, told us that the Basin Studies represent Reclamation’s first concerted efforts at holistic planning in the river basins, taking into account not only the needs and concerns of irrigation users, but also the interests of tribes, recreational users, environmental advocates, and others. A state water manager told us that a prior river basin planning effort had largely been unsuccessful due to the lack of involvement or opposition by environmental and tribal interests, and several stakeholders commended Reclamation for working to ensure that the views of a wide range of stakeholders, including environmental and tribal interests, were considered in the Basin Studies. In addition to the individual named above, Elizabeth Erdmann, Assistant Director; Brad Dobbins; Richard Johnson; Mick Ray; Jeanette Soares; Lorelei St. James; and Sarah E. Veale made key contributions to this report. Nirmal Chaudhary, John Delicath, Cindy Gilbert, and Armetha Liles provided additional technical assistance. | The effects of climate change on water resources have already been observed and are expected to continue. The Corps and Reclamation own and operate key water resource management infrastructure, such as dams and reservoirs. Adaptation-- adjustments in natural or human systems to a new or changing environment that exploits beneficial opportunities or moderates negative effects--can be used to help manage the risks to vulnerable resources. In 2009, a law--commonly referred to as the SECURE Water Act--and a presidential executive order directed federal agencies to address the potential impacts of climate change. GAO was asked to review agency actions to address climate change impacts on water infrastructure. This report examines (1) actions taken by the Corps and Reclamation since 2009 to assess and respond to the potential effects of climate change on water infrastructure and (2) challenges, if any, faced by the Corps and Reclamation in assessing and responding to the potential effects of climate change on water infrastructure, and the steps the agencies are taking to address them. GAO analyzed the agencies' climate change adaptation guidance and planning documents and interviewed agency officials and other key stakeholders, including water users, environmental groups, and researchers. The Department of Defense's U.S. Army Corps of Engineers (Corps) and the Department of the Interior's Bureau of Reclamation (Reclamation) have assessed water resource and infrastructure vulnerabilities and taken steps to develop guidance and strategies to adapt to the effects of climate change. Specifically, since 2009, the Corps has completed a high-level assessment of the vulnerabilities to climate change of various agency missions. The assessment found, for example, that the effects of increasing air temperatures on glaciers could negatively impact mission areas including navigation and flood damage reduction. The Corps has also conducted pilot studies to help identify adaptation guidance and strategies; it has completed 5 of the 15 pilot studies initiated and plans to start another study in 2013. Similarly, Reclamation has completed baseline assessments of the potential impacts of climate change on future water supplies for the major river basins where it owns and operates water management infrastructure. Reclamation, in collaboration with nonfederal entities, is now conducting more focused assessments, known as Basin Studies, through which Reclamation seeks to identify water supply vulnerabilities and project future climate change impacts on the performance of water infrastructure. According to agency officials, these studies will also help Reclamation develop adaptation strategies to address these impacts, such as operational or physical changes to existing water infrastructure or development of new facilities. Three Basin Studies have been completed, an additional 14 are under way, and 2 more are planned. Reclamation next plans to initiate feasibility studies for adaptation strategies identified in completed Basin Studies. Both agencies are incorporating what they have learned from their efforts into agency policies, planning, and guidance, according to agency officials. In 2009, the Corps, Reclamation, the National Oceanic and Atmospheric Administration, and the U.S. Geological Survey (USGS), jointly published a study that identified several challenges that climate change poses for water resource managers, and the Corp and Reclamation are collaboratively addressing these challenges. Specifically, these agencies are identifying the data and tools needed by water managers to address climate change, which will help guide federal research efforts; obtaining needed climate data by collaborating with other agencies to help ensure that the data are collected, such as by sharing some costs associated with maintaining USGS's stream flow measurement activities, which are valuable to Corps water planning and management; integrating climate science into water resource management decision making through activities such as developing and communicating science to inform climate adaptation strategies; and collaborating in the development of a climate change science training program for federal and nonfederal water resources managers. The Corps and Reclamation have collaborated together and with others in a manner that is generally consistent with practices that GAO has identified as important to enhancing and sustaining collaboration among agencies. The Corps and Reclamation have made collaboration a key element of their policy and plans for adapting to the effects of climate change and have reinforced accountability for collaboration through agency performance management systems. GAO is not making any recommendations. |
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Laws enacted since 2006 have directed CMS to collect performance information on providers and eventually reward quality and efficiency of care rather than reimburse for volume of services alone. The Tax Relief and Health Care Act of 2006 required the establishment of the Physician Quality Reporting System (PQRS) to encourage physicians to successfully report data needed for certain quality measures. PQRS applies payment adjustments to promote reporting by eligible Medicare professionals (EP)—including physicians, nurses, physical therapists, and others. In 2013, EPs could report data to PQRS using claims, electronic health records (EHR) or a qualified registry, or opt for CMS to calculate quality measures using administrative claims data. Under its group practice reporting option, CMS allows EPs to report to PQRS as a group, either through a registry or a web-based interface. The Medicare Improvements for Patients and Providers Act of 2008 established the Physician Feedback Program, under which CMS was required, beginning in 2009, to distribute confidential feedback reports, known as Quality and Resource Use Reports (QRUR), to show physicians their performance on quality and cost measures. The Patient Protection and Affordable Care Act required HHS to coordinate the Physician Feedback Program with a Value Modifier (VM) that will adjust fee-for-service (FFS) physician payments for the relative quality and cost of care provided to beneficiaries. In implementing the VM, CMS’s Center for Medicare intends to use PQRS and cost data from groups of EPs defined at the taxpayer identification number level to calculate the VM and then report the payment adjustments in the QRURs. As required in the act, CMS plans to apply the VM first to select physicians in 2015 and to all physicians in 2017. As required by law, CMS implemented a performance feedback program for Medicare physicians, which serves as the basis for eventual payment adjustments. (See fig. 1.) In our December 2012 report on physician payment incentives in the VM program, we found that CMS had yet to develop a method of reliably measuring the performance of physicians in small practices, that CMS planned to reward high performers and penalize poor performers using absolute performance benchmarks, and that CMS intended to annually adjust payments 1 year after the performance measurement period ends. We recommended that CMS develop a strategy to reliably measure the performance of small physician practices, develop benchmarks that reward physicians for improvement as well as for meeting absolute performance benchmarks, and make the VM adjustments more timely, to better reflect recent physician performance. CMS agreed with our recommendations, but noted that it was too early to fully implement these changes. Private entities we reviewed provided feedback mostly to groups of primary care physicians practicing within newer delivery models. Each entity decided which measures to report and which performance benchmarks to use, leading to differences in report content across entities. Largely relying on claims data, health insurers spent from 4 to 6 months to produce the annual reports. To meet the information needs of physicians, they all provided feedback throughout the year. The entities also generally offered additional report detail and other resources to help physicians improve their performance. The private entities in our review had discretion in determining the number and type of physicians to be included in their performance reporting initiatives, and their feedback programs generally included only physician groups participating in newer delivery models—medical homes and ACOs—with which they contract. Within this set of providers, the entities used various approaches to further narrow the physician groups selected to receive performance feedback. For example, one entity told us that only physician groups accredited by a national organization focused on quality were eligible for participation in its medical home program, which included physician feedback reports. Private entities’ feedback programs were generally directed toward primary care physician practices. One entity defined primary care as family medicine, internal medicine, geriatrics, and pediatrics; and included data on the services furnished by nurse practitioners and physician assistants in its medical group reports. The entities indicated that they rarely provided reports directly to specialty care physician groups. Among those that did, the programs typically focused on practice areas considered significant cost drivers—obstetrics/gynecology, cardiology, and orthopedics. Entities further limited their physician feedback programs to groups participating in medical homes with a sufficient number of attributed enrollees to ensure the reliability of the reported measures. In medical home models, enrollees are attributed to a physician (or physicians) responsible for their care, who is held accountable for the quality and cost of care, regardless of by whom or where the services are provided. Among those entities we spoke with, the minimum enrollment size for feedback reporting varied widely, with most requiring a minimum of between 200 and 1,000 attributed enrollees to participate in the program. For example, one entity had two levels of reporting in its medical home program, differentiated by the number of attributed enrollees. In one medical home model, the entity required more than 2,000 attributed enrollees for participation and rewarded the practices through shared savings. In a second medical home model, the entity included practices with fewer than 1,000 attributed enrollees, but these practices did not share in any savings. According to the entities in our study, small physician practices (including solo practitioners) typically received performance reports for quality improvement purposes only. Because smaller practices may not meet minimum enrollment requirements needed for valid measurement, private entities generally did not link their performance results to payment or use them for other purposes. For example, one entity provided feedback to practices of one to three primary care physicians upon request, but did not publicly report these practices’ data on its website. To increase the volume of patient data needed for reliable reporting, some entities pooled data from several small groups and solo practitioners and issued aggregate reports for those small practices. Most of the entities that used this method said they applied their discretion in forming these “virtual” provider groups; however, another entity commented that allowing small practices to voluntarily form such groups for measurement purposes would be advantageous. Because each private entity in our study determined the number and types of measures on which it evaluated physician performance, the measures used in each feedback program differed. Each entity decided on quality measures to include, and many also identified utilization or cost measures for inclusion.ACOs to choose 8 to 10 measures from among a set of about 18 measures. To assess physicians’ quality and utilization/cost results, the entities used absolute or relative performance benchmarks. Private entities generally report on physician quality using many more process of care measures than outcomes of care measures. Entities in our review commonly included indicators of clinical care in areas such as diabetes care, cardiovascular health, and prevention or screening services for both their adult and pediatric patients. The most common measure reported by all entities was breast cancer screening, followed by hemoglobin A1C measures, a service used to monitor diabetes. We found wide variation in the number and type of measures in private entities’ quality measure sets. The total number of quality measures used in the feedback reports ranged from 14 to 51. Measures typically fell into one of several measurement areas, each with as few as one or as many as 20 individual measures. For example, in the quality measurement areas for pulmonary and respiratory conditions, one private entity reported on a single measure (appropriate use of medications for asthma), while another reported three measures (appropriate use of medications for asthma, appropriate testing for pharyngitis, and avoidance of antibiotic treatment for adults with acute bronchitis). Although primarily focused on clinical quality measures, entities also included nonclinical measures, such as patient safety and patient satisfaction. (See app. II for more information on the number and types of quality measures included in sample reports provided by the entities we reviewed.) Even when entities appeared to report on similar types of measures in common areas, we found considerable variability in each measure’s definition and specification. For this reason, results shown in physician feedback reports may not be comparable across entities. As shown in figure 2, the diabetes hemoglobin A1C measure was defined and used in different ways in our selected entities’ reports. In some cases, entities calculated the percentage of enrollees with diabetes within a certain age range that received the test. In other cases, the entities calculated the percentage of enrollees with diabetes within a certain age range that had either good or poor control of the condition, as determined from a specified hemoglobin A1C result. In addition, some entities defined their diabetic patient population as enrollees from 18 to 75 years of age, while another did not indicate the age range, and one entity set the age range from 18 to 64 years of age. Some, but not all, private entities in our review included utilization or cost measures in their performance reports to physicians. Total cost of care per enrollee was the most commonly used measure, but cost measures disaggregated by type of service—facility, pharmacy, primary care physician, and specialty—were also used. Some entities described how they limited their reporting of a total cost of care measure to those medical groups with a large number of enrollees. In one case the minimum enrollment size was 20,000 enrollees and in another it was 2,500 enrollees. Officials from one entity also told us that they allowed smaller physician practices to combine their data in order to meet the required number of enrollees for receiving feedback on cost of care. In addition to feedback on the total cost of care per enrollee, some reports given to groups of primary care physicians contained information on the cost of care provided by specialists in the entity’s network. For example, one entity provided trend data that included the number of specialist visits (total and by type) and the number of patients with one or more visits for these specialty areas. (See fig. 3.) For the two specialties with the most enrollee visits during the measurement period—orthopedic surgery and dermatology—the entity also provided the medical group with data on which specialists were seen most frequently and their cost per visit. This information was intended to encourage cost-efficient referrals. Another entity said it was focused on a program in July 2013 to provide feedback to primary care physicians on cardiologists’ performance showing where care was being delivered most efficiently. By providing such information, the entity expected primary care physicians to take cost differences into account when making referrals, rather than basing referrals solely on historical habits. Disseminating information to primary care physicians about the relative cost of specialty care providers is a key aspect of medical home and ACO programs. The entities were fairly consistent in the number and types of utilization measures they selected for feedback reporting. The most common utilization measures reported by our private entities were physicians’ generic drug prescribing rates, followed by emergency department visits, inpatient visits, hospital readmissions, and specialist visits. One entity provided additional detail under the emergency department visits measure to show the number of patients that repeatedly seek care at emergency departments. Officials from the entity told us that this measure was included to alert physicians of potentially avoidable hospital visits so that they can encourage patients to use office-based care before seeking care in more costly settings. (See examples of this measure as presented by private entities in their sample reports in fig. 4.) To evaluate physician performance, the selected private entities compared the measures data to different types of benchmarks. Some entities compared each physician group’s performance results to that of a peer group (e.g., others in the entity’s network or others in the collaborative’s state or region); some entities compared physician groups’ results to a pre-established target; and others gauged physician groups’ progress relative to their past performance. (See fig. 5.) Entities generally used two or three such benchmarks in their feedback reports. For example, one entity separately displayed results for the medical home’s commercially insured, Medicare insured, and composite patient population. Within each of these population groups, it compared the practice’s performance to the average for nonmedical home practices, as well as to the practice’s performance in the prior measurement year. The entity also gave narrative detail to indicate favorable or unfavorable performance. The most common benchmark for the entities in our study was a physician group’s performance relative to the previous measurement period. However, some entities used this benchmark only for utilization/cost measures and not for quality measures. Private entity officials told us they relied on claims as their primary data source for performance reporting. However, several private entities noted shortcomings in relying solely on claims data—the billing codes that describe a patient’s diagnoses, procedures, and medications—for performance reporting. Some entities supplemented their claims data by obtaining information from EHRs, patient satisfaction surveys, or chart extractions. Entities noted that using EHR data was resource-intensive for both providers and payers, because they depended on physician groups to submit the information. The entities we spoke to have had limited success in using EHR data as a primary data source, although many saw it as complementary to claims data. Another entity supplemented its claims data with data from registries that compile information from administrative data sets, patient medical records, and patient surveys, and thus have the capacity to track trends in quality over time. The health insurers in our review typically spent from 4 to 6 months to produce and distribute annual performance reports; in contrast, the health care collaboratives spent 9 to 10 months. (See illustrations of these timelines in fig. 6.) As is common in the health insurance industry, payers require a 3-month interval after the performance period ends—referred to as the claims run-out—to allow claims for the services furnished late in the measurement period to be submitted and adjudicated for the report. The claims run-out was followed by 1 to 3 months to prepare the data, a period that allowed for provider attribution, risk-adjustment, measure calculation, and quality assurance.collaborative stated that the quality assurance process is helpful in increasing physician trust because the group is able to compare its own data with the collaborative’s data before results are final. The statewide health care collaboratives we spoke with required additional time to collect and aggregate data from multiple health insurers, and their final reports were issued at least 9 months after the end of the performance period. The time needed for some or all of these report production steps varied depending on the entity and the types of measures included. Collaboratives often used all-payer claims databases—centralized data collection where each payer submits claims data on that state’s health care providers—for aggregate reporting to providers. Officials from entities told us that all-payer claims databases are helpful because they provide physicians with a better picture of their entire patient panel, not just results determined by individual payers for limited sets of patients. One entity noted that it aggregates its quality data with other payers in its commercial market through a statewide organization, and no one payer can provide statistically meaningful data to a physician group on its own. Officials from one entity with all-payer claims database experience told us that the addition of Medicare data into these databases would improve the information available for measurement and feedback. In addition, one entity suggested that a multipayer database could help with feedback to physicians in groups of all sizes, including small practices, because the higher number of patients would generate sufficient data for calculating reliable measures. However, one entity acknowledged that using all-payer databases requires more time for merging data from different payers in different formats, and another entity noted the challenges of customizing reports for each medical groups’ patient population. Private entities told us that physicians valued frequent feedback on their performance so that they have time to make practice changes that may result in better performance by the end of the measurement period. In response, these entities typically provided feedback reports on an interim basis throughout the measurement period. Interim reports typically covered a 1-year performance period, and were commonly issued on a rolling monthly, quarterly, or semiannual schedule. Entities also noted that frequent reporting throughout the period updated physicians on their performance so that year-end results were better expected and understood. Some entities in our study elected to issue interim reports that build up to the 12-month performance period by continually adding data from month to month. Those that used preliminary data that may not account for all final claims in building reports told us that such data starts to become useful about 3 to 6 months into the performance year. They also stated that, although the interim reports may be limited by the use of rolling or incomplete data, providers generally seek this information for early identification of gaps in care. Private entities generally offered additional report detail intended to enhance physicians’ understanding of the information contained in their reports or in response to physician requests for more data. Private entity officials told us that, because physicians prefer dynamic reports with as much detail as possible, they generally sent reports that can be expanded to show individual physician or patient-level data. Some entities formatted their reports to include summary-level information on quality and cost measures in labeled sections, with supplemental information following the summary data. Other entities provided additional reports or supplemental data through a web portal that allowed providers to see individual physician or patient-level detail. Private entities sent reports in multiple file formats, such as in a spreadsheet, some of which allowed report recipients to sort their data. Entities in our study also offered resources designed to assist physician groups with actionable steps they can take to improve in the next performance period. Most entities told us they offered resources to physician groups, such as consultations with quality improvement professionals, forums for information-sharing, and documents on best practices. For example, one entity’s staff worked directly with practices to improve their results by distributing improvement guidelines for each performance measure included in the feedback report. In addition, the entity’s officials told us they also convened workgroups to review trend information and paid particular attention to differences between medical homes and nonmedical homes. CMS has provided feedback to increasing numbers of physician practices each year in order to eventually reach all physicians. Each medical group’s chosen method of quality data submission determined the quality measures included in its report, to which CMS added health care costs and certain outcomes measures. CMS’s report generation process took slightly longer than that of most private entities in our study, and the agency did not provide interim performance data during the measurement period. CMS feedback reports have included information to assist providers in interpreting their performance results. Unlike the private entities we contacted, which selected a limited set of physicians to receive feedback reports, CMS is mandated to apply the VM to all physicians by 2017. Therefore, the agency faces certain challenges not faced by private entities as it has expanded its feedback program to reach increasing numbers of physicians. In preparation for implementation of the VM, CMS provided performance reports to nearly 4,000 medical groups in September 2013. In 2014, CMS plans to disseminate reports to physicians in practices of all sizes. As of September 2013, CMS had not yet determined how to report to smaller groups and physicians in solo practices. According to CMS, the decision not to present VM information to smaller groups stemmed from concerns regarding untested cost metrics and administrative complexity. CMS agreed with a 2012 GAO recommendation to develop a strategy to reliably measure the performance of solo and small physician practices, but has not yet finalized such a strategy. Under the CMS approach to performance reporting, the content of feedback reports related to quality measures may vary across providers. Unlike our selected private entities, the agency has allowed physician groups to select the method by which they will submit quality-of-care data, which, in turn, determines the measures on which they receive feedback. CMS used claims data for a consistent set of measures in all of its feedback reports for performance on cost and outcomes. For the CMS 2013 reports, medical groups submitted data on quality measures to CMS via a web interface or through a qualified registry; if a group did not select either of these options, the agency calculated quality measures based on claims data. Both CMS and private entities focused on preventive care and management of specific diseases. Web interface. Quality measures under this method pertain to care coordination, disease management, and preventive services. CMS required groups reporting via the web interface to submit data on 17 quality measures—such as hemoglobin A1C levels for control of diabetes—for a patient sample of at least 218 beneficiaries. Registries. Some groups submitted data for quality measures via qualified registries—independent organizations, typically serving a particular medical specialty, that collect and report these data to CMS. CMS required groups reporting to a qualified registry to submit at least three measures—such as whether cardiac rehabilitation patients were referred to a prevention program—for at least 80 percent of patients. Administrative claims. As a default, if a group did not report via web interface or qualified registry, CMS calculated quality measures using claims data. In September 2013, the majority of groups with 25 or more EPs—nearly 90 percent—received quality scores based on claims data. CMS calculated performance on a set of 17 quality indicators, including several composite measures. For example, the diabetes composite measure included several different measures of diabetes control. Regardless of the method a group selected to submit quality-of-care data, CMS used claims to calculate three outcomes measures—two ambulatory care composite measures and hospital readmission. One ambulatory care composite included hospitalization rates for three acute conditions: bacterial pneumonia, urinary tract infections, and dehydration. Another composite included hospitalization rates for three chronic conditions: diabetes, chronic obstructive pulmonary disease (COPD), and heart failure. CMS included cost measures—several of which differed from the measures private entities in our study reported to physicians—in all 2013 feedback reports (see fig. 7). Using claims data, CMS calculated an overall measure of the cost of care as the total per capita costs for all beneficiaries attributed to each physician group.separately reported total per capita costs for attributed beneficiaries with any of four chronic conditions: diabetes, heart failure, COPD, or coronary artery disease. This contrasts with the private entities that typically measured a more limited set of measures focused on physicians’ generic drug prescribing rates and hospital utilization. CMS’s report generation process took longer than that of most private entities in our study because it required more steps. While most health insurers generated performance reports in 4 to 6 months, CMS issued reports about 9 months after the end of the January to December 2012 reporting period. To produce its 2013 physician feedback reports using administrative claims, CMS began with the standard claims run-out period followed by intervals for provider attribution, measure calculation, risk-adjustment, and quality assurance. (See fig. 10.) CMS officials said they allowed a 3-month run-out interval to account for providers’ late-year claims submissions. After the run-out period, CMS required 5 to 6 months for a series of additional tasks needed to prepare the data for reporting. For groups that submitted data to CMS via the web interface or registry options, CMS gave these groups 3 months to submit such data after the end of the 12-month performance period. CMS then calculated the measures for these options over a period of the next several months. Although FFS beneficiaries see multiple physicians, CMS attributed each beneficiary to a single medical group through its yearly attribution process. It used the claims for the 12-month reporting period to determine which groups provided the beneficiary the most primary care and then assigned responsibility for performance on quality and cost measures to that group. Following attribution, the agency risk-adjusted the cost measures to account for differences in beneficiary characteristics and complexity, and standardized the cost measures by removing all geographic payment adjustments. Finally, CMS officials said they performed data checks to ensure accuracy before the reports were disseminated. According to health insurers and collaboratives, physicians find that frequent feedback enables them to improve their performance more quickly; however, CMS did not provide physicians interim performance feedback. However, with only annual feedback from CMS, physicians may be missing an opportunity to improve their performance on a more frequent basis. Asked if more frequent reporting was considered, CMS officials cited concerns about the time it would take to generate each set of reports. With each round, the agency would need to attribute all beneficiaries to a medical group, risk-adjust and standardize the cost measures, and compute the benchmarks for each measure. In addition, providing interim reports on quality data would require certain providers to report more frequently. For example, providers who submit via registry would need to finalize their data more often than annually. However, experts and CMS officials have stated that, with continued adoption of advanced data reporting technology, CMS may be able to generate reports more frequently. CMS provided general information on its website and through the Medicare Learning Network, to assist providers in understanding the performance feedback and VM. Unlike private entities, CMS has not provided tailored guidance or action steps to help providers improve their scores. However, CMS resources included steps to access reports, a review of methodology, suggested ways to use the data in reports, and contact information for technical support. A representative acting on behalf of a medical group could access the group’s QRUR. In addition, CMS’s web-based reports allowed providers to access further detail on the Medicare beneficiaries attributed to the group. For example, physicians could view their patients’ percentage of total cost by type of service and hospital admission data. CMS included explanatory information within the reports for providers. In addition to comparative performance data, reports made available in September 2013 included a description of the attribution methods, the number of providers billing in each medical group, information about each attributed patient’s hospitalizations during the year, and other details about the group’s performance. In addition, CMS included within the QRUR a glossary of terms used in the feedback report. Payers have been refining their performance reports for physicians, a key component of their VBP initiatives. Private entities have selectively rolled out their feedback programs, generally applying them to relatively large groups of primary care physicians participating in medical homes and ACOs. Although they are not uniform in their approaches, the entities in our study used their discretion to select a limited number of quality and utilization/cost measures, calculated them using claims data, and used them to assess performance against a variety of benchmarks. In response to physicians’ needs, their feedback reports tended to be frequent, timely, and dynamic. CMS’s approach to performance reporting faces some unique challenges. First, it is driven by the statutory requirement that, by 2017, Medicare pay FFS physicians in groups of all sizes, including specialists, using a VM. Second, the agency has had to develop the feedback program in the context of pre-existing incentive programs, such as PQRS. CMS finalized several key changes to the feedback program for future reporting periods, as it expands the application of the VM to all physicians. Specifically, CMS continues to modify program components such as measures and reporting mechanisms as it works to align the reporting and feedback aspects of multiple programs. Despite these program modifications, we found that certain features of private entities’ feedback programs, which are lacking in CMS’s program, could enhance the usefulness of the reports in improving the value of physician care. CMS’s use of a single nationwide benchmark to compare performance on quality and cost ignores richer benchmarking feedback that could benefit physicians. Private entities in our study measured provider performance against several benchmarks. CMS’s reliance on a national average as the sole benchmark precludes providers from gauging their performance relative to their peers in the same geographic area. Without such contextual information, providers lack the feedback to better manage their performance and target improvement efforts. Additionally, CMS disseminates feedback reports only once a year (for example, September 2013). This gives physicians little time (October through December) to analyze the information and make changes in their practices to score better in the next measurement period. The private entities we reviewed sent reports more than once a year, and reported that greater frequency of reporting enabled more frequent improvements. Without interim performance reports, providers may not be able to make needed changes to their performance in advance of their annual VM payment modifications. Our findings also support past GAO recommendations that CMS reward physicians for improvement as well as performance against absolute benchmarks, and develop a strategy to reliably measure solo and small practices, such as by aggregating data. As CMS implements and refines its physician feedback and VM programs, the Administrator of CMS should consider taking the following two actions to help ensure physicians can best use the feedback to improve their performance: Develop performance benchmarks that compare physicians’ performance against additional benchmarks such as state or regional averages; and Disseminate performance reports more frequently than the current annual distribution—for example, semiannually. We provided a draft of this report to HHS for comment. In its written response, reproduced in appendix III, the department generally agreed with our recommendations, and reiterated our observation that the agency faces unique challenges with its mandate to report to Medicare FFS providers in groups of all sizes that encompass all specialty care areas. HHS conditionally agreed with our recommendation that reporting physician performance using multiple benchmarks would be beneficial, but asked for further information on private entities’ practices and their potential use for Medicare providers. As we stated in the report, private entities generally use two or three different types of benchmarks to provide a variety of performance assessments. We found alternative benchmarks that could enhance Medicare feedback reporting by allowing physicians to track their performance in their own historical and geographic context. For example, some entities’ reports included physician group performance on certain measures relative to their past performance, a recommendation we previously made to HHS in December 2012. Although it agreed to consider developing benchmarks for performance improvement, HHS has yet to do so. A comparison to past performance allows a medical group to see how much, if at all, it has improved regardless of where it stands relative to its peers. In this way, CMS can motivate physicians to continuously improve their performance. In addition, some entities in our review compared physician performance data to statewide or regional-level benchmarks. Because of the number of Medicare physicians, CMS has extensive performance data, which could enable more robust localized peer benchmarks than any individual health plan could generate. As we noted, such benchmarks reflect more local patterns of care that may be more relevant to physicians than comparisons to national averages alone. HHS further asserted that, because the physician feedback program’s key purpose is to support the national VM program, it is appropriate to limit reporting to a single national benchmark. HHS expressed concern that displaying other benchmarks could be misleading and confusing for the purposes of the VM. However, CMS’s reports provide a group’s VM payment adjustment in a concise, one-page summary, as shown in figure 9. We do not believe that additional benchmark data, displayed separately, would detract from the information provided on the summary page, and could enhance the value of the reports for physicians. HHS agreed with our second recommendation to disseminate feedback reports more frequently than on an annual basis. As seen in the private entity practices of using rolling or preliminary data for interim reporting, disseminating reports more frequently can assist physicians in making improvements to their performance before CMS determines their VM payment adjustment. HHS commented that producing more frequent reports would first require modifying the PQRS data collection schedules. For example, groups of EPs that use the web interface and registry options currently are only required to submit data to CMS once a year. The registry option will eventually require groups to submit data to CMS on a quarterly or semiannual basis, and HHS noted that these requirements would have to be synchronized with the timing of data submission through the web interface and EHR options. The agency also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Administrator of CMS. The report also is available at no charge on GAO’s website at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512- 7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix contains information on the similarities and differences between private entities’ and Medicare’s performance reporting to hospitals. The private entities in our study provided feedback through a variety of value-based payment (VBP) initiatives and several entities have made accountable care organizations the focus of their feedback programs. Payers’ efforts to provide feedback to hospitals on their performance are centered on rewarding higher-quality and lower-cost providers of care. We followed the same methodology for comparing how private entities and the Centers for Medicare & Medicaid Services (CMS) conduct performance feedback reporting for hospitals as we did for examining physician-focused feedback programs. We interviewed representatives of the nine selected private entities about their feedback reporting to hospitals, if any, with regard to report recipients, data sources used, types of performance measures and benchmarks, frequency of reporting, and efforts to enhance the utility of performance reports. One statewide health care collaborative in our review was established through a partnership between the state medical society and hospital association, and only provides feedback reports to hospitals. We similarly requested sample feedback reports for hospitals. We interviewed CMS officials and obtained CMS documentation on its hospital feedback reporting activities, and compared these to private entity efforts. We also reviewed a sample CMS hospital feedback report from July 2013. CMS’s hospital VBP efforts over the past decade have evolved to provide performance feedback to a range of hospital types, with a focus on acute care hospitals. In 2003 the agency began with a quality incentive demonstration program designed to see whether financial incentives to hospitals were effective at improving the quality of inpatient care, and to publicly report that information. Since then, a number of laws have required CMS to conduct both feedback reporting and VBP programs for hospitals. These included the following: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which required the establishment of the Hospital Inpatient Quality Reporting Program, a pay-for-reporting initiative.required CMS to make downward payment adjustments to hospitals The act also that did not successfully report certain quality measures. That downward payment adjustment percentage was increased by the Deficit Reduction Act of 2005. The Patient Protection and Affordable Care Act established Medicare’s Hospital VBP Program for inpatient care provided in acute care hospitals. Under this program, CMS withholds a percentage of all eligible hospitals’ payments and distributes those funds to high- performing hospitals. In reviewing current feedback reporting practices, we found that private entities and CMS report to hospitals on similar performance measures and that entities’ feedback generally contains publicly available data. Table 1 compares features of the hospital feedback produced by those private entities in our study that report to hospitals through a VBP initiative and CMS’s hospital VBP program. Table 2 summarizes the number of quality measures included in sample physician feedback reports we received from private entities in our study. These entities used their discretion to determine which measures to include in their reports. We analyzed the measures focused on quality of care and categorized them into common areas. In addition to the contact named above, individuals making key contributions to this report include Rosamond Katz, Assistant Director; Sandra George; Katherine Perry; and E. Jane Whipple. Electronic Health Record Programs: Participation Has Increased, but Action Needed to Achieve Goals, Including Improved Quality of Care. GAO-14-207. Washington, D.C.: March 6, 2014. Clinical Data Registries: HHS Could Improve Medicare Quality and Efficiency through Key Requirements and Oversight. GAO-14-75. Washington, D.C.: December 16, 2013. Medicare Physician Payment: Private-Sector Initiatives Can Help Inform CMS Quality and Efficiency Incentive Efforts. GAO-13-160. Washington, D.C.: December 26, 2012. Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase Savings and Better Ensure Proper Payment. GAO-13-102. Washington, D.C.: November 13, 2012. Medicare Physician Feedback Program: CMS Faces Challenges with Methodology and Distribution of Physician Reports. GAO-11-720. Washington, D.C.: August 12, 2011. Value in Health Care: Key Information for Policymakers to Assess Efforts to Improve Quality While Reducing Costs. GAO-11-445. Washington, D.C.: July 26, 2011. Medicare: Per Capita Method Can Be Used to Profile Physicians and Provide Feedback on Resource Use. GAO-09-802. Washington, D.C.: September 25, 2009. Medicare: Focus on Physician Practice Patterns Can Lead to Greater Program Efficiency. GAO-07-307. Washington, D.C.: April 30, 2007. | Health care payers—including Medicare—are increasingly using VBP to reward the quality and efficiency instead of just the volume of care delivered. Both traditional and newer delivery models use this approach to incentivize providers to improve their performance. Feedback reports serve to inform providers of their results on various measures relative to established targets. The American Taxpayer Relief Act of 2012 mandated that GAO compare private entity and Medicare performance feedback reporting activities. GAO examined (1) how and when private entities report performance data to physicians, and what information they report; and (2) how the timing and approach CMS uses to report performance data compare to that of private entities. GAO contacted nine entities—health insurers and statewide collaboratives—recognized for their performance reporting programs. Focusing on physician feedback, GAO obtained information regarding report recipients, data sources used, types of performance measures and benchmarks, frequency of reporting, and efforts to enhance the utility of performance reports. GAO obtained similar information from CMS about its Medicare feedback efforts. Private entities GAO reviewed for this study selected a range of measures and benchmarks to assess physician group performance, and provided feedback reports to physicians more than once a year. Private entities almost exclusively focused their feedback efforts on primary care physician groups participating in medical homes and accountable care organizations, which hold physicians responsible for the quality and cost of all services provided. They limited their feedback reporting to those with a sufficient number of enrollees to ensure the reliability of reported measures. The entities decided on the number and type of measures for their reports, and compared each group's performance to multiple benchmarks, including peer group averages or past performance. All the entities used quality measures, and some also used utilization or cost measures. Because of the variety of quality measures and benchmarks, feedback report content differed across the entities. Some entities noted that in addition to national benchmarks, they compared results to state or regional level rates to reflect local patterns of care which may be more relevant to their physicians. Most health insurers spent from 4 to 6 months to generate their performance reports, a period that allowed them to amass claims data as well as to make adjustments and perform checks on the measure calculations. Commonly, private entities issued interim feedback reports, covering a 1-year measurement period, on a rolling monthly, quarterly, or semiannual schedule. They told GAO that physicians valued frequent feedback in order to make changes that could result in better performance at the end of the measurement period. Feedback from the Centers for Medicare & Medicaid Services (CMS) included quality measures determined by each medical group, along with comparison to only one benchmark, and CMS did not provide interim reports to physicians. The agency has phased in performance feedback in order to meet its mandate to apply value-based payment (VBP) to all physicians in Medicare by 2017, a challenge not faced by private entities. In September 2013, CMS made feedback reports available to 6,779 physician groups. While private entities in this study chose the measures for their reports, CMS tied the selection of specific quality measures to groups' chosen method of submitting performance data. Although both CMS and private entities focused their feedback on preventive care and management of specific diseases, CMS's reports contained more information on costs and outcomes than some entities. While private entities employed multiple benchmarks, the agency only compared each group's results to the national average rates of all physician groups that submitted data on any given measure. CMS's use of a single benchmark precludes physicians from viewing their performance in fuller context, such as relative to their peers in the same geographic areas. CMS's report generation process took 9 months to complete, several months longer than health insurers in the study, although it included more steps. In contrast to private entity reporting, CMS sent its feedback report to physicians once a year, a frequency that may limit physicians' opportunity to make improvements in advance of their annual payment adjustments. The Department of Health and Human Services generally concurred with GAO's recommendations and asked for additional information pertaining to the potential value of using multiple benchmarks to assess Medicare physicians' performance. The Administrator of CMS should consider expanding performance benchmarks to include state or regional averages, and disseminating feedback reports more frequently than the current annual distribution. |
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The electricity industry includes four distinct functions: generation, transmission, distribution, and system operations. Once electricity is generated—whether by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydro energy—it is sent through high-voltage, high-capacity transmission lines to areas where it will be used. Once there, electricity is transformed to a lower voltage and sent through local distribution wires for end use by industrial plants, businesses, and residential customers. Because electric energy is generated and consumed almost instantaneously, the operation of an electric power system requires that a system operator constantly balance the generation and consumption of power. Historically, the electric industry developed as a loosely connected structure of individual monopoly utility companies, each building and operating power plants and transmission and distribution lines to serve the exclusive needs of all the consumers in its local area. Because these companies were monopolies, they were overseen by regulators who balanced different stakeholder interests in order to protect consumers from unfair pricing and other undesirable behavior. Retail electricity prices were regulated by the states, generally through state public utility commissions. States retained regulatory authority over retail sales of electricity, construction of transmission lines within their boundaries, and intrastate distribution. Generally, states set retail rates based on the utility’s cost of production plus a fair rate of return. States also approved plans and spending for building new power plants to serve regulated customers. In contrast, wholesale electricity pricing and interstate transmission were regulated by the federal government, principally FERC. Under law, FERC has the obligation to ensure that the rates it oversees are “just and reasonable” and not “unduly discriminatory or preferential.” To meet this responsibility, FERC approved rates for transmission and wholesale sales of electricity in interstate commerce based on the utilities’ costs of production plus a fair rate of return on the utilities’ investment. Since the early 1990s, the federal government has taken a series of steps to restructure the wholesale electricity industry, generally focused on increasing competition in wholesale markets. Federal restructuring efforts have (1) changed how electricity prices are determined, replacing cost- based regulated rates with market-based pricing in many wholesale electricity markets, and (2) allowed new companies to enter electricity markets. Some of these efforts have focused on allowing nontraditional utilities to buy and sell electricity in wholesale markets, while others have focused on allowing nontraditional utilities to build new power plants and sell electricity to utilities and others. To facilitate formation of these markets and these companies’ efforts to buy and sell electricity, FERC initially required that transmission owners under its jurisdiction, generally large utilities, allow all other entities to use their transmission lines under the same prices, terms, and conditions as those they apply to themselves. To do this, FERC required the regulated monopoly utilities—which had historically owned the power plants, transmission systems, and distribution lines—to separate their generation and transmission functions, and encouraged these companies to form independent entities, called Independent System Operators (ISO), to manage the transmission network. In recognition that these initial efforts were not sufficient, FERC issued Order 2000 in December 1999 to encourage owners of transmission systems to develop more robust organizations, called RTOs, to manage the transmission networks and perform other functions that FERC believed were important. FERC believed RTOs were needed to address impediments to competitive wholesale markets: growing stresses on the transmission grid and remaining discrimination in the provision of transmission service— transmission owners operating their grids in a way that favored their own interests over those of their competitors. FERC Order 2000 encouraged, but did not mandate, that transmission owners join RTOs and allowed companies engaged in purchase and sale of electricity in markets to continue to own power plants, retail utilities, distribution lines, transmission lines, and other assets regulated by FERC or the states. FERC outlined minimum characteristics that RTOs were to have: independence from control by any market participant, sufficient scope to maintain reliability and support nondiscriminatory power markets, operational authority for transmission facilities under their control, and exclusive authority for maintaining the short-term reliability of the grid they operate. Appendix II describes these characteristics in more detail. In Order 2000, FERC opined that RTOs would achieve the following benefits: eliminate multiple charges incurred when crossing transmission systems owned by different utilities, improve management of electricity congestion––bottlenecks resulting from insufficient transmission capacity to accommodate all requests to transport power and maintain adequate safety margins for reliability, provide more accurate estimates of transmission system capacity—the amount of electric power the transmission system can manage, increase efficiency in planning for transmission and generation investments; improve grid reliability, and reduce opportunities for discriminatory transmission practices. FERC expected the formation of RTOs to result in significant cost reductions, additional efficiencies, and better wholesale market performance, ultimately lowering prices for electricity consumers. Specifically, it estimated RTOs would bring at least $2.4 billion in annual benefits to the industry. Because of their independence, FERC expected RTOs to lead to lighter regulation by reducing the need for resolving stakeholder disputes through the FERC complaint process and allowing FERC to provide additional latitude to RTOs in their transmission pricing proposals, among other things. FERC’s efforts to encourage the formation of RTOs have been relatively successful and RTOs now serve many parts of the country and extend into Canada, as figure 1 shows. FERC oversees six RTOs: California ISO, ISO New England, Midwest ISO, PJM, New York ISO, and Southwest Power Pool. The Electric Reliability Council of Texas is primarily regulated by the Public Utility Commission of Texas. RTOs operate, but do not own, electricity transmission lines and are responsible for ensuring nondiscriminatory access to these lines for all market participants. As shown in table 1, the six RTOs under FERC’s jurisdiction, in general, are responsible for managing transmission in their regions—by implementing the rules and transmission pricing outlined in their tariffs and performing reliability planning by considering factors such as weather conditions and equipment outages that could affect electricity supply and demand—as well as operating wholesale markets for electricity and other services. Decisions an RTO makes when carrying out these responsibilities can influence the wholesale price of electricity and ultimately the price consumers pay. A number of other factors outside an RTO’s control, such as regulator decisions about what transmission and distribution rates to approve and whether to implement price caps, also influence the prices consumers pay for electricity. Prices are also highly dependent on the cost of fuel used to generate electricity. Typically, consumer electricity prices are composed of three broad components: (1) distribution, which, for four states GAO contacted, accounts for about 15 to 30 percent of the final price of electricity; (2) transmission, which accounts for about 5 to 10 percent of the final price; and (3) electricity generation or production, which accounts for about 55 to 65 percent of the final price. In RTO regions, distribution rates continue to be set by state regulators, and transmission rates continue to be set by state and federal regulators. FERC also approves RTO procedures for planning transmission infrastructure, as well as the recovery of transmission expenses. The electricity generation component was previously set by regulators based on the cost of providing electricity plus a rate of return. The price of this component is now determined in RTO-administered markets—regulated by FERC to ensure they are competitive—to the extent that entities choose to buy electricity in these markets. Some RTOs also administer markets that determine the price of other services needed to maintain reliability, such as capacity and ancillary services, in lieu of charging a cost-based rate. The generation portion of consumers’ bills may also include administratively determined payments made to generators to maintain reliability—reliability payments, as well as a FERC-approved rate to recover RTO expenses. The size of these components varies from region to region. In New England, for example, on average approximately 47 percent of a typical consumer’s bill in 2006 was for electricity, capacity, and ancillary services, the prices of which are determined through the markets this RTO administers. A very small portion of a typical consumers’ bill, less than 1 percent, was from ISO New England’s rate to recover operational and investment expenses. Figure 2 provides more information. Because RTOs charge for the use of transmission lines, for certain wholesale sales of electricity, and to recover their own expenses, they are subject to FERC oversight and regulation. In general, FERC regulates RTOs as it does other utilities. FERC’s basic rate authority stems from Sections 205 and 206 of the Federal Power Act of 1935 and is to ensure that wholesale electricity rates are just and reasonable and not unduly discriminatory or preferential. Under Section 205, FERC generally has the authority to review and approve expenses and, if applicable, a reasonable rate of return on investment used to serve customers. For RTOs, which are nonprofit entities, rates are generally based on proposed annual expenses and are periodically adjusted based on the actual expenses incurred by the RTOs. RTOs must also seek FERC approval for decisions to implement initiatives such as new markets and changes to existing markets and market rules, among other things. Section 206 authority provides for FERC review of rates already in effect. FERC may initiate Section 206 proceedings if it deems an investigation is needed or in response to a complaint filed by an outside party. FERC has authority to determine if these rates are just and reasonable, set new rates, and may, in some cases, order refunds. Under Section 205 or Section 206, RTOs or other parties, respectively, file evidence with FERC to support their proposed rates or rate changes. Others can file comments and present any contrary evidence under either provision. FERC conducts hearings, which may include proceedings before an administrative law judge, and makes final decisions. Parties may file appeals, first with FERC and later in federal court. From 2002 to 2006, RTO expenses totaled $4.8 billion when adjusted for inflation and varied considerably depending on the size of the RTO and functions it carried out. In general, RTOs with greater electricity transmission volume benefit from economies of scale by spreading their expenses over more units of electricity volume, thereby reducing their expenses per MWh. On a per MWh basis, RTO inflation-adjusted expenses have varied from 2002 to 2006, with ISO New England, Midwest ISO, and New York ISO expenses rising and California ISO, PJM, and Southwest Power Pool expenses decreasing. The expenses per MWh we calculated for PJM for 2002 and 2003 are significantly higher than the amounts it billed its market participants, because we did not retroactively apply financial statement reclassifications to data from prior years. Form No. 1 filings for 2006 made by the RTOs to FERC provide better visibility of transmission and market expenses than prior years’ reports did. In 2006, about 17 percent of all RTO expenses were for transmission services, 13 percent were for market expenses, 39 percent were for administrative and general expenses, and 31 percent consisted of other expenses. RTOs also made major investments in property, plant, and equipment—$1.6 billion when adjusted for inflation as of December 2006. From 2002 to 2006, total inflation-adjusted expenses reported in RTO financial statements totaled $4.8 billion, ranging from $227 million for Southwest Power Pool, a smaller RTO in terms of 2006 transmission volume and the number of functions it performs, to $1.4 billion for PJM, an RTO with many diverse functions and the largest 2006 transmission volume. As shown in figure 3, the largest category of expenses for RTOs over this time period was salaries and benefits, accounting for about $1.6 billion, or 33 percent of RTOs’ expenses from 2002 to 2006. According to RTO officials, due to the highly technical and sophisticated nature of the functions RTOs must carry out, RTOs require highly trained staff, such as power system engineers, economists, and software engineers. In 2006, all RTOs combined employed 2,737 full-time equivalents (FTE) with an average salary and related benefits of approximately $134,000. Appendix III shows the inflation-adjusted expenses, number of full-time equivalents, and average salary and expenses per full-time equivalent for each RTO from 2002 to 2006. Our analysis reflects total annual expenses as reported in the RTOs’ audited financial statements. We did not retroactively apply financial statement reclassifications to data from prior years. Because PJM made retroactive reclassifications that affected its 2002 and 2003 financial statements, in 2002 and 2003, the expenses we calculated for PJM are significantly higher than the amounts it billed its market participants. In general, RTOs with greater electricity transmission volume benefit from economies of scale––spreading their expenses over more units of electricity volume, thus lowering the amount of RTO-related expenses per MWh. For example, PJM had the highest total inflation-adjusted expenses among RTOs in 2006—$282 million—but had the second lowest expense per MWh—$0.39 per MWh—because it transmitted a greater amount of electricity than the other RTOs. In contrast, ISO New England had the second lowest expenses in 2006—$118 million—but had the highest expense per MWh—$0.89 per MWh—because it transmitted less electricity. Figure 4 illustrates total RTO expenses in 2006 per unit of electricity transmitted by major category. Appendix IV provides transmission data and expense per MWh data by RTO from 2002 to 2006. Our analysis reflects total annual expenses as reported in the RTOs’ annual audited financial statements, divided by the amount of transmission volume within the RTO. These calculations may result in MWh expenses that differ from what RTOs charge their market participants. Furthermore, we did not retroactively apply financial statement reclassifications to data from prior years. Because PJM made retroactive reclassifications that affected its 2002 and 2003 financial statements, in 2002 and 2003, the expenses per MWh we calculated for PJM are significantly higher than the amount it billed its market participants. For example, in 2002, PJM had expenses of $0.95 per MWh, according to our analysis. According to data provided by PJM officials that we adjusted for inflation, market participants were billed $0.51 per MWh, after refunds and other billing adjustments were taken into account. Similarly, in 2003, PJM had expenses of $0.85 per MWh according to our analysis, but market participants were billed $0.57 per MWh when adjusted for inflation. In addition, RTOs utilize differing billing methodologies. As a result, the rates they charge to market participants may be different than the total expenses per MWh calculated in our analysis. Table 2 shows actual electricity rates per MWh charged to RTO market participants, adjusted for inflation, from 2002 to 2006. When looked at annually, inflation-adjusted RTO expenses from 2002 to 2006 have varied, reflecting new initiatives implemented by the RTOs and other changes made by management. Figure 5 illustrates changes in RTO inflation- adjusted expenses per unit of electricity transmitted over this period. Several key trends occurred over this period, with the expenses per MWh of three RTOs—Midwest ISO, New York ISO, and ISO New England— rising as they implemented major market and other initiatives. For example, during this period, Midwest ISO expanded its role from coordinating reliability, administering its tariff, and performing transmission system planning to include operating markets for energy and other services. As a result, Midwest ISO’s expenses rose in a number of areas. Salaries and benefits increased as the RTO increased its full-time equivalents from 265 in 2002 to 643 in 2006, in part, to carry out the RTO’s expanded operations. Expenses for consulting, professional, and outside services—used, in part, to develop the new markets for electricity and other services—and depreciation and amortization expenses—to recover the costs of major investments, such as information systems and infrastructure related to the electricity market—also increased from 2002 to 2006. Increases in Midwest ISO’s expenses were mitigated by its rising transmission load as it took on additional members. In contrast, California ISO’s expenses per MWh hour declined significantly over this time period, particularly in the areas of depreciation and amortization and facilities and maintenance. California ISO officials attributed declining expenses to an organizational focus on keeping expenses low, including a specific cost containment management initiative in 2005, and more economically advantageous contracts in a few key areas. Additionally, as noted in the graphic, PJM changed the way it reported revenues and expenses. Starting in 2004, PJM offset revenues and expenses related to study and interconnection fees. Had 2002 and 2003 expenses been reported as they were in later years, PJM’s inflation- adjusted expenses per MWh would have fluctuated over the period and ultimately declined from $0.52 per MWh in 2002 to $0.39 per MWh in 2006. Finally, Southwest Power Pool’s expenses per MWh declined slightly over this time period—from $0.47 per MWh to $0.37 per MWh, as increasing overall expenses were mitigated by rising transmission load. Starting in 2006, FERC required RTOs and other utilities to provide more detailed information about market and transmission expenses on their Form No. 1 filings to improve the visibility and uniformity of RTO and utility financial reporting, and we found that RTO’s 2006 Form No. 1s are more transparent than in previous years. FERC officials told us these changes would facilitate review by FERC and the public of RTO expenses and rates. Form No. 1 filings categorize expenses according to two key functions RTOs perform—transmission coordination and market operation—as well as other categories such as administrative and general expenses. In 2006, about 17 percent of all RTO inflation-adjusted expenses were for transmission services, 13 percent were for market expenses, 39 percent were for administrative and general expenses, and 31 percent consisted of other expenses. Figure 6 provides information reported in the Form No. 1 about each of the RTOs’ expenses. Appendix V shows 2006 RTO inflation-adjusted expenses as reported on the FERC Form No. 1. Transmission expenses cover the cost of providing reliability services and monitoring and operating the transmission systems, among other things. Market expenses include the cost of administering markets for electricity and other services, monitoring markets for competitiveness, and related computer software and hardware maintenance, among other things. Administrative and general expenses consist of employee salaries and benefits, rent, and outside services, among other things. The six RTOs whose financial statements we reviewed have made investments in property, plant, and equipment. Total inflation-adjusted investment for all RTOs was $1.6 billion as of December 31, 2006, without adjusting for accumulated depreciation. Software and equipment was the largest category of investment at each of the RTOs, as shown in figure 7, and was used by the RTOs to provide various transmission and market services across regions. For example, in 2005, ISO New England began construction of a replacement control center equipped with computer hardware and software to deploy generators, forecast electricity requirements, ensure load is not interrupted in the event of a contingency, and conduct and monitor electricity transfers with other RTOs. Appendix VI shows RTOs’ investments in property, plant, and equipment as of December 2006. RTOs consider stakeholder comments when reviewing RTO expenses and other decisions that may affect electricity prices. In the two RTOs we visited, stakeholders said they valued the opportunity for discussion with the RTOs, but some stakeholders expressed concern that attending meetings was resource intensive and that too little emphasis was placed on how decisions might affect the prices consumers pay for electricity. Furthermore, though RTO budgets offer one tool FERC could use to revisit whether rates remain just and reasonable between rate proceedings, the extent to which FERC reviews proposed expense information in RTO budgets varies. Additionally, although FERC annually requires RTOs to report the actual expenses they incurred, FERC staff have not regularly reviewed or audited these submissions for accuracy and do not look at them for reasonableness. Instead, FERC relies heavily on stakeholders to raise concerns over proposed expenses and other decisions that may affect consumer electricity prices. According to senior RTO officials, RTO boards and staff give much consideration to stakeholder comments when reviewing RTO expenses and making decisions that affect electricity prices. They told us that while RTO decisions are independent—stakeholder input is generally advisory— stakeholders play an important role in evaluating RTOs’ operations and plans. In particular, although RTOs conduct internal reviews of their proposed expenses, establish controls for reviewing the prudence of expenses, and may perform formal cost-benefit analysis on major initiatives, officials told us stakeholder comments are one of the most important factors when reviewing expenses and making decisions. In general, RTOs solicit comments from stakeholders about their opinions on decisions to modify new market rules, changes to governing documents, and budgets and expenses, among other things. According to RTO officials, in some instances, RTOs are required to secure affirmative stakeholder votes on these decisions prior to proceeding. Specific issues for discussion may be raised by the RTOs, stakeholders, or in response to FERC orders or directives. Stakeholders generally provide input to the RTO boards of directors in three ways––written communications, oral discussions, and votes––although each RTO has a unique process for soliciting this input, as shown in table 3. RTO officials told us that these processes were developed after extensive negotiations with stakeholders when each RTO was formed. To ensure stakeholder input reflects a range of interests, five of the six RTOs we reviewed group stakeholders with common interests, such as electric distribution companies, transmission owners, and end users. All six of the RTOs we reviewed involve state regulators in their decision-making process, either formally as a unique stakeholder group or informally as participants who attend stakeholder meetings. Though state regulators are not prohibited from voting in stakeholder meetings, most have chosen to participate formally in the process but not vote. Additionally, in several RTO areas, state regulators have formed organizations to collectively represent their interests and advise the RTO. For instance, state regulators in the Midwest ISO formed the Organization of MISO States to discuss what decisions the RTO should make and participate in stakeholder meetings. In general, stakeholders participate in the RTO decision-making process through a primary committee that reports to the board of directors and a range of lower-level committees and working groups that report to the primary committee. Lower-level committees and working groups tend to focus on narrow subjects or specific initiatives such as development of specific markets or proposed changes to existing rules, and lower-level committees often involve stakeholders with expertise in the specific subject matter. The primary committee and lower-level committees and working groups hold regular or episodic meetings that stakeholders participate in. These meetings are open to participation by any stakeholder with an interest in attending. As shown above, stakeholders representing many perspectives, from generators to groups representing consumers, participate. Because of the numerous, simultaneous matters under consideration, there can be many meetings potentially relevant to stakeholders. Subjects discussed and analyzed in lower-level committee and working group meetings are eventually raised for discussion at the primary committee meeting, where a vote is taken about whether to recommend a decision be pursued by the board of directors. (See fig. 8 for an example of the Midwest ISO’s committee structure. Midwest ISO’s primary committee is called the Advisory Committee.) RTO staff may facilitate discussions within the primary committee, as well as lower-level committees and working groups, and may also prepare analyses to help stakeholders understand how a decision might affect them. For example, as agreed to when its RTO status was approved, Southwest Power Pool must develop a cost-benefit analysis before making the decision to implement a new market rather than relying on cost-based pricing of a service. Other RTO officials told us that although they may develop formal cost-benefit analyses for some major decisions, such as changes to key market rules, the stakeholder process is a key way in which the cost and benefits of a decision are discussed. Most RTOs have a specific lower-level committee to review and analyze RTO budgets that contain information about proposed expenses. According to RTO officials, RTOs and stakeholders discuss and jointly determine organizational priorities, which influence the RTO’s preparation of a draft budget. Stakeholders serving on the budget committee review the budget’s proposed expenses and provide recommendations. Discussion of the budget is then taken up by the primary stakeholder committee, which then votes whether to recommend to the board that the budget be adopted. The composition of the subcommittee that initially reviews the budget differs among the six RTOs. For example, PJM’s budget committee consists of equal representation from each formal stakeholder group plus two members of the independent board. ISO New England’s budget committee is open to participation by any stakeholder. Most stakeholders we spoke with in the two RTOs we visited—ISO New England and Midwest ISO—valued the opportunity for discussion with their respective RTOs and believed that RTOs facilitate an open and democratic process that focuses on reaching consensus among stakeholders. However, most stakeholders in these two RTOs found the process resource intensive, specifically the stakeholder meetings, which require staff time and travel costs. RTOs may carry out hundreds of stakeholder meetings annually, as shown in table 4. Stakeholders must prepare for meetings by reviewing documentation and preparing comments, and the ability of stakeholders we spoke with to do so varied significantly. Individual stakeholders in the two RTO regions we visited estimated they devoted a range of time—from less than one-half of a full-time equivalent to 5 full-time equivalents—to stakeholder involvement annually. In some cases, stakeholders told us they are not able to attend all meetings they would like to due to resource constraints. For example, stakeholders from ISO New England’s public power sector told us they often have to rely on other stakeholders to attend meetings in their place, because they lack the resources to participate themselves. Many stakeholders told us they believe the level of their participation determines their influence on RTO decisions. In the two RTOs we visited, many stakeholders representing and serving consumers, such as consumer advocates and state commissioners, were concerned that RTOs do not place adequate emphasis on assessing the implications on consumer electricity prices of decisions, such as whether to build new transmission lines, when to create markets for services in lieu of charging cost-based rates, and reliability decisions. Several of these stakeholders believed that RTOs overemphasize ensuring reliability without full consideration as to whether lower-cost options are available. For example, some ISO New England stakeholders we spoke to believed the RTO was overly conservative when determining whether noncompetitive generators were needed for reliability. They believed that, as a result, the RTO entered into unnecessary and costly contracts to keep these inefficient generators running. They observed that this could lead to higher consumer electricity prices, which they did not believe were justified, since they did not agree the generators were needed to ensure electricity was delivered reliably. Moreover, one stakeholder we spoke to was concerned that the cost of operating these generators, which may benefit only certain local areas, were unfairly borne by consumers outside those local areas. Officials from ISO New England acknowledged that there can be trade-offs between reliability and costs, but said transmission-planning efforts and their new capacity market are effective in keeping payments for reliability as low as possible. They and other RTO officials explained that fulfilling their mission of ensuring reliability and efficient markets will minimize consumer prices in the long run. A number of stakeholders representing and serving consumers in these two regions were concerned, however, that the RTOs do not conduct enough cost- benefit analyses of how decisions may affect electricity prices. Others felt they had inadequate access to data and resources to conduct such analyses themselves. Some RTO officials told us that while they always consider the costs and benefits of a decision before making it, formal cost- benefit analysis may not always be practical, because it is difficult to estimate the potential impact of a decision on electricity prices, how benefits and costs could change over time, the appropriate assumptions to be made, and how different stakeholders are affected. They noted that individual stakeholders already give much consideration to the costs and benefits of a given decision when discussing it during stakeholder meetings. There was disagreement among stakeholders in ISO New England and Midwest ISO about which groups have, and should have, more influence with RTOs; however, many stakeholders agreed that participating in stakeholder meetings and, in particular, participating in lower-level committees and working groups, provided the best opportunity to influence RTOs’ proposed expenses and decisions that may affect electricity prices. Although most stakeholders we spoke with thought ISO New England and Midwest ISO worked hard to solicit comments from all stakeholders, many believed that when making decisions, the RTOs deferred more to certain stakeholders and that because RTOs were created through the voluntary agreement of the transmission owners, the RTOs were more likely to defer to their interests than to others’. Other stakeholder groups we spoke with in ISO New England and Midwest ISO commented that state regulators have a large influence on the RTOs’ decisions. A number of state public utility commission officials disagreed with this view. In particular, one state regulator stated that because state regulators are charged with protecting the public interest, their opinions should carry greater weight than those of participants whose interests are primarily profit-oriented. The frequency of FERC’s review of proposed RTO expenses varies, with reviews of certain expenses not being conducted for years at a time. FERC’s review of proposed expenses occurs when it conducts a proceeding to evaluate whether the rate an RTO charges customers to recover these expenses is just and reasonable and not unduly discriminatory or preferential. Because of variation in the manner and frequency with which rate proceedings are conducted, FERC’s consideration of proposed RTO expenses can be infrequent. For example, in 2001, FERC conditionally approved Midwest ISO’s rate for recovering expenses associated with administering its tariff and ensuring reliability. Because Midwest ISO has not since asked to change its rate for recovering these expenses, FERC has not reviewed these expenses since 2001. FERC officials explained that more frequent review of proposed RTO expenses is not necessary because RTO expenses and decisions undergo much scrutiny during the RTO stakeholder process. Moreover, according to these officials, stakeholders are in the best position to know whether RTO expenses are prudent and reasonable. As a regulator, FERC may initiate a new rate proceeding if it believes an RTO’s rates are no longer just and reasonable. While, as FERC points out, stakeholder comments and complaints are an important piece of FERC’s consideration, more frequent review of proposed expenses could also aid FERC in determining whether a rate remains just and reasonable. Table 5 shows when each RTO’s rate for recovering expenses was last approved. RTOs annually develop budgets that contain extensive information on proposed expenses; however, FERC’s use of RTO budgets as a tool in reviewing proposed RTO expenses varies. For example, ISO New England agreed with its stakeholders to submit operational and capital budgets to FERC for annual approval. Southwest Power Pool submits annual copies of its operating and capital budgets for informational purposes, rather than for FERC approval. The other RTOs either do not submit budgets or do so infrequently, despite the fact that these budgets could provide FERC with potentially valuable information about proposed RTO expenses that could help it in ensuring the rates RTOs charge customers are just and reasonable. For example, FERC could use such information to regularly benchmark RTO spending on key categories, such as market oversight or capital investments. (Table 6 outlines the frequency with which RTOs submit budgets to FERC for review.) FERC officials pointed out that FERC staff sometimes attend stakeholder meetings, including discussions about the budget, to observe what concerns stakeholders raise. They also noted that RTOs post their budgets on their Web sites annually, allowing FERC and the public to view them if so desired. Some representatives of stakeholder groups including public utility commissions, consumer groups, and the publicly owned sector expressed concerns over FERC’s infrequent review of budgets or lack of independent analysis of proposed RTO expenses. They expressed concern that FERC deferred too much to the stakeholder process within the RTOs, assuming stakeholders had adequately resolved all concerns. These stakeholders were concerned that without more scrutiny of proposed expenses, FERC could not be sure that the RTOs were as cost-effective as possible. We found that RTO expenses may change over time, and some—such as expenses for outside consultants––may decrease between the times FERC reviews the rates. Furthermore, without more consistency in how FERC reviews proposed expenses, customers may not fully benefit from potential improvements or efficiencies RTOs achieve. For example, for the 2008 Midwest ISO budget, expenses as approved by the finance subcommittee and the board of directors for outside services decreased by 24.4 percent, while its net operating expense increased by 1.2 percent. The total cost of salaries and benefits increased by 10 percent, offsetting some of the increased efficiency in the area of outside services. In the stakeholder process for the 2007 budget, the finance subcommittee expressed concerns about the continued increase in staffing levels and how that need was determined. They recommended that Midwest ISO develop financial metrics to evaluate and compare and contrast Midwest ISO’s financial results. Since Midwest ISO’s proposed expenses were not regularly reviewed by FERC, FERC may have missed an opportunity to determine whether Midwest ISO’s salaries were reasonable and ensure that Midwest ISO customers benefited from lower outside service expenses. More broadly, without regular, recurring analysis of RTO expenses, such as through review of RTO budgets, it is not clear that FERC is as well positioned as it could be to know whether certain expenses are reasonable and RTOs are as cost-effective as possible. Such knowledge could supplement comments from stakeholders and help FERC determine whether rates remain just and reasonable or when a new rate case should be initiated. FERC does not routinely review or assess the accuracy or reasonableness of expenses RTOs report annually using the Form No. 1. FERC officials told us they use the financial information in the Form No. 1 to carry out FERC’s responsibilities and post this information to their Web site for use by public utility customers, state commissions, and the public so that they can assess the reasonableness of electric rates. However, during the course of our work, FERC officials told us they did not routinely audit or review the Form No. 1s for accuracy or completeness. When we began our work, FERC had not audited any RTO FERC Form No. 1 filings for accuracy or completeness, although in 2004 it performed some limited review of the Form No. 1s during the course of other audits. In May 2008, FERC initiated an audit of Midwest ISO that includes a more in-depth examination of its Form No. 1. FERC officials told us it is the RTOs’ responsibility to ensure that the FERC Form No. 1 filings are accurate and complete and said that it requires public accounting firms to attest that they have audited RTOs’ balance sheets, statements of income, retained earnings, and cash flows contained in their Form No. 1s in conformity with FERC’s Uniform System of Accounts requirements. Auditor opinions confirm that CPAs audit the above statements in the Form No. 1 but may not audit all supporting schedules. Without more regular audits and review of actual expense information for accuracy, FERC may be at risk of unknowingly using and providing to the public inaccurate and incomplete RTO financial data, limiting the effectiveness of the Form No. 1 as a tool for determining whether rates are just and reasonable. For example, during the course of our audit work, we noted a significant reporting error on Southwest Power Pool’s 2006 Form No. 1 filing. In 2006, Southwest Power Pool reported $88 million in rent and $175 million in maintenance of general plant expenses; however, we noted actual rent and maintenance of general plant expenses were $830,000 and $440,000, respectively. FERC officials said that in 2006 several RTOs experienced problems using FERC’s software program to file their Form No. 1s, due to an unforeseen delay in implementing software updates. To correct the errors, a revised schedule was added to Southwest Power Pool’s 2006 Form No. 1 filing. However, maintenance of general plant expenses was still overstated in the revised schedule by approximately $3 million, and the revised schedule was not clearly referenced by the original schedule. FERC said the error did not affect electricity rates; however, the overstated expense information remained posted on FERC’s Web site for over a year, where public utility customers, state commissions, the public, and other parties that may be interested in reviewing RTOs’ expenses could access it. In August 2008, Southwest Power Pool submitted a revised FERC Form No. 1 that corrects the error. Furthermore, according to FERC officials, the Office of Enforcement is taking steps to incorporate a system of electronic data validation checks into the FERC Form No. 1 submission software to help ensure the accuracy of the FERC Form No. 1 filings before they are submitted. FERC anticipates having the validation checks in place for the 2008 FERC Form No. 1 submission year and told us that once the checks are implemented, an error like the one identified at Southwest Power Pool can be corrected prior to the entity submitting its FERC Form No. 1 filing. Because these checks have not yet been implemented, we cannot review their effectiveness. We believe that while they will likely help identify and correct some reporting errors, they do not constitute the comprehensive review of the Form No. 1s for accuracy and completeness that FERC staff could perform through audits or other review. FERC does not routinely review RTOs’ reported expenses to ensure that they are reasonable, noting that Form No. 1 information on expenses is made public and interested parties can file a complaint about their concerns. FERC officials from the Office of Energy Market Regulation observed that the Form No. 1 might sometimes be used to detect potentially unreasonable expenses but told us they do not analyze them due to limited resources. Moreover, although FERC compared expenses across RTOs in 2004 as a means to estimate the potential expense involved in creating new RTOs, FERC officials do not regularly compare expenses across RTOs or create expense benchmarks to use as an analytical tool in evaluating just and reasonable rates or as a way of determining whether efficiencies realized by one RTO could be applied to another. FERC and RTO officials said that the varied nature of RTO functions would make regular comparison of actual RTO expenses challenging and of limited value. Several stakeholders we spoke with, including a former RTO executive, disagreed, observing that comparisons among RTOs could help raise questions about the appropriateness of expenses. Without reviewing actual RTO expenses for reasonableness, FERC may not be as well positioned as it could be to ensure the rates RTOs charge to recover their expenses are just and reasonable and that RTO funds were spent according to how FERC and the stakeholders approved them to be. FERC relies heavily on stakeholders to raise concerns about RTO expenses and other decisions with the potential to affect electricity prices. FERC officials acknowledged that the process through which RTO stakeholders review information on proposed expenses contained in RTO budgets is integral to identifying imprudent and unreasonable expenses between RTO rate cases. Parties who disagree with RTO expenses can file comments when an RTO’s rate for recovering these expenses is being evaluated at FERC during rate-setting proceedings. In one instance, in November 2005, the Attorneys General of Connecticut and Massachusetts submitted comments to FERC about ISO New England’s proposed 2006 budget, contesting executive salaries that they believed were unnecessarily high. FERC found the proposed salary expenses to be just and reasonable after reviewing the entire record in the proceeding, including all comments and ISO New England’s comments that surveys and benchmarks showed the salaries were competitive. However, FERC did not perform any independent analysis of ISO New England salaries or review the surveys or benchmarks ISO New England cited. FERC also did not conduct comparisons of salaries across RTOs, although FERC officials said that had this information been introduced into the record, it would have considered it. As with stakeholder review of proposed expenses, FERC officials told us the Form No. 1 is a tool to provide stakeholders with ready access to data needed to assess the prudence of actual RTO expenses, and that its information is key to stakeholders knowing when a new rate case may be needed. FERC also explained that stakeholders can file a complaint that rates are not just and reasonable at any time. However, several stakeholders told us that because FERC places the burden of proof on the complaining party, it is difficult and resource intensive to file a complaint. These stakeholders told us that they typically lack the staff and resources to file a complaint and said that it is difficult to obtain the data and conduct the analysis necessary to support it. For example, one state regulator noted that the data needed to show that expenses are not just and reasonable is typically proprietary and that such complaints are difficult to win, since the burden of proof is high. FERC officials confirmed that they have heard over the years that it can be challenging to make complaints and win. They said consumer groups sometimes felt they were at a disadvantage compared to transmission owners and generators because they have fewer resources, including staffing and funding, to file and support complaints. FERC officials also noted that if an evidentiary hearing was deemed necessary, their staff might provide some analytical assistance. As in its reviews of expenses, FERC also places much emphasis on the stakeholder process when reviewing RTO decisions with the potential to affect electricity prices, and FERC offers stakeholders the opportunity to provide additional evidence for its consideration prior to making a final decision. For example, in 2006, FERC conducted a proceeding related to a proposed PJM decision to develop a capacity market—a market designed to attract new generation and other resources to ensure PJM can meet future electricity needs. PJM’s proposal resulted from years of work and numerous stakeholder meetings. Additionally, PJM and numerous parties submitted thousands of pages of comments in support and against the proposed decision, which FERC evaluated. FERC issued a final order on this proceeding in December 2006. In May 2008, numerous stakeholders, including public utility commissions and consumer advocacy groups, filed a complaint with FERC alleging the initial model PJM used for establishing the price of capacity produced excessively high prices and did not deliver commensurate benefits. Complainants are asking for rate relief, which they estimate to be about $12 billion. The Maryland Office of the People’s Counsel calculates that excess charges to Maryland residential customers will average $570 over 3 years. FERC evaluated the merits of this complaint and supporting documents. On September 18, 2008, it dismissed the complaint but granted a request for a technical conference to determine if further action would better achieve this market’s goals. Experts, industry participants, and FERC lack consensus about whether RTOs have provided net benefits to consumers. Many key experts and industry participants agree that RTOs can provide certain benefits, such as more efficient management of the transmission grid and improved access by independent generators. However, there is some disagreement about whether RTOs’ access to additional lower-cost generating resources has led to electricity prices for consumers that are lower than they otherwise would have been. Furthermore, experts and industry participants are divided on the benefits of RTO markets and their effect on consumer electricity prices. Some critics of RTO markets believe that RTO markets have not fully achieved anticipated benefits and contribute to higher consumer electricity prices, while proponents believe RTO markets have kept prices lower than they otherwise would have been. Some RTOs have developed assessments to demonstrate the benefits they have provided to their regions. FERC officials share the view that RTOs have resulted in benefits to the economy, such as new efficiencies in operating the regional transmission grid, but FERC has not conducted an empirical analysis to measure whether these benefits were realized or developed a comprehensive set of publicly available, standardized measures that can be used to evaluate RTO performance. Many industry participants and experts agree that RTOs provide opportunities for more efficient management of the transmission grid and can improve access by independent generators. They believe that because RTOs integrate multiple transmission systems into a larger service area, they have broader knowledge of the grid’s transmission capacity and wider perspective on events that can affect reliability, allowing them to more efficiently manage the grid. For example, Midwest ISO now centrally controls operation of a vast transmission network spanning 15 states that was once overseen by 24 different system operators who had to work together to address any reliability problems such as the unexpected loss of a key transmission line or power plant. Some also believe that because RTOs integrate multiple transmission systems into a larger service area, they keep electricity buyers and sellers from paying multiple fees for each transmission network they use—previously a disincentive to trade power across multiple utilities’ transmission systems. In addition to the benefits of centralized management of the transmission grid, many experts and industry participants believe RTOs have improved independent generators’ access by reducing discrimination. They note that because RTOs operate the grid independently and do not own generation or transmission resources themselves, they have no incentive to discriminate when providing transmission access. According to a representative of independent developers of new generation we spoke to, this improved access has allowed new generators to more easily connect to and use the transmission system. A representative of buyers of power, on the other hand, told us this improved access has allowed buyers of power opportunities to purchase electricity from new suppliers, although this representative questioned whether the prices they receive for that electricity are better. Despite much agreement that RTOs have provided opportunities for more efficient management of the transmission grid and improved access, some industry participants we spoke with believed RTOs were not the only way to provide these benefits. They question whether similar benefits could be achieved using other mechanisms, such as power pools—groups of utilities that have entered into agreements to coordinate electricity supply, like those that have existed along the East Coast for more than 30 years. Many experts and industry participants agree that RTOs are better positioned than individual utilities to make use of lower-cost generators more frequently, although they do not agree whether this has resulted in electricity prices for consumers that are lower than they otherwise would have been. By overseeing a region formerly run by many individual utilities, RTOs have more generators at their disposal than the individual utilities did. Because RTOs generally use the generators with the lowest bid first—according to some, the least costly and most fuel efficient—they may be able to more efficiently meet requirements for electricity reserves, lower the cost of producing electricity, and use fuel more efficiently. However, some industry participants we spoke with questioned whether this has kept electricity prices for consumers lower than they otherwise would have been. They noted that generator bids may not always reflect their costs of production and that in some cases, lower costs of production have led to higher profits for generators rather than lower consumer prices. Experts and industry participants are divided on whether RTO efforts to create and oversee markets have lowered electricity prices and led to other benefits, such as improved generator efficiency and more investment in electricity infrastructure. Studies of restructuring draw differing conclusions. Experts and Industry Participants Are Divided on RTOs’ Influence on Electricity Prices Experts and industry participants debate how RTO markets have influenced the prices consumers pay for electricity. Critics of RTO markets believe these markets have not fully achieved anticipated benefits and have contributed to the higher prices for electricity seen by consumers, because markets are expensive to establish and operate, and as currently designed, produce higher wholesale prices than would otherwise occur. RTO markets use multiple types of generators—coal, nuclear, natural gas, and others—in satisfying consumer demand, and the different costs of fuels for these generators, among other factors, contribute to different costs of electricity production. RTO markets select the smallest amount of generating resources needed each day to provide reliable service. To do so, these markets generally rank and accept generator bids in the market in order of lowest to highest and pay generators, regardless of their costs of production or fuel, the price bid by the last generating unit needed to satisfy demand. Critics believe this pricing approach reduces the benefits for consumers of using varied types of generators, because low-cost generators, like nuclear and coal plants, receive the same price as higher-cost generators, like natural gas plants, when higher cost generators are needed to satisfy demand. Supporters of RTOs believe this pricing approach, by rewarding low-cost generators, promotes efficiency and provides an incentive for new low-cost generators to enter the market, leading to lower prices in the long run than otherwise would have been the case. They note that price transparency in RTO markets is valuable and can signal profit-making opportunities for potential new entrants. They believe that this, coupled with improved access to the grid, can encourage market entry by, among others, developers of renewable energy sources, such as wind power. Proponents of RTO markets observe that price transparency may also encourage demand response—consumers lowering electricity usage in response to price signals—which can lead to lower, less volatile prices. RTO officials explained that while RTO markets establish wholesale prices for electricity traded in them, a number of other factors also influence the price consumers ultimately pay. Furthermore, much electricity is supplied from sources outside RTO markets, for example, when utilities use their own generators to self-supply or when two parties directly negotiate a transaction with each other. However, critics believe that the pricing approach used by RTO markets has led to higher prices for directly negotiated contracts as well, because low-cost generators recognize that they can often receive the price bid by higher-cost generators in the RTO marketplace. A state-by-state analysis of electricity prices reveals differences between RTO and non-RTO regions that have likely led to concerns about the impact of RTO markets on electricity prices. We considered retail electricity prices in four regions of the country: (1) original RTO states— states that joined an RTO in 1999 or earlier and were historically in a power pool, (2) new RTO states—states in an RTO region after 1999, (3) non-RTO states—states outside RTO regions, and (4) California. As shown in figure 9, 11 of the 17 states with above-average retail electricity prices are in the original RTO group. California also had above average prices in 2007. To further understand the basis for these disagreements, we analyzed retail electricity prices for industrial customers, because we believe that trends in industrial prices more closely reflect trends in wholesale prices, which RTOs are most capable of influencing. However, this relationship is not perfect, because, as noted earlier in the report, many other factors influence retail prices. Furthermore, numerous wholesale transactions occur outside RTO markets. As shown in figure 10, inflation-adjusted electricity prices for industrial consumers have been consistently higher in the original RTO states than in the new and non-RTO states over the entire period. Prices in the original RTO states fell from 1990 to 1999 but have since risen close to prior levels. However, in recent years, the rate of price increases in the original RTO states has generally been higher than in the non-RTO states. It is important to note that this price analysis does not isolate the impact of RTOs on prices. It is not possible to draw conclusions about what impact the establishment of RTOs has had on electricity prices without properly accounting for and isolating the impacts of other factors, such as the cost of fuels used to generate electricity, changes in the fuel mix, and changes in consumer demand. Experts generally agree that fuel prices play a large role in determining electricity prices. However, they disagree about the magnitude of their influence. Prices for fuels commonly used to generate electricity—such as coal and natural gas—have increased in recent years, with prices of natural gas rising more dramatically than those for coal over this period. Figure 11 illustrates how average prices of fuels used in the electricity sector have changed from 1996 through 2006. Compounding this overall trend, the original RTO region tends to rely more heavily on natural gas than the non-RTO region. Proponents of RTOs acknowledge that consumer electricity prices have increased in RTO regions, but they believe that higher fuel prices, greater demand for electricity, increasing costs for infrastructure needed after years of underinvestment, the high costs of complying with environmental regulations, and regulatory decisions made by states about transmission and distribution rates are the principal reasons for rising electricity prices across the country and in RTO regions. They believe RTO markets have kept prices to consumers lower than they otherwise would have been. Critics of RTO markets disagree, observing that problems with RTO markets have exacerbated the effect of other factors, such as higher fuel prices, on electricity prices. Experts and Industry Participants Disagree on RTOs’ Influence on Generator Plant Efficiency Experts and industry participants are also divided about the ways in which RTO markets may influence how efficiently existing plants are used. Some believe prices established competitively in RTO markets have given generators an incentive to improve the maintenance and operation of their facilities and operate them a greater percentage of the time, thereby improving efficiency and lowering the overall cost of generating electricity. By operating plants more efficiently, generators can better compete against rival bidders, resulting in either greater profits for themselves, lower prices to consumers, or both. Some studies conclude that nuclear plants in RTO and restructured regions have increased their capacity factors—the electricity generated by a plant as a percentage of that plant’s maximum capacity to generate electricity. As seen in figure 12, our analysis illustrates that nuclear plant capacity factors show more pronounced improvement in recent years in the original RTO states and new RTO states than in the non-RTO group. We did not attempt to account for other potential causes for this improvement, such as technological or institutional factors that may have improved efficiencies prior to the advent of restructuring and RTO markets or determine whether aggregate trends were the result of widespread efficiency improvements or a few improved generating units. While many agree that the results of capacity factor analysis would inform discussions of the benefits of RTO markets, they do not agree on how to isolate the influence of these markets and restructuring on capacity factors or determine whether improvements preceded restructuring changes or resulted from them. Some experts and industry participants believe improved generator efficiency at existing plants benefits consumers because it reduces the need to construct new generating plants and allows less expensive generating options, such as previously constructed nuclear plants, to satisfy a greater portion of electricity demand. Others question the role of RTO markets and restructuring in improving nuclear plant generator efficiency and whether efficiencies have resulted in lower prices for consumers than would have otherwise occurred. Experts and Industry Participants Disagree about RTO Influence on Infrastructure Investment There is also disagreement about whether RTOs have led to other regional benefits, such as increased construction of transmission and generation infrastructure. For example, some industry participants and experts believe a practice a number of RTOs employ of pricing electricity differently at various locations in a region to reflect the costs associated with transmission congestion provides valuable signals by indicating where additional generation or transmission is needed. Some critics, however, charge that this method of pricing electricity has not produced the expected investment in transmission and generation in the locations where it is needed. Furthermore, they believe this practice, combined with what they characterize as limited competition in RTO markets, allows generators to keep their bids high and earn excess profits. Studies of Restructuring and RTOs Draw Differing Conclusions In order to weigh in on these issues, a number of academics and private consulting firms have conducted studies about the benefits of restructuring and RTOs and their effect on electricity prices, although their studies have drawn differing conclusions. Some of these studies seek to isolate the effect of restructuring and RTO membership from other factors, such as fuel prices, to determine whether restructuring and RTOs themselves have influenced prices and led to other benefits. We identify and describe in appendix VIII a selection of 13 studies that are representative of these varied conclusions. Several of the studies conclude that the formation of RTOs resulted in greater efficiencies in the electricity industry, significantly benefited local economies, and, in some cases, kept electricity prices lower than they otherwise would have been. Others conclude that RTO market design and operations have not kept prices to consumers lower, but rather have led to higher consumer prices and higher generator profits. As a way of addressing concerns about whether they have provided benefits, some RTOs have quantified the benefits they believe they have provided to their regions. ISO New England, for example, developed measures related to wholesale electricity prices, power production costs, emissions, and other areas to quantify the value it has provided to New England. According to ISO New England, average wholesale electricity prices in its region, when adjusted for rising fuel costs, have declined from $45.95 per MWh in 2000 to $42.64 per MWh in 2006. ISO New England reports that over this same period, non-fuel-adjusted prices rose from $45.95 per MWh to $62.74 per MWh. Midwest ISO also recently developed an initiative to quantify its performance. According to its analysis, Midwest ISO has improved electric service reliability and is more efficiently using generation resources, a fact that, along with other factors, has contributed to between $555 million and $850 million in annual net benefits. Midwest ISO is currently soliciting comments from stakeholders on its analysis. We did not analyze or validate either of these efforts. FERC officials believe that RTOs have resulted in benefits to the economy, such as new efficiencies in operating the regional transmission grid; however, it has not conducted an empirical analysis or developed a comprehensive set of performance measures to analyze these benefits. FERC officials told us they consider RTO benefits when they review proposals to create RTOs and approve RTO decisions, such as new markets for electricity and other services. FERC also recently initiated a proceeding to consider specific reforms to RTO markets—for example, considering how to strengthen market monitoring and increase opportunities for long-term power contracts. FERC believes RTOs have produced numerous benefits, including the following: improving the efficiency of the regional transmission grid, including resolving operating problems such as transmission congestion; providing more efficient transmission pricing policies; and minimizing market power; improving transmission reliability by facilitating more accurate calculations of regional transmission capacity; improving access to the grid by reducing opportunities for discriminatory transmission practices; improving competition in regional power markets by facilitating the entry of new independent generators; facilitating stakeholder consensus solutions to regional problems; enhancing transparency and oversight regarding how prices are determined and how access to the grid is granted; and providing a process of regional transmission planning, thus resulting in more efficient planning and use of resources across a region, as well as an opportunity for input by a broad range of stakeholders. However, FERC has not conducted an empirical analysis to measure whether RTOs have achieved these expected benefits or how RTOs or restructuring efforts more generally have affected consumer electricity prices, costs of production, or infrastructure investment. FERC believes data exist to support its conclusion that RTOs have provided benefits—for example, data illustrating changes in generating capacity in RTO regions and data about the number of transmission interruptions used by system operators to address congestion. However, FERC has not used these or other available data to analyze whether RTOs have produced benefits. Furthermore, FERC has not reexamined its prospective estimate of the benefits RTOs were expected to produce—estimated in 1999 at $2.4 billion annually in cost savings—to determine whether these expected benefits are actually being realized or how actual outcomes have differed from original estimates. Some of the projections used to develop this estimate were too conservative, indicating that the estimate is not as reliable as it could be. Rather than incorporating a range of assumptions about future fuel prices to account for uncertainty, the model used one set of fuel price projections that turned out to be lower than what actually occurred. For example, the model’s projections assumed the average price of natural gas delivered to electric generation plants in the United States would rise to $3.25 per million British thermal units (Btu) by 2005. In fact, the actual price rose much faster, reaching $8.50 per million Btu in 2005. Similarly, the model assumed that U.S. electric generation capacity using natural gas and oil as fuel would increase from about 230,000 megawatts in 1997 to about 284,000 megawatts in 2005, but in fact, U.S. electric generation capacity rose to about 440,000 megawatts. FERC officials acknowledge that some of the study’s assumptions were low but maintain that RTOs have provided benefits. Although FERC collects a wide range of data from the RTOs, it has not developed a report or other assessment with comprehensive, standardized measures that Congress and the public could use to identify and track RTO performance. FERC has taken a step in this direction by developing a nonpublic document that provides some standardized measures of RTO market performance, and these measures are also addressed in public reports issued by the RTOs. However, FERC officials explained that these measures were not intended to be used to assess RTO benefits or evaluate the performance of individual RTOs. Moreover, they are not comprehensive, since they do not address the extent to which RTOs have achieved the full range of expected benefits—such as improved reliability, more efficient planning for generation and transmission investments, or prices for consumers that are as low as possible—and do not compare performance between RTO and non-RTO regions. FERC also includes some statistics about RTOs on its Web site and in its annual report on the electricity industry, but these data are of limited scope and do not contain measures of operational and market performance. The RTOs themselves publish large volumes of data about market and operational performance in publicly available annual reports and other documents available on their Web sites; however, the large amount of information and, in some cases, its lack of standardization, make it difficult for the public or Congress to easily compare and interpret it. Moreover, FERC has not synthesized these data in a way that allows Congress and the public to draw conclusions about the benefits of RTOs and their effectiveness or discern whether RTOs and organized markets are in their best interest. According to FERC officials, quantitative analyses of whether benefits were achieved and identification of performance measures are not a necessary part of its oversight of RTOs. Rather, FERC officials believe FERC’s continual review of RTO performance—through its evaluation of RTO decisions, proceedings about RTO market reforms, and market monitoring—is sufficient to ensure RTOs continue to benefit consumers as expected. Furthermore, FERC officials cited methodological challenges to performing an empirical analysis of whether benefits were achieved and developing performance measures, which it believes would limit their value. FERC officials also explained that RTO participation is voluntary, and that participants are able to assess for themselves the benefits of RTO membership and join or depart based on their own determination. Experts from the electricity industry and the academic community we spoke with acknowledged that empirical analysis and measures of RTO performance would be methodologically challenging to conduct. In particular, these experts noted that there are difficulties in isolating the influence of RTOs on prices, efficiency, and investment from other factors, such as fuel prices. However, these experts observed that tracking performance measures across RTOs would encourage better performance and could identify potential areas for improvement. Some added that, in certain cases, the same measures could be developed for non-RTO regions to provide points of comparison. These experts suggested measuring and providing standardized information to the public on market competitiveness, transmission and generation investment, plant efficiency, reliability, and changes in prices in RTO regions, among other things. Some industry groups have also called for the development of common measures of RTO performance, such as measures to track the difference between generator costs and prices charged in RTO markets, changes in congestion costs over time, and RTO costs of acquiring capital for major investments. Another industry group commissioned an independent study to identify and begin tracking standardized measures of RTO performance. GAO’s Standards for Internal Control identify the value to organizations of comparing actual performance to planned or expected results. More specifically, past GAO work recognizes that federal agencies can use performance information to identify problems in existing programs, develop corrective actions, and identify more effective approaches to program implementation, among other things. By developing standard performance measures that draw upon its own internal analysis or work being conducted by RTOs, industry experts, market monitors, and others, FERC could, over time, develop a more thorough empirical understanding of RTO performance and whether and to what extent RTOs have provided benefits to the industry and to consumers. This could help FERC in evaluating the success of the decision to encourage the creation of RTOs and understand whether RTOs have led to the benefits expected of them. Measures may also help FERC determine whether to encourage the creation of additional RTOs or identify areas where its RTO policy and RTOs themselves could be improved. Moreover, if available to Congress and the public, measures could allow FERC to weigh in on the disagreements among experts and industry participants about the benefits RTOs provide. It has been over 10 years since major federal electricity restructuring was introduced and some of the first RTOs were developed to facilitate it, yet there is little agreement about whether restructuring and RTOs have been good for consumers, how they have affected electricity prices, and whether they have produced the benefits FERC envisioned. Compounding this, rising electricity prices and diverse regional interests complicate an unbiased discussion of the merits of RTOs and restructuring. Although there are challenges to answering questions about the benefits of RTOs, a more structured and formalized approach to RTO oversight would be beneficial. FERC’s initial approach to allow a diverse range of RTO types, governance structures, and rate recovery mechanisms provided a means for regions to quickly build upon existing institutions like power pools and past participant experience working together. However, much has changed since the first RTOs came into existence, and it has become clear that FERC’s efforts to regulate RTOs as it does utilities may no longer be sufficient. Furthermore, the specific characteristics of RTOs devised by FERC and its expectation that these entities would lead to lighter regulation by FERC give RTOs a unique position in the electricity industry. Some RTO functions, such as operating the transmission grid, typically fell within the purview of utilities. Others, including market monitoring and balancing different stakeholder interests, were more traditionally performed by regulators. As a result of this unique set of responsibilities, RTOs face much public scrutiny—something RTOs have implicitly embraced in part through their varied stakeholder processes—and may require different oversight by FERC. Although stakeholders told us they value the stakeholder process at each of the RTOs, the concerns they raised about its resource intensiveness and the challenges involved in analyzing RTO decisions highlight the importance of FERC involvement and oversight. In this regard, without more regular, consistent review of RTO expenses and budgets, FERC may be missing an opportunity to better ensure the cost-effectiveness of RTOs and that their rates remain just and reasonable, even between rate proceedings. Furthermore, FERC’s lack of regular review of RTO financial reports, filed annually in the Form No. 1, limits its ability to ensure RTO expenses are accurately and completely reported and reassure Congress, industry participants, stakeholders, and the public that the billions of dollars in expenses RTOs have incurred in recent years were reasonable and spent in accordance with budgets previously approved. Finally, while FERC believes RTOs have produced numerous benefits, the fact that it has not developed a comprehensive set of publicly available standardized measures to track RTO performance contributes to uncertainty about what those benefits have been and their magnitude. We acknowledge that FERC’s review of RTO decisions that affect electricity prices and consideration of stakeholder comments and complaints sometimes results in new rules designed to improve the ability of RTOs to deliver benefits to their regions. However, in the absence of measures for evaluating the success of the decision to encourage the creation of RTOs, FERC may be missing opportunities to facilitate improvements in RTO operations and markets and is not as strongly positioned as it could be to evaluate the success of its decision to encourage the creation of RTOs and determine whether to encourage further RTO development. To help ensure that FERC, industry participants, and the public have adequate information to inform their assessment of whether rates to recover RTO expenses are just and reasonable, we recommend the Chairman of FERC take the following two actions: develop a consistent approach for regularly reviewing expense information contained in RTO budgets and routinely review and assess the accuracy, completeness, and reasonableness of the financial information RTOs report to FERC in their Form No. 1 filings. To provide a foundation for FERC to evaluate the effectiveness of its decision to encourage the creation of RTOs and help Congress, industry stakeholders, and the public understand RTO performance and net benefits, we recommend the Chairman of FERC take the following two actions: work with RTOs, stakeholders, and other experts to develop standardized measures that track the performance of RTO operations and markets and report the performance results to Congress and the public annually, while also providing interpretation of (1) what the measures and reported performance communicate about the benefits of RTOs and, where appropriate, (2) changes that need to be made to address any performance concerns. We provided FERC a draft of this report for review and comment. In a letter dated August 28, 2008, we received written comments from the Chairman of FERC. These comments are reprinted in appendix IX. We also received technical comments, which we incorporated into the report as appropriate. In his letter, the Chairman generally agreed with our report and its recommendations. We commend FERC for its interest in addressing the concerns we raised. The Chairman also provided comments in response to each of the recommendations and outlined plans to address them. Specifically: Regarding our first recommendation, that FERC develop a consistent approach for regularly reviewing expense information contained in RTO budgets, FERC agreed to increase its efforts to review RTO budgets and the reasonableness of RTO costs, and the Chairman has directed FERC staff to evaluate possible approaches for doing so. Regarding our second recommendation, that FERC perform additional review of the financial information in Form No. 1 filings, FERC indicated that, in addition to the one audit it has already begun, it plans to perform periodic audits of the financial information in Form No. 1 filings in the future. Regarding our third and fourth recommendations, that FERC work with RTOs, stakeholders, and other experts to develop standardized measures that track the performance of RTO operations and markets and report on those measures to Congress and the public, the Chairman noted that FERC is considering appropriate procedures for developing such measures and how best to report them. Regarding reporting, the Chairman observed that RTO “State of the Market” annual reports may be a vehicle for providing data and additional information to the public on RTO performance. While we agree that these annual reports of data on RTOs could be helpful for providing the public with additional performance information, we urge the Commission to consider what role it can play in helping Congress, industry stakeholders, and the public interpret and evaluate data and other information from RTOs in order to draw conclusions about RTO performance and value. It is clear that electricity markets and RTO operations are complex. FERC’s expertise and independence make it well positioned to help Congress and others assess RTO performance and net benefits, and its oversight authority gives it the ability to use this information to encourage continued improvement. The Chairman also expressed uncertainty about whether annual evaluation of results and recommendations for change was feasible or cost-effective. We recognize that FERC must balance numerous responsibilities and that the extent of its evaluation of RTO performance may vary from year to year. However, we believe significant value could be realized from (1) providing Congress and others with a consistent, annual source of data for tracking the performance of RTOs and (2) ongoing analysis of performance information and consideration of how it could aid FERC in carrying out its RTO responsibilities. Finally, along with its general agreement with our recommendations, FERC provided two clarifying comments. The first clarifies FERC’s role in approving RTO procedures for planning transmission infrastructure, and we incorporated this comment into our report. In the second, FERC commented on a statement in our draft report’s conclusions that RTOs are in a position of greater public trust than utilities. FERC observes that all utilities have a position of public trust and that a number of utilities are responsible for administering transmission systems that are as large as or larger than those of some RTOs. We agree that all utilities carry out important activities in the public interest that necessitate vigilant regulatory oversight and acknowledge that a number of large utilities exist. However, we also recognize that FERC had a number of unique expectations for RTOs that it did not have for utilities, believing the creation of RTOs could lead to lighter regulation by FERC. For example, FERC expected RTOs to assist it in its oversight of the electricity industry through, among other things, their market monitoring activities and the stakeholder process in which market development and other issues are discussed and potentially resolved without resorting to FERC’s complaint process. It is for these reasons that we believe FERC should take certain regulatory steps specific to RTOs like those we recommend in our report—for example, evaluating RTOs using performance measures—in order to improve RTOs and educate the public on their performance. However, in response to FERC’s comments, we revised the report’s conclusions to emphasize the unique role of RTOs and avoid relative comparisons of trust between RTOs and utilities. 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 interested congressional committees; the Chairman of FERC; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web Site at http://www.gao.gov. If you or your offices 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 X. At the request of the Chairman and Ranking Member of the Senate Committee on Homeland Security and Governmental Affairs, we reviewed (1) Regional Transmission Organizations’ (RTO) key expenses and investments in property, plant, and equipment; (2) how RTOs and the Federal Energy Regulatory Commission (FERC) review RTO expenses and decisions that may affect electricity prices; and (3) the extent to which there is consensus about what benefits RTOs have provided. Our review focused on the six RTOs in FERC’s jurisdiction—California Independent System Operator (ISO), ISO New England, Midwest ISO, New York ISO, PJM Interconnection (PJM), and Southwest Power Pool. To determine the total expenses incurred by RTOs from 2002 to 2006, the most recent data available when we began our review, and their key investments in property, plant, and equipment, we reviewed independent public auditor reports over this period, as well as full-time-equivalent personnel and transmission volume as reported to us by the RTOs. We summarized RTO expense, personnel, and transmission volume and property, plant, and equipment balances by RTO, and calculated average salary and related benefits per full-time equivalent and total expenses per megawatt hour (MWh) from 2002 through 2006 for each RTO. Our analysis reflects total annual expenses as reported in the RTOs’ annual audited financial statements. We did not retroactively apply financial statement reclassifications to data from prior years. In addition, RTOs utilized differing billing methodologies, and consequently, the rates they charged to market participants may be different from the total expenses per MWh calculated in our analysis. To illustrate the total amount of investments in property, plant, and equipment as of December 31, 2006, we used total property, plant, and equipment in our analysis without reducing those amounts by accumulated depreciation. We also reviewed 2006 RTO FERC Form No. 1 filings, the most current available at the time of our audit, to determine the amount of RTO expenses attributable to transmission expenses and regional market expenses, as well as administrative and general expenses. Independent public auditor reports did not aggregate expenses by these categories. We adjusted all expense amounts for inflation utilizing 2007 as the base year. To determine how FERC and RTOs review RTO expenses and decisions and discuss other aspects of RTO costs and benefits, we collected general information, interviewed representatives from the six RTOs, and spoke to the ISO/RTO Council about how FERC and the RTOs review proposed budget expenses and consider how RTO decisions affect electricity prices. For two RTOs—ISO New England and Midwest ISO—we collected more in-depth information and interviewed stakeholders from each of the major stakeholder sectors. We selected these two RTOs because they are multistate and perform a breadth of functions and services, but also reflect geographical and historical differences. For example, ISO New England evolved from a power pool; Midwest ISO did not. We interviewed state agency officials from these RTO areas, including state regulatory agencies (such as the Connecticut Department of Public Utility Control, Illinois Commerce Commission, Indiana Utility Regulatory Commission, Maine Public Utilities Commission, and Massachusetts Department of Public Utilities), state consumer agencies (such as the Connecticut Office of Consumer Counsel and Maine Office of the Public Advocate), and state regulatory associations (such as the Organization of MISO States, National Association of Regulatory Utility Commissioners, and the New England Conference of Public Utility Commissioners). We also interviewed representatives from each of these RTOs’ stakeholder groups to understand how FERC and RTOs review RTO decisions and expenses. We interviewed officials from the North American Electric Reliability Corporation to understand their interaction with RTOs. We spoke with officials from FERC’s Office of Enforcement and Office of Energy Market Regulation and reviewed related documentation that outlined FERC’s steps to review RTO expenses for reasonableness and accuracy. We reviewed selected FERC rate proceedings to better understand the type of information provided to FERC about proposed RTO expenses and the analysis it performs. We also considered FERC’s process for reviewing actual expenses as reported in FERC Form No. 1 filings and reviewed FERC audits of RTOs conducted in 2004 which focused primarily on governance. While we generally reviewed FERC’s oversight of RTOs, we did not perform an in-depth analysis of FERC’s review of specific RTO decisions. Finally, to address the extent to which there is consensus about what benefits RTOs have provided, we interviewed FERC officials and reviewed related documentation, including FERC’s 1999 prospective assessment of RTO expected benefits. We interviewed several experts in the field of electricity restructuring to discuss their opinions on the benefits and costs of RTOs and their assessment of the adequacy of FERC’s analysis of RTOs to date. These included experts from the Analysis Group, Cornell University, Northeastern University, Penn State University, the University of California Berkeley, and Vermont Law School. We chose experts affiliated with academic institutions and research firms with extensive knowledge of electricity restructuring and RTOs. We selected experts with a balanced range of views about the economic benefits of RTOs. We also interviewed a number of industry participants, including representatives from electricity industry associations and consumer organizations, such as the American Public Power Association, Compete Coalition, Consumer Federation of America, Electric Power Supply Association, Edison Electric Institute, Electricity Consumers Resource Council, Industrial Energy Consumers of America, National Rural Electric Cooperative Association, and Public Citizen to more fully understand where there was agreement and disagreement about the costs and benefits of RTOs. We reviewed reports and analyses from these and other industry participants that discussed the costs and benefits of RTOs. We also reviewed expert studies on the economic effects of restructuring and competition in the electricity industry and electricity consumers. In deciding which studies to include in our summary table, we selected some studies that were sponsored by both advocates and critics of the existing RTOs, as well as studies that are more academic in nature. Some of these studies specifically addressed the impact of RTOs on electricity costs and prices, while others addressed the impacts of restructuring and competition more generally, without specifically isolating the impact of RTOs. We conducted basic analyses of data on electricity prices, intensity of the use of generation resources (capacity factors), and type of generation resources (by fuel use). For the analysis of prices and capacity factors, we divided states into four categories: (1) original RTO states— states joining an RTO in 1999 or earlier and historically in a power pool, (2) new RTO states—states joining an RTO region after 1999, (3) non-RTO states—states outside RTO regions, and (4) California. The original RTO states category included Connecticut, Delaware, Massachusetts, Maryland, Maine, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and the District of Columbia. The new RTO states category included Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, North Dakota, Ohio, Oklahoma, Virginia, Wisconsin and West Virginia. The non-RTO states category included Alaska, Alabama, Arkansas, Arizona, Colorado, Florida, Georgia, Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, North Carolina, Nebraska, New Mexico, Nevada, Oregon, South Carolina, South Dakota, Tennessee, Utah, Washington and Wyoming. We placed California in a separate category because its electricity industry went through a turbulent restructuring process during part of the time period that we analyzed. We did not include Texas in our analysis, because most of the state constitutes a separate grid from the two other main grids in the United States and is largely unregulated by FERC. For the other three groupings, states that were partially in an RTO region were considered part of the region if electricity for most major cities was provided by a utility that participated in an RTO. Our analysis was based on electricity data obtained from the Energy Information Administration. For the price analysis, we used electric power retail sales and electric revenues data. We developed average price estimates by aggregating state-level data, dividing revenues by sales, and adjusting for inflation using the gross domestic product price index. We focus on the prices in the industrial sector because the retail portion of its electricity prices is typically smaller than the retail portion of residential and commercial electric prices. RTOs operate wholesale markets and do not determine the retail portion of electric prices. We also conducted a specific analysis of relative industrial electricity prices. A description of that analysis and our methodology is presented in Appendix VII. For the analysis of the intensity of the use of generation resources, we calculated capacity factors from Energy Information Administration state- level data on electric power generation capacity and actual generation. We also interviewed representatives from the Energy Information Administration to understand the type of data that agency collects related to estimating the benefits and costs RTOs. We conducted this performance audit from October 2007 to September 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We provided a draft of this report to FERC for its review. FERC’s comments are reprinted in Appendix IX. Appendix II: RTO Characteristics and Functions Required by FERC Order 2000 RTOs must be independent of control by any market participant and have the authority to propose rates, terms, and conditions of transmission services provided over the facilities they operate. An RTO’s employees must not have financial interest in any market participant. RTOs must serve an appropriate region of sufficient scope to maintain reliability, support efficient and nondiscriminatory power markets, and carry out their other functions. RTOs must have operational authority for all transmission facilities under their control. RTOs must have exclusive authority for maintaining the short-term reliability of the grid they operate. RTOs must administer their own transmission tariff—an agreement that outlines the terms and conditions of transmission service—and employ a transmission pricing system that promotes efficient use and expansion of transmission and generation facilities. RTOs must ensure the development and operation of market mechanisms to manage transmission congestion. These mechanisms should accommodate broad participation by all market participants and provide transmission customers with efficient price signals. RTOs must develop and implement procedures to address engineering and reliability problems caused by parallel path flows—a term that refers to electricity flowing over all possible transmission lines regardless of who owns the lines and what transmission contracts were agreed to. According to FERC, prior to RTOs many transmission owners found their grids overloaded by the actions of others because of this engineering reality. Since they were unable to determine the responsible party, these owners had to curtail their own use of their grid. RTOs must serve as the provider of last resort for ancillary services—services to maintain the reliable operation of the transmission system—and have the authority to decide the minimum required amounts of each ancillary service. RTOs must also ensure that transmission customers have access to a real-time balancing market. RTOs must be the single administrator for the Open Access Same Time Information System (OASIS) site—an Internet-based electronic communication and reservation system through which transmission providers provide information about the availability and price of transmission and ancillary services and customers procure those services. Furthermore, RTOs must independently calculate total and available transmission capacity—measures of the amount of electric power that the transmission system is capable of transferring from one point in the grid to another. RTOs must provide for objective monitoring of markets administered to identify market design flaws, market power abuses, and opportunities for efficiency improvements. RTOs must be responsible for planning and directing necessary transmission expansions, additions, and upgrades that will enable it to provide efficient, reliable, and nondiscriminatory service. In doing so, they must coordinate such efforts with appropriate state authorities and must encourage market-driven operating and investment actions for preventing and relieving congestion. RTOs must ensure the integration of reliability practices across regions. Appendix V: Inflation-Adjusted RTO 2006 Expenses Reported on FERC Form No. 1 (Dollars in thousands) Appendix VI: Investment in Property, Plant, and Equipment for RTOs as of December 31, 2006 (Dollars in thousands) As part of our effort to examine trends in state-level prices for industrial customers, we created indexes of prices at the state level. The indexes reflect the average of electricity prices paid by industrial customers, divided by the comparable national average price. As such, a state with an index greater than 1.0 would indicate that the state price was greater than the national average and vice versa. Such an approach focuses attention on how prices compare to the national average and how the different states’ standing relative to the national average changes over time. This approach also avoids the necessity of deciding which deflator is most appropriate for adjusting nominal electricity prices for inflation. To examine the trends in these indexes for the different regions of the country according to their RTO affiliations, we created weighted average indexes consistent with our RTO classifications described in appendix I. We chose to include Texas in this analysis for purposes of comparison. We obtained a weighted average by multiplying each state’s index for a given year by the share of its retail sales of electricity to industrial customers relative to its group’s total, and then summing up the resulting multiples for all the states in a given group. The results of this effort are reasonably consistent with the results of the basic price analysis reflected in figure 10 of the report. This analysis provides additional insights into price trends over the period of analysis. For example, it shows that from about 1997 through 2002, the original and new RTO states witnessed relative price decreases compared to the non-RTO group. Further, it appears that from 2002 through the most recent data in 2007, the original RTO states also witnessed relative price increases that effectively erased the decline in prices from 1997 through 2002. In this analysis, these prices (original RTO states) in 2007 are higher, in a relative sense, than they were prior to restructuring in 1997. Industrial prices in Texas, generally not overseen by FERC, have witnessed notable relative price increases since the introduction of restructuring. It is important to note that this analysis provides a look at price trends and does not provide any indication of RTOs causing these trends or even influencing them. Notably, both the original RTO states and Texas are highly reliant on natural gas, the prices of which have increased dramatically in recent years. Restructuring and competition in New England resulted in relatively small savings in the capital and operating costs of wholesale electricity. No specific analysis of the impact of wholesale cost savings on consumer prices. Sponsored by an electricity- generating company. Estimated that restructuring and competition resulted in an expected 2 percent savings in wholesale electricity costs for New England from 2002 to 2018. Net benefits estimate based on comparing model simulations of capital and operating costs of the restructured electric industry in New England with simulations of investments and operating costs in a “counterfactual” case with more traditional regulation and without industry restructuring. Attributed very significant benefits to greater nuclear plant efficiency from restructuring and competition. Restructuring has been beneficial to companies that restructured, but the evidence regarding the impact of RTOs on consumers is far less clear. Constructed an economic and statistical model to study the impact of various elements of retail and wholesale restructuring on the price-cost markup of electricity-generating companies. Asserted that restructuring was beneficial to companies that restructured, based on the conclusion that 2 to 3 cents per kilowatt-hour of the difference between prices and costs was explained by restructuring rather than increases in fuel prices. The study finds no evidence that RTO formation or industry restructuring explains price differences among regions of the country. Compared actual average retail industrial electricity prices with model-predicted prices in states classified as restructured and nonrestructured in 2001-2003. Concluded that prices were lower than predicted in two- thirds of restructured states and in about one-quarter of nonrestructured states. Concluded also that regulatory reform at neither the retail nor wholesale levels (RTO participation) was a significant driver of the difference in price trends. Consumers in the Eastern Interconnect region (entire United States except 11 Western states and Texas) benefited from large savings in the cost of utility wholesale purchases of electric power. Commissioned by private energy companies. Concluded that wholesale competition in the electricity industry in the Eastern Interconnect region resulted in large net economic benefits and that RTOs contributed significantly to the realization of these benefits. Used a computer model to simulate wholesale electricity production costs for 1999-2003 under two scenarios: simulating (1) actual restructuring events over 1999-2003 and (2) the absence of procompetitive FERC reform over the same period. Concluded that procompetitive reforms resulted in about $15 billion net savings. Savings largely driven by dramatically improved efficiencies of power plants. Also specifically estimated large net economic benefits from expansion of the PJM Interconnect in 2004, supporting the conclusion that RTO formation and operations played an important role in realizing the benefits of competition. Average retail prices are slightly lower per megawatt hour for PJM and New York ISO residential consumers than if coordinated markets had not been implemented. Commissioned by PJM. Used several statistical economic models to isolate the impact of electricity restructuring from several other variables that affect electricity prices. All model specifications indicated somewhat lower prices associated with restructuring. Concluded that while current RTO markets are imperfect, they have provided material benefits to consumers. LMP markets in RTOs have not delivered benefits to consumers in ISO New England and PJM; resource owners have reaped windfall profits. Commissioned by the American Public Power Association. Concluded that location-based pricing of RTO markets like PJM and ISO New England represented the best approach available for operating large, interconnected power pools efficiently and reliably. Also concluded that the benefits of this form of pricing have been limited because markets are based on bids rather than costs and lack perfect competition. Further, this pricing mechanism in the PJM and ISO New England markets resulted in windfall profits for resource owners without benefits to consumers. Found no evidence of this form of pricing improving the pattern of investments in the industry. Large savings in wholesale electricity costs in New England and in ratepayers’ bills, and other benefits including service reliability, lower emissions, and greater demand response. Summarized unpublished ISO New England analyses that estimated RTO benefits in different aspects of electricity service in New England. Estimated average annual wholesale market savings of about $850 million from 2000 to 2006, equivalent to an approximate net monthly savings of $4 for the average New England ratepayer. Quantified other RTO benefits, such as lower emissions of certain pollutants. Concluded that ISO New England had a significant role in enhancing the reliability and efficiency of the region’s electricity industry and can help achieve the region’s environmental goals by enabling the interconnection of low- carbon-emitting resources, benefit the region’s electricity consumers, improve planning, and more. Lower prices for residential and industrial consumers. Constructed an economic and statistical model to study the effects of retail and wholesale competition on electricity prices for residential and industrial consumers, using the share of electricity generated by unregulated generators in a state as a proxy measure for the effect of wholesale restructuring. Concluded that greater activity in a state’s wholesale electricity market is associated with lower prices for residential and industrial consumers, supporting the study’s view that RTOs improved industry performance. Found no reliable or convincing evidence that consumers are better off as a result of restructuring the U.S. electric power industry. No data analysis conducted (review of other studies) Commissioned by the American Public Power Association, reviewed 12 studies on the economic impact of restructuring in the U.S. electricity industry. Identified serious weaknesses in all 12, concluding that the methodologies consistently fell short of the standards for good economic research. Most also failed to fully address the effects of restructuring. Large net economic benefits in the Midwest ISO region in various aspects of electricity services; no specific analysis of how benefits affect consumer prices. Size, duration, cost, and probability of electricity outages; measures of the use of electricity generation capacity and of the cost of reserve generation capacity; RTO administrative and operating costs; etc. Summarized Midwest ISO and consulting firm studies that used different approaches to estimating the economic impact of Midwest ISO operations in several areas. Concluded that $555 million to $850 million in annual net economic benefits for the region resulted from more efficient use of the industry’s resources (generation and transmission assets), more reliable service, and improved planning and investment patterns. Pointed to unquantified benefits related to greater price transparency, regulatory compliance, and improved opportunities for demand response and renewable resources. No conclusions on whether RTOs yielded net economic benefits or whether retail consumers were benefiting from RTOs. Prepared for the National Rural Electric Cooperative Association and intended to provide insight into RTO performance in various areas. Stated that many industry stakeholders were concerned that no single reference document was available for RTO statistics to objectively analyze RTO and RTO market performance. Consolidated data from different sources to make performance comparisons across RTOs. Mentioned areas of strength of individual RTOs and expressed concern, particularly about market power, demand response, and investments. Restructuring electricity markets at least so far has resulted in no discernible benefits to consumers of electricity. Commissioned by the Virginia State Corporation Commission. Addressed retail and wholesale restructuring. Recognized that RTOs’ “marginal cost” pricing is needed for an efficient market under competitive conditions, but expressed concern that RTO markets were not sufficiently competitive because consumers had very limited ability to respond to high prices by reducing demand and because of evidence of market power on the supply side. Restructuring and competition resulted in significant reductions in the prices consumers pay for electricity. Used a comparison of prices for 1997 and 2002, assuming that prices were lower in 2002 due to a large extent to restructuring. Estimated that PJM electricity consumers saved about $3.2 billion in 2002 from restructuring, equivalent to about 15 percent of their electricity bills that year. For comparison, the 2007 average retail price of electricity was about 9 cents per kilowatt-hour (see fig. 9). Blumsack, Lave, and Apt, Electricity Prices (2008), p. 24: “Overall, simply joining an RTO has had little effect on price-cost markups, although the combination of RTO membership and retail competition appears to dampen the increase in price-cost margins.” In addition to the individual above Jon Ludwigson, Assistant Director; Pedro Almoguera; Dan Egan; Philip Farah; N’Kenge Gibson; Paige Gilbreath; Randy Jones; Jennifer Leone; Ying Long; Alison O’Neill; Glenn Slocum; Barbara Timmerman; Walter Vance; and George Warnock provided significant contributions. | In 1999, as a part of federal efforts to restructure the electricity industry, the Federal Energy Regulatory Commission (FERC) began encouraging the voluntary formation of Regional Transmission Organizations (RTO)--independent entities to manage regional networks of electric transmission lines. FERC oversees six RTOs that cover part or all of 35 states and D.C. and serve over half of U.S. electricity demand. As electricity prices increase, stakeholders-- organizations and individuals with financial and regulatory interest in the electricity industry--have voiced concerns about RTO benefits and how RTO expenses and decisions influence electricity prices. GAO was asked to review (1) RTO expenses and key investments in property, plant, and equipment from 2002 to 2006, the most current data available; (2) how RTOs and FERC review RTO expenses and decisions that may affect electricity prices; and (3) the extent to which there is consensus about RTO benefits. To do so, GAO reviewed documentation and data and spoke with FERC officials and experts. RTO expenses and investments in property, plant, and equipment vary, depending on the size of the RTO and its functions. Expenses for the six RTOs FERC oversees totaled $4.8 billion from 2002 to 2006, and property, plant, and equipment investments totaled $1.6 billion as of December 2006. RTOs and FERC rely on stakeholder participation to identify and resolve concerns about RTO expenses and decisions that affect electricity prices, such as decisions about reliability and whether to develop markets for electricity and other services. The stakeholders GAO spoke with in two RTO regions value the opportunity for input but have concerns about the resources and information required to participate. Moreover, although regular review of RTO budgets could help FERC with its responsibility to ensure RTO rates remain just and reasonable or determine if a new rate proceeding is needed, FERC's review of RTO budgets varies. Furthermore, while FERC requires RTOs to report actual expenses annually, it does not regularly review this information for accuracy or reasonableness and is at risk of using and providing to the public inaccurate and incomplete information. FERC officials, industry participants, and experts lack consensus on whether RTOs have brought benefits to their regions. Many agree that RTOs have improved the management of the transmission grid and improved generator access to it; however, there is no consensus about whether RTO markets provide benefits to consumers or how they have influenced consumer electricity prices. FERC officials believe RTOs have resulted in benefits; however, FERC has not conducted an empirical analysis of RTO performance or developed a comprehensive set of publicly available, standardized measures to evaluate such performance. Without such measures, FERC will remain unable to demonstrate the extent to which RTOs provide consumers and others with benefits--information that could aid FERC in its evaluation of its decision to encourage the creation of RTOs and help address divisions about which benefits RTOs have provided. |
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Power plant developers consider many factors when determining where to locate a power plant, including the availability of fuel, water, and land; access to electrical transmission lines; electricity demand; and potential environmental issues. Often, developers will consider several sites that meet their minimum requirements, but narrow their selection based on economic considerations such as the cost of accessing fuel, water, or transmission lines, or the costs of addressing environmental factors at each specific site. One key requirement for thermoelectric power plants is access to water. Thermoelectric power plants use a heat source to make steam, which is used to turn a turbine connected to a generator that makes electricity. As shown in figure 1, the water used to make steam (boiler water) circulates in a closed loop. This means the same water used to make steam is also converted back to liquid water —referred to as condensing—in a device called a condenser and, finally, moved back to the heat source to again make steam. In typical thermoelectric plants, water from a separate source, known as cooling water, flows through the condenser to cool and condense the steam in the closed loop after it has turned the turbine. Consideration of water availability during the power plant siting process can pose different challenges in different parts of the country because precipitation and, relatedly, water availability varies substantially across the United States. Figure 2 shows the total amount of freshwater withdrawn in the United States as a percentage of available precipitation. Areas where the percentage is greater than 100—where more water is withdrawn than locally renewed through precipitation—are indicative of basins using other water sources transported by natural rivers and manmade flow structures, or may indicate unsustainable groundwater use. Power plants can use various types of water for cooling—such as freshwater or saline water—and different water sources, including surface water, groundwater, and alternative water sources. An example of alternative water sources is reclaimed water such as treated effluent from sewage treatment plants. To make siting decisions, power plant developers typically consider the water sources that are available and lea costly to use. Fresh surface water is the most common water source for power plants nationally, as shown in table 1. Power plant developers must also consider what cooling technologies they plan to use in the plant. There are four general types of cooling technologies. Traditional cooling technologies that have been used for decades include once-through and wet recirculating cooling systems. Advanced cooling technologies that have focused on reducing the amount of cooling water used are relatively newer in the United States and include dry cooling and hybrid cooling. Specifically: Once-through cooling systems. In once-through cooling systems, large amounts of cooling water are withdrawn from a water body such as a la river, or ocean, and used in the cooling loop. As shown in figure 3, the cooling water passes through the tubes of a condenser. As steam in the boiler water loop exits the turbine, it passes over the condenser tubes. This contact with the condenser tubes cools and condenses the steam back into boiler water for reuse. After the cooling water passes through the condenser tubes, it is discharged back into the water body warmer than it was when it was withdrawn. Once-through cooling systems withdraw a significant amount of water but directly consume almost no water. However, because the water discharged back into the wate warmer, experts believe that once-through systems may increase evaporation from the receiving water body. Furthermore, because of r body is concerns about the harm withdrawal for once-through systems can have on aquatic life—when aquatic organisms are pulled into cooling systems, trapped against water intake screens, or their habitat is adversely affected by warm water discharges—these systems are rarely installed at new plants. Although a number of federal agencies collect data on water, two collect key data that are used to analyze the impacts of thermoelectric power plants and water availability: USGS and EIA. USGS’s mission is to provide reliable scientific information to manage water, energy and other resources, among other things. USGS collects surface water and groundwater availability data through a national network of stream gauges and groundwater monitoring stations. USGS currently monitors surface and groundwater availability with approximately 7,500 streamflow gauges and 22,000 groundwater monitoring stations located throughout the United States. USGS compiles data and distributes a report every 5 years on national water use that describes how various sectors, such as irrigation, mining, and thermoelectric power plants, use water. USGS data related to thermoelectric power plants include (1) water withdrawal data at the state and county level organized by cooling technology—once-through and wet recirculating; (2) water source—surface or groundwater; and (3) whether water used was fresh or saline. USGS compiles water use data from multiple sources, including state water regulatory officials, power plant operators, and EIA. If data are not available for a particular state or use, USGS makes estimates. EIA’s mission is to provide policy-neutral data, forecasts, and analyses to promote sound policy making, efficient markets, and public understanding regarding energy and its interaction with the economy and the environment. In carrying out this mission, EIA collects a variety of energy and electricity data nationwide, about topics such as energy supply and demand. For certain plants producing 100 megawatts or more of electricity, EIA collects data on water withdrawals, consumption, discharge, as well as some information on water source and cooling technology type. EIA annually collects water use data directly from power plants by using a survey. The variety of state water laws relating to the allocation and use of surface water can generally be traced to two basic doctrines the riparian doctrine, often used in the eastern United States, and the prior appropriation doctrine, often used in the western United States. Under the riparian doctrine, water rights are linked to land ownership— owners of land bordering a waterway have a right to use the water that flows past the land for any reasonable purpose. In general, water rights in riparian states may not be bought or sold. Landowners may, at any time, use water flowing past the land, even if they have never done so before. All landowners have an equal right to use the water, and no one gains a greater right through prior use. In some riparian states, water use is closely tracked by requiring users to apply for permits to withdraw water. In other states, where water has traditionally not been scarce, water use is not closely tracked. When there is a water shortage, water users share the shortage in proportion to their rights, or the amount they are permitted to withdraw, to the extent that it is possible to determine. Under the prior appropriation doctrine, water rights are not linked with land ownership. Instead, water rights are property rights that can be owned independent of land and are linked to priority and beneficial water use. A water right establishes a property right claim to a specific amount of water—called an allotment. Because water rights are not tied to land, water rights can be bought and sold without any ownership of land, although the rights to water may have specific geographic limitations. For example, a water right generally provides the ability to use water in a specific river basin taken from a specific area of the river. Water rights are also prioritized—water rights established first generally have seniority for the use of water over water rights established later—commonly described as “first in time, first in right.” As a result, once established, water rights retain their priority for as long as they remain valid. For example, a water right to 100 acre feet of Colorado River water established in 1885 would retain that 1885 priority and allotment, even if the right was sold by the original party who established it. Water rights also must be exercised in order to remain valid, meaning rights holders must put the water to beneficial use or their right can be deemed abandoned and terminated— commonly referred to as “use it or lose it.” When there is a water shortage in prior appropriation states, shortages fall on those who last obtained a legal right to use the water. As a result, a shortage can result in junior water rights holders losing all access to water, while senior rights holders have access to their entire allotment. For some states, the legal framework for groundwater is similar to that of surface water as they use variants of either the riparian or prior appropriation doctrine to allocate water rights. However, in other states, the allocation of groundwater rights follows other legal doctrines, including the rule of capture doctrine and the doctrine of reasonable use. Under the rule of capture doctrine, landowners have the right to all the water they can capture under their land for any use, regardless of the effect on other water users. The doctrine of reasonable use similarly affords landowners the right to water underneath their land, provided the use is restricted to an amount necessary for reasonable use. In some cases, permits may be required prior to use and additional regulation may occur if a groundwater source is interconnected with surface water. A number of state agencies may be involved in considering or approving applications to build power plants or to use water in power plants. In some states, a centralized agency considers applications to build new power plants. In other states, applications may be filed with multiple state agencies. State water regulators issue water permits for power plants and other sectors to regulate water use and ensure compliance with relevant state laws and regulations. Public Utility Commissions, or the equivalent, may also have a role in authorizing the development of a power plant. In many states where retail electricity rates are regulated, these commissions are primarily responsible for approving the rates (or prices) electric utilities charge their customers and ensuring they are reasonable. As part of approving rates, these commissions approve utility investments into such things as new power plants and, as a result, may consider whether specific power plant design and cooling technologies are reasonable. Based on figures from EIA’s 2009 Annual Energy Outlook, thermoelectric power plant generating capacity will increase by about 15 percent between 2006 and 2030. Depending on which cooling approaches are used, such an increase could further strain water resources. A variety of additional factors may also affect the availability of water for electricity generation and other uses, as well as the amount of water used to produce electricity. Some studies indicate that climate change will result in changes in local temperatures and more seasonal variations, both of which could cause increased levels of water consumption from thermoelectric power plant generation. Climate change may also result in changes in local precipitation and water availability, as well as more and longer droughts in some areas of the country. To the extent that this occurs, power plant operators may need to reduce the use of water for power plant cooling. In addition, some technologies aimed at reducing greenhouse gas emissions, such as carbon capture technologies, may require additional water. The combination of environmental laws, climate change, and the inclusion of new water intensive air emission technologies may impact water availability and require power plants operators to reduce water use in the future. In addition, since the water inlet structures used at once-through cooling plants can either trap or draw in fish and other aquatic life— referred to as impingement and entrainment—there is increased pressure to reduce the use of once-through cooling at existing plants. Advanced cooling technologies and alternative water sources can reduce freshwater use by thermoelectric power plants, leading to a number of benefits for plant developers; however, incorporating each of these options for reducing freshwater use into thermoelectric power plants also poses certain drawbacks. Benefits of reducing freshwater use may include social and environmental benefits, minimizing water-related costs, as well as increasing a developer’s flexibility in determining where to locate a new plant. On the other hand, drawbacks to using advanced cooling technologies may include potentially lower net electricity output, higher costs, and other trade-offs. Similarly, the use of alternative water sources, such as treated effluent or groundwater unsuitable for drinking or irrigation, may have adverse effects on cooling equipment, pose regulatory challenges, or be located too far from a proposed plant location to be a viable option. Power plant developers must weigh the trade-offs of these drawbacks with the benefits of reduced freshwater use when determining what approaches to pursue, and must consider both the economic costs over a plant’s lifetime and the regulatory climate. For example, in a water- scarce region of the country where water costs are high and there is significant regulatory scrutiny of water use, a power plant developer may opt for a water-saving technology despite its drawbacks. Advanced cooling technologies under development and in limited commercial use and alternative water sources can reduce the amount of freshwater needed by plants, resulting in a number of benefits to both the environment and plant developers. As shown in table 2, dry cooling can eliminate nearly all the water withdrawn and consumed for power plant cooling. Hybrid cooling systems, depending on design, can reduce water use— generally to a level between that of a wet recirculating system with cooling towers and a dry cooling system. According to the Electric Power Research Institute, hybrid systems are typically designed to use 20-80 percent of the water used for a wet recirculating system with cooling towers. In addition to using advanced cooling technologies, power plant operators can reduce freshwater use by utilizing water sources other than freshwater. Alternative water sources include treated effluent from sewage treatment plants; groundwater that is unsuitable for drinking or irrigation because it is high in salts or other impurities; sea water; industrial water and water generated when extracting minerals like oil, gas, and coal. For example, the oil and gas production process can generate wastewater, which is the subject of research as a possible source of cooling water for power plants. Use of alternative water sources by power plants is increasing in some areas, and two power plant developers we spoke with said they routinely consider alternative water sources when planning new power plants, particularly in areas where water has become scarce, tightly regulated, or both. A 2007 report by the DOE’s Argonne National Laboratory identified at least 50 power plants in the United States that use reclaimed water for cooling and other purposes, with Florida and California having the largest number of plants using reclaimed water. According to the report, the use of reclaimed water at power plants has become more common, with 38 percent of the plants using reclaimed water doing so after 2000. One example of a power plant using an alternative to freshwater is Palo Verde, located near Phoenix, Arizona—the largest U.S. nuclear power plant, with a capacity of around 4,000 megawatts. Palo Verde uses approximately 20 billion gallons of treated effluent annually from treatment plants that serve several area municipalities, comprising over 1.5 million people. Reducing the amount of freshwater needed for cooling leads to a number of social and environmental benefits and may benefit developers by lowering water-related costs and providing more flexibility in choosing a location for a new plant, among other things. Reducing the amount of freshwater used by power plants through the use of advanced cooling technologies and alternative water sources has the potential to produce a number of social and environmental benefits. For example, limiting freshwater use may reduce the impact to the environment associated with withdrawals, consumption, and discharge. Freshwater is in high demand across the United States. Reducing freshwater withdrawals and consumption by the electricity sector makes this limited resource more available for additional electricity production or competing uses, such as public water supplies or wildlife habitat. Furthermore, eliminating water use for cooling entirely, such as by using dry cooling, could minimize or eliminate the water discharges from power plants, a possible source of heat and pollutants to receiving water bodies, although regulations limit the amount of heat and certain pollutants that may be discharged into water bodies. By eliminating or minimizing the use of freshwater for cooling, power plant developers may reduce some water-related costs, including the costs associated with acquiring, transporting, treating, and disposing of water. Depending on state water laws, a number of costs may be associated with acquiring water—purchasing a right to use water, buying land with a water source on or underneath it, or buying a quantity of freshwater from a municipal or other source. Eliminating the need to purchase water for cooling by using dry cooling could reduce these water-related expenses. Using an alternative water source, if less expensive than freshwater, could reduce the costs of acquiring water, although treatment costs may be higher. Power plant developers and an expert from a national laboratory told us the costs of acquiring an alternative water source are sometimes less than freshwater, but vary widely depending on its quality and location. In addition to lowering the costs associated with acquiring water, if water use for cooling is eliminated entirely, plant developers may eliminate the need for a pipeline to transport the water, as well as minimize costs associated with treating the water. Water-related costs are one of several costs that power plant developers will consider when evaluating alternatives to freshwater. Since the cost of freshwater may rise as demand for freshwater increases, a developer’s ability to minimize power plant freshwater use could become increasingly valuable over time. Minimizing or eliminating the use of freshwater may offer a plant developer increased flexibility in determining where to locate a power plant. According to power plant developers we spoke with, siting a power plant involves balancing factors such as access to fuel, including natural gas pipelines, and access to large transmission lines that carry the electricity produced to areas of customer demand. Some explained that finding a site that meets these factors and also has access to freshwater can be challenging. Power plant developers we spoke with said options such as dry cooling and alternative water sources have offered their companies the flexibility to choose sites without freshwater, but with good access to fuel and transmission. According to power plant developers and an expert from a national laboratory we spoke with, eliminating or lowering freshwater use can lead to other benefits, such as minimizing regulatory hurdles like the need to acquire certain water permits. Furthermore, using a nonfreshwater source may be advantageous in areas with more regulatory scrutiny of or public opposition to freshwater use. Despite the benefits associated with the lower freshwater requirements of advanced cooling technologies, these technologies have a number of drawbacks related to electricity production and costs that power plant developers will have to consider during their decisionmaking process. Despite the many benefits advanced cooling technologies offer, both dry cooling and hybrid cooling technologies may reduce a plant’s net energy production to a greater extent than traditional cooling systems—referred to as an “energy penalty.” Energy penalties result in less electricity available outside the plant, which can affect plant revenues, and making up for the loss of this electricity by generating it elsewhere can result in increases in water use, fuel consumption, and air emissions. Energy penalties result from (1) energy consumed to run cooling system equipment, such as fans and pumps, and (2) lower plant operating efficiency—measured as electricity production per unit of fuel—in hot weather due to lower cooling system performance. Specifically, energy penalties include: Energy needed for cooling system equipment. Cooling systems, like many systems in a power plant, use electricity produced at the plant to operate, which results in less electricity available for sale. According to experts we spoke with, because dry cooling systems and hybrid cooling systems rely on air flowing through a condenser, energy is needed to run fans that provide air flow, and the amount of energy needed to run cooling equipment will depend on such factors as system design, season, and region. A 2001 EPA study estimated that for a combined cycle plant, energy requirements to operate a once-through system (pumps) are 0.15 percent of plant output, 0.39 percent of plant output for a wet recirculating system with cooling towers (pumps and fans), and 0.81 percent of plant output for a dry cooled system (fans). Plant operating efficiency and cooling system performance. Plants using a dry cooling component, whether entirely dry cooled or in a hybrid cooled configuration, may face reduced operating efficiency under certain conditions. A power plant’s operating efficiency is affected by the performance of the cooling system, among other things, and power plants with systems that cool more effectively produce electricity more efficiently. A cooling system’s effectiveness is influenced both by the design of the cooling system and ambient conditions that determine the temperature of that system’s cooling medium—water in once-through and wet recirculating systems and air in dry cooling systems. In general, the effectiveness of a cooling system decreases as the temperature of the cooling medium increases, since a warmer medium can absorb less heat from the steam. Once-through systems cool steam using water being withdrawn from the river, lake, or ocean. Wet recirculating systems with cooling towers, on the other hand, use the process of evaporation to cool the steam to a temperature that approaches the “wet-bulb temperature”— an alternate measure of temperature that incorporates both the ambient air temperature and relative humidity. In contrast, dry cooled systems transfer heat only to the ambient air, without evaporation. As a result, dry cooled systems can cool steam only to a temperature that approaches the “dry-bulb temperature”—the measure of ambient air temperature measured by a standard thermometer and with which most people are familiar. In general, once-through systems tend to cool most effectively because the temperature of the body of water from which cooling water is drawn is, on average, lower than the wet- or dry-bulb temperature. Moreover, wet-bulb temperatures are generally lower than dry-bulb temperatures, often making recirculating systems more effective at cooling than dry cooled systems. Further, according to one report that we reviewed, greater fluctuations in dry-bulb temperatures seasonally and throughout the day can make dry cooled systems harder to design. Dry bulb temperatures can be especially high in hot, dry parts of the country, such as the Southwest, leading to significant plant efficiency losses during periods of high temperatures, particularly during the summer. According to experts and power plant developers we spoke with, plant efficiencies may witness smaller reductions during other parts of the year when temperatures are lower or in cooler climates. Nevertheless, in practice, lower cooling system performance can result in reduced plant net electricity output or greater fuel use if more fuel is burned to produce electricity to offset efficiency losses. Plant developers can take steps to reduce efficiency losses such as by installing a larger dry cooling system with additional cooling capability, but such a system will result in higher capital costs. A plant’s total energy penalty will be a combination of both effects described—energy needed for cooling system equipment and the impact of cooling system performance on plant operating efficiency. Energy penalties may result in lost revenue for the plant due to the net loss in electricity produced for a given unit of fuel, especially during the summer when electricity demand and prices are often the highest. Energy penalties may also affect the price consumers pay for electricity in a regulated market, if the cost of the additional fuel needed to produce lost electricity is passed on to consumers by regulators. Finally, energy penalties may affect emissions of pollutants and carbon dioxide if lost output is made up for by an emissions producing power plant, such as a coal- or natural gas- fueled power plant. This is because additional fuel is burned to produce electricity that offsets what was lost as a result of the energy penalty, and, thus, additional carbon dioxide and other pollutants are released. Recent studies comparing total energy penalties between cooling systems have used differing methodologies to estimate energy penalties and have reached varying conclusions. For example, a 2001 EPA study estimates the national average, mean annual energy penalties—lower electricity output—for plants operating at two-thirds capacity with dry cooling to be larger than those with wet recirculating systems with cooling towers. In this study, EPA estimated penalties of 1.7 percent lower output for a combined cycle plant with a dry system compared to a wet recirculating system with a cooling tower, and 6.9 percent lower output for a fossil fueled plant run fully on steam, such as a coal plant. Similarly, a separate study conducted by two DOE national labs in 2002 estimated larger annual energy penalties for hypothetical 400 megawatt coal plants in multiple regions of the country retrofitted to dry cooling—these penalties ranged between 3 to 7 percent lower output on average for a plant retrofitted with a dry cooled system compared to a plant retrofitted with a wet recirculating system with a cooling tower. On the hottest 1 percent of temperature conditions during the year, this energy penalty rose to between 6 and 10 percent lower output for plants retrofitted to dry cooling compared with those retrofitted to a wet recirculating system with cooling towers. However, some experts we spoke with told us energy penalties are higher in retrofitted plants than when a dry cooled system is designed according to the unique specifications of a newly built plant. A 2006 study conducted for the California Energy Commission estimated electricity output and other characteristics for new, theoretical combined cycle natural gas plants in four climatic zones of California using different cooling systems. The study found that dry cooling systems result in significant water savings, but that plants using wet cooling systems generally experience higher annual net electricity output, as shown in table 3, and lower fuel consumption. Furthermore, while the study estimates that plant capacity to produce electricity is limited on hot days for both types of cooling systems, the hot day capacity of the dry cooled plant to produce electricity is up to 6 percent lower than the wet recirculating plant with cooling tower. Power plant developers can take steps to address the energy penalties associated with dry cooling technology by designing their plants with larger dry cooled systems capable of performing better during periods of high ambient temperatures. Alternatively, they can use a hybrid technology that supplements the dry system with a wet recirculating system with a cooling tower during the hottest times of the year. However, in making this decision, developers must weigh the trade-offs between the costs associated with building and operating a larger dry cooled system or a hybrid system and the benefits of lowering their energy penalties. According to some power plant developers and experts we spoke with, another drawback to using dry and hybrid cooling technologies is that these technologies typically have higher capital costs. Experts, power plant developers, and studies indicated that while capital costs for each system can vary significantly, as a general rule, capital costs are lowest for once-through systems, higher for wet recirculating systems, and highest for dry cooling. Some told us the capital costs of hybrid systems—as a combination of wet recirculating and dry cooling systems—generally fall in between these two systems. Furthermore, according to some of the experts we spoke with and studies we reviewed, the capital costs of a plant’s cooling system vary based on the specific characteristics of a given plant, such as the costs of the cooling towers, the circulating water lines to transport water to and around the plant, pumps, fans, as well as the extent to which a dry cooled system is sized larger to offset energy penalties. As with energy penalties, studies estimating capital costs for dry and hybrid systems have used differing methodologies and provide varying estimates of capital costs. One study by the Electric Power Research Institute estimated dry cooling system capital costs for theoretical 500 megawatt combined cycle plants in 5 climatic locations to be 3.6 to 4.0 times that of wet recirculating systems with cooling towers. Experts from an engineering firm we spoke with also explained that capital costs for dry and hybrid cooled systems can be many times that of a wet recirculating system with cooling towers. They estimated that, in general, installing a dry system on a 500 megawatt combined cycle plant instead of a wet recirculating system with a cooling tower could increase baseline capital costs by $9 to $24 million, depending on location—an increase in baseline capital costs that is 2.0 to 5.1 times higher than if a wet recirculating system with a cooling tower were used. They estimated dry cooling to be more costly on a 500 megawatt coal plant, with dry cooling resulting in an increase in baseline capital costs that was 2.6 to 7.0 times higher than if a wet recirculating system with a cooling tower were used. With respect to annual costs, according to experts we spoke with and studies we reviewed, annual cost differences between alternative cooling technologies and traditional cooling technologies are variable and may depend on such factors as the costliness of obtaining and treating water, the extent to which cooling water is reused within the system, the need for maintenance, the extent to which energy penalties result in lost revenue, and the extent to which a cooling system is sized larger to offset energy penalties. Estimates from four reports we reviewed calculated varying cooling system annual costs for a range of plant types and locations using different methodologies, and found annual costs of dry systems to generally range from one and a half to four times those of wet recirculating systems with cooling towers. One of these studies, however, in examining the potential for higher water costs, found that dry cooling could be more economical on an annual basis in some areas of the country with expensive water or become more economical in the future if water costs were to rise. Furthermore, an expert from an engineering firm we spoke with explained that cooling system costs are only one component of total plant costs, and that while one cooling system may be expensive relative to another, its impact on total plant costs may not be as significant in a relative sense if the plant’s total costs are high. There may be other drawbacks to dry cooled technology, including space and noise considerations. Towers, pumps, and piping for both dry cooled and wet cooled systems with cooling towers require substantial space, but according to experts we spoke with, dry cooled systems tend to be larger. For example, according to one expert we spoke with, a dry cooled system for a natural gas combined cycle plant that derives one-third of its electricity from the steam cycle could be almost as large as two football fields. Moreover, according to others, the large size of dry cooling systems needed for plants that derive all of their electricity production from the steam cycle—for example, nuclear and coal plants—may make the use of dry cooling systems less suitable for these kinds of power plants. Experts we spoke with explained that because full steam plants produce all of their electricity by heating water to make steam, they require larger cooling systems to condense the steam back into usable liquid water. As a result, the size of a dry cooling system for a full steam plant could be three times that of a dry cooling system for a similarly-sized combined cycle plant that only produces one-third of its electricity from the steam cycle. Furthermore, according to one expert we spoke with, the most efficient type of dry cooled technology may not be approved for use with certain nuclear reactors, because of safety concerns. Finally, the motors, fans, and water of both dry cooled and wet recirculating systems with cooling towers may create noise that disturbs plant employees, nearby residents, and wildlife. Noise-reduction systems may be used to address this concern, although they introduce another cost trade-off that plant developers must consider. Despite the growth in plants using alternative water sources, there are a number of drawbacks to using this water source instead of freshwater. While some of these drawbacks are similar to those faced by power plants that use freshwater, they may be exacerbated by the lower quality of alternative water sources. These drawbacks include adverse effects to cooling equipment, regulatory compliance issues, and access to alternative water sources, as follows. Water used in power plants must meet certain quality standards in order to avoid adverse effects to cooling equipment, such as corrosion, scaling, and the accumulation of micro or macrobiological organisms. While freshwater can also cause adverse effects, the generally lower quality of alternative water sources make them more likely to result in these effects. For example, effluent from a sewage treatment plant may be higher in ammonia than freshwater, which can cause damage to copper alloys and other metals. High levels of ammonia and phosphates can also lead to excessive biological growth on certain cooling tower structures. Chemical treatment is used to mitigate such adverse effects of alternative water sources when they occur, but this treatment results in additional costs. According to one power plant operator we spoke with, alternative water sources often require more extensive and expensive treatment than freshwater sources, and it can be a challenging process to determine the precise makeup of chemicals needed to minimize the adverse effects. Power plant developers using alternative water sources may face additional regulatory challenges. Depending on their design, power plants may discharge water directly to a water source, such as a surface water body, or release water into the air through cooling towers. As a result, power plants must comply with a number of water quality and air regulations, and the presence of certain pollutants in alternative water sources can make compliance more challenging. For example, reclaimed water from sewage treatment plants is treated to eliminate bacteria and other contaminants that can be harmful to humans. Similarly, water associated with minerals extraction may contain higher total dissolved and suspended solids and other constituents, which could adversely affect the environment if discharged. Addressing these issues through the following actions entail additional costs to the power plant operators: (1) chemical treatment prior to discharging water to another water source, (2) discharging water to a holding pond unconnected to another water source for evaporation, or (3) eliminating all liquid discharges by, for example, evaporating all the water used at the plant and disposing of the resulting solid waste into a facility such as a landfill. As with freshwater sources, the proximity of an alternative water source may be a drawback that power plant developers have to consider when pursuing this option. Power plant developers wishing to use an alternative water source must either build the plant near that source—which can be challenging if that water source is not also near fuel and transmission lines—or pay the costs of transporting the water to the power plant’s location, such as through a pipeline. Furthermore, two power plant developers we spoke with told us that certain alternative water sources, like treated effluent, are in increasing demand in some parts of the country, making it more challenging or costly to obtain than in the past. A power plant developer may want to reduce the use of freshwater for a number of reasons, such as when freshwater is unavailable or costly to obtain, to comply with regulatory requirements, or to address public concern. However, power plant developers we spoke with told us that when considering the viability of an advanced cooling technology or alternative water source, they must weigh the trade-offs between the water savings and other benefits these alternatives offer with the drawbacks to their use. For example, in a water-scarce region of the country where water costs are high and there is much regulatory scrutiny of water use, a power plant developer may determine that, despite the drawbacks associated with the use of advanced cooling technologies or alternative water sources, these alternatives still offer the best option for getting a potentially profitable plant built in a specific area. Furthermore, according to power plant developers we spoke with, these decisions have to be made on a project by project basis because the magnitude of benefits and drawbacks will vary depending on a plant’s type, location, and the related climate. For example, dry cooling has been installed in regions of the country where water is relatively plentiful, such as the Northeast, to help shorten regulatory approval times and avoid concerns about the adverse impacts that other cooling technologies might have on aquatic life. In making a determination about what cooling technology to use, power plant developers evaluate the net economic costs of alternatives like dry cooling or an alternative water source—its savings compared to its costs— over the life of a proposed plant, as well as the regulatory climate. Experts we spoke with told us this involves consideration of both capital and annual costs, including how expected water savings compare to costs related to energy penalties and other factors. Anticipated future increases in water-related costs could prompt a developer to use a water-saving alternative. For example, a recent report by the Electric Power Research Institute estimates that a power plant’s economic trade-offs vary considerably depending on its location and that high water costs could make dry cooling less expensive annually than wet cooling. The National Energy Technology Laboratory is funding research and development projects aimed at minimizing the drawbacks of advanced cooling technologies and alternative water sources. In 2008, the laboratory awarded close to $9 million to support research and development of projects that, among other things, could improve the performance of dry cooled technologies, recover water used to reduce emissions at coal plants for reuse, and facilitate the use of alternative water sources in cooling towers. Such research endeavors, if successful and deemed economical, could alter the trade-off analysis power plant developers conduct in favor of nontraditional alternatives to cooling. The seven states that we contacted––Alabama, Arizona, California, Georgia, Illinois, Nevada, and Texas––vary in the extent to which they consider the impacts that power plants will have on water when they review power plant water use proposals. Specifically, these states have differences in water laws that may influence their oversight of power plant water use. Some also have other regulatory policies and requirements specific to power plants and water use. Still other states require additional levels of review that may affect their states’ oversight of how power plants use water. Differences in water laws in the seven states we contacted––Alabama, Arizona, California, Georgia, Illinois, Nevada, and Texas––influence the steps that power plant developers need to take to obtain approval to use surface or groundwater, and provide for varying levels of regulatory oversight of power plant water use. Table 4 shows the differences in water laws and water permitting for the seven states we contacted. With regard to surface water—the source of water most often used for power plant cooling nationally—of the seven states we contacted, all but Alabama required power plant developers to obtain water permits through the state agency that regulates the water supply. However, the states requiring permits varied in how the permits were obtained and under what circumstances. For example, in general, under Illinois law, water supply permits are only necessary if the surface water is defined as a public water body, which covers most major navigable lakes, rivers, streams, and waterways as defined by the Illinois Office of Water Resources. However, for any other surface water body, such as smaller rivers and streams, no such permit is required. To obtain a permit to use water in a power plant in Illinois, developers must file an application with the Illinois Office of Water Resources. In determining whether to issue a permit, the Office of Water Resources requires the applicant to address public comments and evaluates USGS streamflow data to determine whether restrictions on water use are needed. In some instances, such as to support fish and other wildlife, the state may designate a minimum level of flow required for a river or stream and restrict the amount of water that can be used by a power plant or other water user when that minimum level is reached. The Director of the Office of Water Resources told us that the office has sometimes encouraged power plant operators to establish backup water sources, such as onsite reservoirs, for use when minimum streamflow levels are reached and water use is restricted. In contrast, under Georgia and Alabama riparian law, landowners have the right to the water on and adjacent to their land, and both states require users who have the capacity to withdraw (Alabama) or actually withdraw (Georgia) an average of more than 100,000 gallons per day to provide information to the state concerning their usage and legal rights to the water. However, this requirement is applied differently in the two states. Alabama requires that water users register their planned water use for informational purposes with the Alabama Office of Water Resources but does not require users to obtain a permit for the water withdrawal or conduct analysis of the impact of the proposed water use. In contrast, Georgia requires water users to apply for and receive a water permit from the Georgia Environmental Protection Division. In determining whether to issue a permit for water use, this Georgia agency analyzes the potential effect of the water use on downstream users and others in the watershed. State water regulators in Georgia told us they have never denied an application for water use in a power plant due to water supply issues since there has historically been adequate available water in the state. For more details on Georgia’s process for approving water use in power plants, see appendix IV. Groundwater laws in the selected states we reviewed also varied and affected the extent to which state regulators provided oversight over power plant water use. In four of the seven states––Alabama, California, Illinois, and Texas––groundwater is largely unregulated at the state level, and landowners may generally freely drill new wells and use groundwater as they wish unless restricted by local entities, such as groundwater conservation districts. However, in three of the seven states we contacted—Arizona, Georgia, and Nevada—state-issued water permits are required for water withdrawals for some or all regions of the state. For example, in Nevada, which has 256 separate groundwater basins, and in which most of the in-state power generation uses groundwater for cooling, state water law follows the doctrine of prior appropriation. A power plant developer or other entity wanting to acquire a new water right for groundwater must apply for a water permit with the Nevada Division of Water Resources. In evaluating the application for a water permit, the Division determines if water is available—referred to as unappropriated; whether the proposed use will conflict with existing water rights or domestic wells; and whether the use of the water is in the public interest. In determining whether groundwater is available, if the Division of Water Resources determines that the amount of water that replenishes the groundwater basin annually is greater than the existing committed ground water rights in a given basin, unappropriated water may be available for appropriation. In two cases where groundwater was being considered for possible power plants, the State Engineer, the official in the Division of Water Resources who approves permits, either denied the application or expressed reservations over the use of groundwater for cooling. For example, in one case, the State Engineer noted that large amounts of water should not be used in a dry state like Nevada when an alternative, like dry cooling, that is less water intensive was available. In contrast, in Texas, where 8 percent of in state electricity capacity uses groundwater for cooling, state regulators do not issue groundwater use permits or routinely review a power plant or other users’ proposed use of the groundwater. Texas groundwater law is based on the “rule of capture,” meaning landowners, including developers of power plants that own land, have the right to the water beneath their property. Landowners can pump any amount of water from their land, subject to certain restrictions, regardless of the effect on other wells located on adjacent or other property. Although Texas state water regulators do not issue water permits for the use of groundwater, in more than half the counties in Texas, groundwater is managed locally through groundwater conservation districts which are generally authorized by the Texas Legislature and ratified at the local level to protect groundwater. These districts can impose their own requirements on landowners to protect water resources. This includes requiring a water use permit and, in some districts, placing restrictions on the amount of water used or location of groundwater wells for landowners. Oversight of water use by proposed power plants in the selected states may be influenced by regulatory policies and requirements that formally emphasize minimizing freshwater use by power plants and other new industrial users. With respect to regulatory policies, of the 7 states, California and Arizona have established formal policies or requirements to encourage power plant developers to consider alternative cooling methods and reduce the amount of freshwater used in a proposed power plant. Specifically: California, a state that has faced constrained water supplies for many years, established a formal policy in 1975 that requires applicants seeking to use water in power plants to consider alternative water sources before proposing the use of freshwater. More recently, the California Energy Commission, the state agency that is to review and approve power plant developer applications, reiterated in its 2003 Integrated Energy Policy Report, the 1975 policy that the commission would only approve power plants using freshwater for cooling in limited circumstances. Furthermore, state regulators at the Commission told us that in discussing potential new power plant developer applications, commission staff encourage power plant developers to consider using advanced cooling technologies, such as dry cooling or alternative water sources, such as effluent from sewage treatment plants. Between January 2004 and April 2009, California regulators approved 10 thermoelectric power plants—3 that will use dry cooling; 6 that will use an alternative water source, such as reclaimed water; and 2 that will use freshwater purchased from a water supplier, such as a municipal water district, for power plant cooling. Of 20 additional thermoelectric power plant applications pending California Energy Commission approval, developers have proposed 11 plants that plan to use dry cooling, 8 plants that plan to use an alternative water source, and 1 that plans to use freshwater for cooling. For more details on California’s process for approving water use in power plants, see appendix III. In Arizona, where there is limited available surface water and where groundwater is commonly used for power plant cooling, the state has requirements to minimize how much water may be used by power plants. Specifically, in Active Management Areas—areas the state has determined require regulatory oversight over the use of groundwater—the state requires that developers of new power plants 25 megawatts or larger using groundwater in a wet recirculating system with a cooling tower, design the plants to reuse the cooling water to a greater extent than what is common in the industry. Plants must cycle water through the cooling loop at least 15 times before discharging it, whereas, according to an Arizona public utility official, outside of Active Management Areas plants would generally cycle water 3 to 7 times. These additional cycles result in water savings, since less water must be withdrawn from ground or surface water sources to replace discharges, but can require plant operators to undertake more costly and extensive treatment of the cooling water and to more carefully manage the plant cooling equipment to avoid mineral buildup. Arizona officials also told us they encourage the use of alternative water sources for cooling and have informally encouraged developers to consider dry cooling. According to Arizona state officials, no plants with dry cooling have been approved to date in the state and, due mostly to climatic conditions, dry cooling is probably too inefficient and costly to currently be a viable option. For details on Arizona’s process for approving water use in power plants, see appendix II. In contrast to California and Arizona, water supply and public utility commission officials in the other 5 selected states told us their states had not developed official state policies regarding water use by power plants. For example, Alabama, a state where water has traditionally been plentiful, has not developed a specific policy related to power plant water use or required the use of advanced cooling technologies or alternative water sources. Additionally, the state does not require that power plant developers and other proposed water users seek a water use permit; rather power plant operators are only required to register their maximum and average expected water use with the state and report annual usage. State officials told us that they require this information so that they can know how much water is being used but that their review of power plant water use is limited. Officials from the state’s Public Service Commission, responsible for certifying the development of power plants, said their office does not have authority to regulate a utility’s water use and, therefore, generally does not analyze how a proposed power plant will affect the water supply. Rather, their office focuses on the reasonableness of power plant costs. Similarly, Illinois, where most power plants use surface water for cooling and water is relatively plentiful, has not developed a policy on water use by thermoelectric power plants or required the use of advanced cooling technologies or alternative water sources, according to an official at the Office of Water Resources. However, the Illinois Office of Water Resources does require power plant operators, like other proposed water users, to apply for water permits for use of surface water from the major public water bodies. Three of the states we selected––Arizona, Nevada, and California–– conduct regulatory proceedings that consider water availability, in addition to determining whether to issue a water permit, while the other states do not. In Arizona, water use for power plants is subject to three reviews: (1) the process for a prospective water user to obtain a water permit, if required; (2) review by a committee of the Arizona Corporation Commission, known as the Arizona Power Plant and Transmission Line Siting Committee; and (3) review by the Commission as part of an overall evaluation of the plant’s feasibility and its potential environmental and economic impacts. Both the Committee and Commission evaluate water supply concerns, along with other environmental issues, and determine whether to recommend (Committee) or issue (Commission) a Certificate of Environmental Compatibility, which is necessary for the plant to be approved. Water supply concerns have been a factor in denying such a certificate for a proposed power plant. For example, in 2001, the Commission denied an application to build a new plant over concerns that groundwater withdrawals for cooling water would not be naturally replenished and, thereby, would reduce surface water availability which could adversely affect the habitat for an endangered species. For more details on Arizona’s processes for approving water use in power plants see appendix II. Similarly, in Nevada and California, several state agencies may play a role in the approval of water use and the type of cooling technology used by power plants. In Nevada, although water permits for groundwater and surface water are issued by the State Engineer, the Public Utilities Commission oversees final power plant approval under the Utility Environmental Protection Act. Even if the power plant developer has obtained a water permit, water use could play a role in the review process if the plant’s use of the cooling water or technologies has environmental effects that need to be mitigated. Additionally, as in a number of states where electricity rates are regulated, the Public Utilities Commission could consider the effect of dry cooling on electricity rates. In California, the California Energy Commission reviews all aspects of power plant certifications, including issuing any water permits and approvals for cooling technologies. According to a California Energy Commission official, during this process the Commission works with other state and local agencies to ensure their requirements are met. The other four states we contacted do not conduct reviews of how power plants will affect water availability beyond issuing a water use permit or certificate of registration. Public utility regulators in Illinois, Texas, Alabama, and Georgia told us they had no direct role in regulating water use or cooling technologies in power plants. Officials from the Public Utility Commission of Texas noted that since they do not regulate electricity rates in most of the state, the Commission plays no role in the approval of power plants in most areas. In other areas, they told us water use and cooling technologies were not reviewed by the Commission. Similarly, in Illinois—a state that does not regulate electricity rates—an official from the Illinois Commerce Commission stated that the agency had no role in reviewing water use or cooling technologies for power plants. While Georgia and Alabama are states that regulate electricity rates, officials from their Public Service Commissions—the state agencies regulating electricity rates—noted that they focus on economic considerations of power generation and not the impact that a power plant might have on the state’s water supply. State water regulators rely on data on water availability collected by USGS’s streamflow gauges and groundwater studies and monitoring stations when they are evaluating developers’ proposals for new power plants. In contrast, state water regulators do not routinely rely on federal data on water use when evaluating power plant applications, although these data are used by water and industry experts, federal agencies, and others to analyze trends in the industry. However, these users of federal data on water use identified a number of limitations with the data that they believe limits its usefulness. State water regulators, federal agency officials, and water experts we spoke with agreed that federal data on water availability are important for multiple purposes, including for deciding whether to approve power plant developer proposals for water permits and water rights. Most state water regulators we contacted explained that they rely upon federal data on water availability, particularly streamflow and groundwater data collected by USGS, for permitting decisions and said these data helped promote more informed water planning. For example, water regulatory officials from the Texas Commission on Environmental Quality—the agency that evaluates surface water rights applications from prospective water users in Texas—told us that streamflow data collected by USGS are a primary data source for their water model that predicts how water use by power plants and others applying for water rights will impact state water supplies and existing rights holders. USGS’s network of streamflow gauges and groundwater monitoring stations provide the only national data of their kind on water availability over long periods. As a result, state officials told us that these data are instrumental in predicting how much water is likely to be available in a river under a variety of weather conditions, such as droughts. For example, state regulators in Georgia and Illinois told us that they rely on USGS streamflow data to determine whether or not to establish special conditions on water withdrawal permits, such as minimum river flow requirements that affect the amount of cooling water a power plant can withdraw during periods when water levels in the river are low. State water regulators in Nevada also told us they rely on a number of data sources, including USGS groundwater studies, to determine the amount of time necessary for water to naturally refill a groundwater basin. This information helps them ensure that water withdrawals for power plants and others are sustainable and do not risk depleting a groundwater basin. State regulators told us that while federal water availability data is a key input into their decisionmaking process for power plant permits, they also rely on a number of other sources of data, as shown in table 5. These include data that they themselves collect and data collected by universities; private industry, such as power plant developers; and various other water experts. Some state regulators and water experts we spoke with expressed concern about streamflow gauges being discontinued, which they said may make evaluating trends in water availability and water planning more difficult in the future. Without accurate data on water availability, decisions about water planning and allocation of water resources—including power plant permitting decisions—may be less informed, according to regulators and experts. For example, an official from Arizona told us that a reduction in streamflow gauges would adversely impact the quality of the states’ water programs and that state budget constraints have made it increasingly difficult to allocate the necessary state funds to ensure cooperatively- funded streamflow gauges remain operational. Similarly, an official from the Texas Commission on Environmental Quality told us that if particular streamflow gauges were discontinued, water availability records would be unavailable to update existing data for their water availability models— which are relied upon for water planning and permitting decisions—and alternative data would be needed to replace these missing data. USGS officials told us that the cumulative number of streamflow gauges with 30 or more years of record that have been discontinued has increased, as seen in figure 8, due to budget constraints. Unlike federal data on water availability, federal data on water use is not routinely relied upon by state officials we spoke with to make regulatory decisions; but, instead is used by a variety of data users to identify trends in the industry. Specifically, data users we spoke with, including water experts, representatives of an environmental group, and federal agency officials, identified the following benefits of the water use data collected by USGS and EIA: USGS Data on Water Use. A number of users of federal water data we spoke with told us that USGS’s 5-year data on thermoelectric power plant water use are the only centralized source of long-term, national data for comparing water use trends across sectors, including for thermoelectric power plants. As a result, they are valuable data for informing policymakers and the public about the state of water resources, including changes to water use among power plants and other sectors. For example, one utility representative we spoke with said that USGS data are important for educating the public about how power plants use water and the fact that while thermoelectric power plants withdraw large amounts of water overall—39 percent of U.S. freshwater withdrawals in 2000––their water consumption as an industry has been low—3 percent of U.S. freshwater consumption in 1995. Furthermore, some state water regulators told us that USGS’s water use data allow them to compare their state’s water use to that of other states and better evaluate and plan around their state’s water conditions. An Arizona Department of Water Resources official, for example, told us that USGS’s water use data are essential for understanding how water is used in certain parts of the state where the Department has no ability to collect such data. EIA Data on Water Use. EIA’s annual data are the only federally-collected, national data available on water use and cooling technologies at individual power plants; and data users noted that EIA’s national data were useful for analyzing the water use characteristics of individual plants, as well as for comparing water use across different cooling technologies. For example, officials at USGS and the National Energy Technology Laboratory told us that they use EIA data to research trends in current and future thermoelectric power plant and other categories of water use. Specifically, USGS utilizes EIA’s data on individual plant water use, in addition to data from state water regulators and individual power plants, to develop county and national estimates of thermoelectric power plant water use. USGS officials explained that in some of their state offices, such as California and Texas, agency staff primarily use EIA and other federal data to develop USGS’s 5-year thermoelectric power plant water use estimates. Officials from USGS also explained that other USGS state offices use EIA data on water use to corroborate their estimates of thermoelectric power plant water withdrawals and to identify the cooling technology utilized by power plants. Similarly, officials at the National Energy Technology Laboratory have extensively used EIA’s data on individual power plant water withdrawals and consumption to develop estimates of how freshwater use by thermoelectric power plants will change from 2005 to 2030. However, data users we spoke with also identified a number of shortcomings in the federal data on water use, collected by USGS and EIA, that limits their ability to conduct certain types of industry analyses and understanding of industry trends. Specifically, they identified the following issues, along with others that are detailed in appendix V. Lack of comprehensive data on the use of advanced cooling technologies. Currently, EIA does not systematically collect information on power plants’ use of advanced cooling technologies. In the EIA database, for example, data on power plants’ use of advanced cooling technologies is incomplete and inconsistent—not all power plants report information on their use of advanced cooling technologies or do so in a consistent way. Lacking these national data, it is not possible without significant additional work to comprehensively identify how many power plants are using advanced cooling technologies, where they are located, and to what extent the use of these technologies has reduced the use of freshwater. According to a study by the Electric Power Research Institute, although the total number of dry cooled plants is still small relative to plants using traditional cooling systems, the use of advanced cooling technologies is becoming increasingly common. As these technologies become more prevalent, we believe that information about their adoption would help policymakers better understand the extent to which advanced cooling technologies have been successful in reducing freshwater use by power plants and identify those areas of the country where further adoption of these technologies could be encouraged. EIA officials told us they formally coordinate with a group of selected stakeholders every 3 years to determine what changes are needed to EIA data collection forms. They told us they have not previously collected data on advanced cooling technologies because EIA’s stakeholder consultation process had not identified these as needed data. However, these officials acknowledged that EIA has not included USGS as a stakeholder during this consultation process and were unaware of USGS’ extensive use of their data. In discussing these concerns, EIA officials also said that they did not expect that collecting this information would be too difficult and agreed that such data could benefit various environmental and efficiency analyses conducted by other federal agencies and water and industry experts. Furthermore, in discussing our preliminary findings, EIA officials also said they believed that EIA could collect these data during its triennial review process by, for example, adding a reporting code for these types of cooling systems. However, they noted that they would have to begin the process soon to incorporate it into their ongoing review. Lack of comprehensive data on the use of alternative water sources. Our review of federal data sources indicates that they cannot be used to comprehensively identify plants using alternative water sources. EIA routinely reports data on individual plant water sources, but we found that these data do not always identify whether the source of water is an alternative source or not. Similarly, while the USGS data identify thermoelectric power plants using ground, surface, fresh, and saline water, they do not identify those using alternative water sources, such as reclaimed water. While a goal of USGS’s water use program is to document trends in U.S. water use and provide information needed to understand the nation’s water resources, USGS officials said budget constraints have limited the water use data the agency can provide, and has led to USGS discontinuing distribution of data on one alternative water source—reclaimed water. According to two studies we reviewed, use of some alternative water sources is becoming more common and, based on our discussions with regulators and power plant developers, there is much interest in this nonfreshwater option, particularly in areas where freshwater is constrained. As use of these alternative water sources becomes more prevalent, we believe that information about how many plants are using these resources and in what locations, could help policymakers better understand how the use of alternative water sources by power plants can replace freshwater use and help identify those areas of the country where such substitution could be further encouraged. Incomplete water and cooling system data. Though part of EIA’s mission is to provide data that promote public understanding of energy’s interaction with the environment, EIA does not collect data on the water use and cooling systems of two significant components of the thermoelectric power plant sector. First, in 2002, EIA discontinued its reporting of water use and cooling technology information for nuclear plants. According to data users we spoke with, this is a significant limitation in the federal data on water use and makes it more difficult for them to monitor trends in the industry. For example, USGS officials said that the lack of these data make developing their estimates for thermoelectric power plant water use more difficult because they either have to use older data or call plants directly for this information, which is resource intensive. EIA officials told us they discontinued collection of data from nuclear plants due to priorities stemming from budget limitations. Second, EIA does not collect water use and cooling system data from operators of some combined cycle thermoelectric power plants. Combined cycle plants represented about 25 percent of thermoelectric capacity in 2007, and constituted the majority of thermoelectric generating units built from 2000 to 2007. According to EIA officials, water use and cooling technology data are not collected from operators of combined cycle plants that are not equipped with duct burning technology—a technology that injects fuel into the exhaust stream from the combustion turbine to provide supplemental heat to the steam component of the plant. However, these plants use a cooling system and water, as do other combined cycle and thermoelectric power plants whose operators are required to report to the agency. As a result, data EIA currently collects on water use and cooling systems for thermoelectric power plants is incomplete. EIA officials acknowledged that not collecting these data results in an incomplete understanding of water use by these thermoelectric power plants; however, budget limitations have thus far precluded collection of such data. According to a senior EIA staff in the Electric Power Division, since speaking with GAO, the agency has begun exploring options for collecting these data as part of its current data review process. Discontinued distribution of thermoelectric power plant water consumption data. One of the stated goals of USGS’s water use program is to document trends in U.S. water use, but officials told us that a lack of funding has prompted the agency to discontinue distribution of data on water consumption for thermoelectric power plants and other water users. These USGS officials told us they would like to restart distribution of the data on water consumption by thermoelectric power plants and other water users if additional funding were made available, because such data can be used to determine the amount of water available for reuse by others. Similarly, some users of federal water data told us that not having USGS data on consumption limits their and the public’s understanding of how power plant water consumption is changing over time, in comparison to other sectors. They said that the increased use of wet recirculating technologies, which directly consume more water but withdraw significantly less than once-through cooling systems, has changed thermoelectric power plant water use patterns. In a 2002 report, the National Research Council recommended that USGS’s water use program be elevated from one of water use accounting to water science––research and analysis to improve understanding of how human behavior affects patterns of water use. Furthermore, the council’s report concluded that statistical analysis of explanatory variables, like cooling system type or water law, is a promising technique for helping determine patterns in thermoelectric power plant water use. The report suggested these and other approaches could help USGS improve the quality of its water use estimates and the value of the water data it reports. USGS has proposed a national water assessment with the goal of, among other things, addressing some of the recommendations made by the National Research Council report. USGS officials also told us such an initiative would make addressing some of the limitations in USGS water use data identified by water experts and others possible, such as reporting data on water consumption and by hydrologic code. While much of the authority for regulating water use resides at the state level, the federal government plays an important role in collecting and distributing information about water availability and water use across the country that can help promote more effective management of water resources. However, the lack of collection and reporting of some key data related to power plant water use limits the ability of federal agencies and industry analysts to assess important trends in water use by power plants, compare them to other sectors, and identify the adoption of new technologies that can reduce freshwater use. Without this comprehensive information, policymakers have an incomplete picture of the impact that thermoelectric power plants will have on water resources in different regions of the country and will be less able to determine what additional activities they should encourage for water conservation in these areas. Moreover, although both EIA and USGS seek to provide timely and accurate information about the electricity sector’s water use, they have not routinely coordinated their efforts in a consistent and formal way. As a result, key water data collected by EIA and used by USGS have been discontinued or omitted and important trends in the electricity sector have been overlooked. EIA’s ongoing triennial review of the data it collects about power plants and the recent passage of the Secure Water Act, that authorizes funding for USGS to report data on water use to Congress, provide a timely opportunity to address gaps in federal data collection and reporting and improve coordination between USGS and EIA in a cost- effective way. We are making seven recommendations. Specifically, to improve the usefulness of the data collected by EIA and better inform the nation’s understanding of power plant water use and how it affects water availability, we recommend that the Administrator of EIA consider taking the following four actions as part of its ongoing review of the data it collects about power plants: add cooling technology reporting codes for alternative cooling technologies, such as dry and hybrid cooling, or take equivalent steps to ensure these cooling technologies can be identified in EIA’s database; expand reporting of water use and cooling technology data to include all significant types of thermoelectric power plants, particularly by reinstating data collection for nuclear plants and initiating collection of data for all combined cycle natural gas plants; collect and report data on the use of alternative water sources, such as treated effluent and groundwater that is not suitable for drinking or irrigation, by individual power plants; and include USGS and other key users of power plant water use and cooling system data as part of EIA’s triennial review process. To improve the usefulness of the data collected by USGS and better inform the nation’s understanding of power plant water use and how it affects water availability, we recommend that the Secretary of the Interior consider: expanding efforts to disseminate available data on the use of alternative water sources, such as treated effluent and groundwater that is not suitable for drinking or irrigation, by thermoelectric power plants, to the extent that this information becomes available from EIA; and reinstating collection and distribution of water consumption data at thermoelectric power plants. To improve the overall quality of data collected on water use from power plants, we recommend that EIA and USGS establish a process for regularly coordinating with each other, water and electricity industry experts, environmental groups, academics, and other federal agencies, to identify and implement steps to improve data collection and dissemination. We provided a draft of this report to the Secretary of the Interior and to the Secretary of Energy for review and comment. The Department of the Interior, in a letter dated September 29, 2009, provided written comments from the Assistant Secretary for Water and Science. These comments are reprinted in appendix VI. In her letter, the Assistant Secretary agreed with GAO’s recommendations and noted the importance of improving water use data, including data on water consumption at thermoelectric power plants. The letter noted that USGS plans to reinstate data collection on water consumption as future resources allow and will expand efforts to disseminate data on alternative water use as information becomes available from EIA. In addition, USGS plans to coordinate with EIA to establish a process to identify and implement steps to improve and expand water use data collection and dissemination by the two agencies. In response to our request for comments from the Department of Energy, we received emails from the audit liaisons at the National Energy Technology Laboratory and the EIA. The laboratory’s comments note that the report accurately described the energy-water nexus as it relates to power plants and accurately documented the current state of power plant cooling technologies. These comments expressed the importance of completing a full assessment of the energy-water relationship in the future, especially in light of climate change regulations. The laboratory also provided technical comments, which we incorporated as appropriate. EIA provided technical comments, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees; the Administrator of the Energy Information Administration; the Secretaries of Energy and the Interior; 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 us at (202) 512-3841 or [email protected] or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. At the request of the Chairman of the House Committee on Science and Technology, we reviewed (1) technologies and other approaches that can help reduce freshwater use by power plants and what, if any, drawbacks there are to implementation; (2) the extent to which selected states consider water impacts of power plants when reviewing power plant development proposals; and (3) the usefulness of federal water data to experts and state regulators who evaluate power plant development proposals. We focused our evaluation on thermoelectric power plants, such as nuclear, coal, and natural gas plants using a steam cycle. We did not consider the water supply issues associated with hydroelectric power, since the process through which these plants use water is substantially different from that of thermoelectric plants (e.g., water is used as it passes through a dam but is not directly consumed in the process). We also focused the review on water used during the production of electricity at power plants, and did not include water issues associated with extracting fuels used to produce electricity. To understand technologies and other approaches that can help reduce freshwater use by power plants and their drawbacks, we reviewed industry, federal, and academic studies on advanced cooling technologies and alternative water sources that discussed their benefits, such as reduced freshwater use, and what, if any, drawbacks their implementation entails. These included studies with information on power plants’ use of water and the drawbacks of nonfreshwater alternatives conducted by the Electric Power Research Institute, the Department of Energy’s National Energy Technology Laboratory, and others. We discussed these trade-offs with various experts, including power plant and cooling system manufacturers, such as GEA Power Cooling Inc., General Electric, Siemens, and SPX Cooling Technologies; other industry groups and consultants, such as the Electric Power Research Institute, Maulbetsch Consulting, Nalco, and Tetra Tech; an engineering firm, Black & Veatch; and federal, national laboratory, and academic sources. To get a user perspective on these different technologies and alternative water sources, we met with power plant operators, including Arizona Public Service Company, Calpine, Georgia Power Company, and Sempra Generation. We also spoke with representatives from and reviewed reports prepared by other National Laboratories, such as the Department of Energy’s Argonne National Laboratory, to understand related research activities concerning water and electricity. To better understand how the differences in cooling technologies and heat sources used by power plants affect power plant configuration and design, we toured three power plant facilities in Texas— Comanche Peak (nuclear, once-through cooling), Limestone (coal, wet recirculating with cooling towers), and Midlothian (natural gas combined cycle, dry cooling). To determine the extent to which selected states consider water impacts of power plants when reviewing power plant development proposals, we conducted case study reviews of three states Arizona, California, and Georgia. These states were selected because of their historic differences in water availability, differences in water law, high energy production, and large population centers. We did not attempt to determine whether states’ efforts were reasonable or effective, rather we only described what states do to consider water impacts when making power plant siting decisions. For each of these case study states, we met with state water regulators and power plant developers to understand how water planning and permitting decisions are approached from both a regulatory and private industry perspective. We also met with water research institutions and other subject matter experts to understand current and future research related to water impacts of power plants and the extent to which these research endeavors help inform power plant development proposals and regulatory water permitting decisions. Specifically, in California we met with the California Department of Water Resources; the California Energy Commission; the California State Water Resources Control Board; the San Francisco Bay Regional Water Quality Control Board; and the U.S. Geological Survey’s (USGS) California Water Science Center. In Georgia we met with the Georgia Environmental Protection Division; the Georgia Public Service Commission; the Georgia Water Resources Institute; the Metropolitan North Georgia Water Planning District; the U.S. Army Corps of Engineers, South Atlantic Division; and the USGS Georgia Water Science Center. In Arizona we met with the Arizona Corporation Commission; the Arizona Department of Environmental Quality; the Arizona Department of Water Resources; the Arizona Power Plant and Transmission Line Siting Committee; the Arizona Office of Energy, Department of Commerce; the Arizona Water Institute, and the USGS Arizona Water Science Center. In addition, we reviewed state water laws and policies for thermoelectric power plant water use, selected power plant operator proposals to use water, and state water regulators’ water permitting decisions. We also reviewed selected public utility commission dockets and testimonies describing various power plant siting decisions to understand what, if any, water issues were addressed. To broaden our understanding of how states consider the water impacts of power plants when reviewing power plant development proposals, we supplemented our case studies by conducting interviews and reviewing documents from four additional states Nevada and Alabama—which shared watersheds with the case study states—and Illinois and Texas, which are large electricity producing states with sizable population centers. For each of these four states, we spoke with the primary state water regulatory agencies—the Alabama Office of Water Resources, the Illinois Office of Water Resources, the Nevada Division of Water Resources, and the Texas Commission on Environmental Quality—to understand how state water regulators consider the impacts of power plant operators’ proposals to use water. In Texas, additional discussions were held with the Public Utility Commission of Texas; the Texas Water Development Board; the University of Texas; and the USGS Texas Water Science Center to further understand how water supply issues and energy demand are managed in Texas. In Alabama, we held additional discussions with officials from the Alabama Public Service Commission and the Alabama Department of Environmental Management to learn more about how Alabama’s state water regulators and power plant operators manage water supply and energy demand. In Nevada, we held a discussion with an official from the Public Utilities Commission of Nevada to determine how they evaluate cooling technologies and water issues in plant siting certification proceedings. We also contacted the Illinois Commerce Commission. Finally, to determine how useful federal water data are to experts and state regulators who evaluate power plant development proposals, we reviewed data and analysis from the Energy Information Administration (EIA), USGS, and the Department of Energy’s National Energy Technology Laboratory and analyzed how the data were being used. We also conducted interviews with federal agencies, including the Bureau of Reclamation; EIA; Environmental Protection Agency; Tennessee Valley Authority; U.S. Army Corps of Engineers; and USGS to understand whether each organization also collected water data and their opinions about the strengths and limitations of EIA and USGS data. We spoke with several regional offices for the Bureau of Reclamation, including the Lower Colorado and Mid-Pacific offices to understand federal water issues in California, Arizona, and Nevada. In addition, to understand how valuable federal water data are to experts and state regulators who evaluate power plant development proposals to use water, we conducted interviews and reviewed documents from state water regulators and public utility commissions, as well as water and electricity experts at environmental and water organizations, such as the Pacific Institute and Environmental Defense Fund; at universities such as the Georgia Institute of Technology; Southern Illinois University, Carbondale; and the University of Maryland, Baltimore County; and experts from industry, national laboratories, and other organizations and universities previously mentioned. We also contacted other electricity groups, including the North American Electric Reliability Corporation and the National Association of Regulatory Utility Commissioners, to get a broader understanding of how the electricity industry addresses water supply issues. We conducted this performance audit from October 2008 through October 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. Arizona, with a population of 6.5 million, was the 16th most populous state in the country in 2008 and was one of the fastest growing states, growing at a rate of 2.3 percent from 2007 to 2008. Most of the land in Arizona is relatively dry, therefore, water for electricity production is limited. For 2007, Arizona accounted for 2.7 percent of U.S. net electricity generation, ranking it 13th, with most generation coming from coal (36 percent); natural gas (34 percent); nuclear (24 percent); and renewable sources, such as hydroelectric (6 percent), although the state has a strong interest in developing solar and other renewable sources. Arizona relies on three water sources for electricity production: (1) surface water, including the Colorado River; (2) groundwater; and (3) effluent. Arizona water law varies depending on the source and the user’s location, specifically: Surface water. The use of surface water in Arizona is determined by the doctrine of prior appropriation. The Arizona Department of Water Resources issues permits to use surface water statewide, with the exception of water from the Colorado River. The federal government developed water storage and distribution via a series of canals to divert water from the Colorado River to southern Arizona, and the Bureau of Reclamation issues contracts for any new water entitlements related to Colorado River water, in consultation with the Arizona Department of Water Resources. Groundwater. The use of groundwater depends on its location. Because some areas receive seasonal rain and snow, average annual precipitation can vary by location, from 3 to over 36 inches of moisture. The state established five regions where groundwater is most limited known as Active Management Areas. Permits to use groundwater in these five areas are coordinated through the Arizona Department of Water Resources, which provides several permitting options for power plants. Outside Active Management Areas, the state subjects groundwater to little regulation or monitoring and generally only requires users to submit a well application to the Department of Water Resources. Effluent. Effluent is owned by the entity that generates it until it is discharged into a surface water channel. The owner has the right to put effluent to beneficial use or convey it to another entity, such as a power plant, that will put it to beneficial use. However, once it is discharged from the pipe, generally into a surface water body, such as a river, it is considered abandoned and subject to laws governing surface water. Arizona has no overall statewide policy on the use of water in thermoelectric power plants. However, in Active Management Areas, the state requires developers of newer power plants with a generating capacity of 25 megawatts or larger to use groundwater in a wet recirculating system with a cooling tower and to cycle water through the cooling loop at least 15 times before discharging it. An official of an Arizona public utility noted that it was more common to cycle water 3 to 7 times outside of Active Management Areas. Before a power plant developer can begin constructing a power plant with a generating capacity of 100 megawatts or larger, it must go through a two- step certification process and a permitting process, as follows: The first step of the certification process involves public hearings before the Arizona Power Plant and Transmission Line Siting Committee, made up of representatives from five state agencies and six additional members appointed by the Arizona Corporation Commission. Although the Line Siting Committee is not required to evaluate water use unless the plant will be located within an Active Management Area, it typically considers water rights, water availability for the life of the power plant, and the environmental effects of groundwater pumping around the plant. Committee members told us they often ask about the planned water sources and whether alternative water sources and cooling technologies are available. If the plant will be located within an Active Management Area, a representative of the Department of Water Resources serving on the Committee takes the lead in evaluating the plant’s potential adverse impacts on the water source, including reviewing state data or U.S. Geological Survey (USGS) studies that document the status and health of the proposed water source. A representative from the Arizona Department of Environmental Quality serving on the Committee considers the plant’s potential adverse effects on water quality. Based on this information, as well as the proposed plant’s feasibility and its potential environmental and economic impacts, the Committee issues a recommended Certificate of Environmental Compatibility, if appropriate. In the second step of the certification process, the Arizona Corporation Commission reviews the power plant developer’s application to ensure there is a balance between the state’s need for energy and the plant’s cost and potential environmental impacts, including water quality, water supply, ecological, and wetlands impacts. The Commission can accept, deny, or modify the Certificate of Environmental Compatibility that was recommended by the Line Siting Committee and has denied some certificates. The Commission places the burden on the applicant to demonstrate that the proposed water supply is sustainable and how any water quality impacts will be mitigated. The Commission does not collect or review additional water data or conduct quality checks on the data provided by the power plant developers. The permitting process applies to both water supply and water quality. With respect to water supply, when required, power plant developers who plan to use surface water in most areas of the state or groundwater in an Active Management Area must obtain a water use permit from the Department of Water Resources. When applying for a permit, power plant developers are required to provide information on the amount of water they will use, the source, points of diversion and release, and how the power they generate will be used. For groundwater in an Active Management Area, users are strictly limited to a total volume of water permitted for withdrawal and are subject to annual reporting and an analysis of the impact on other wells. According to an official at the Department of Water Resources, the Department has extensive data on available groundwater for each Active Management Area to assist in determining the effects of groundwater use. With respect to water quality, power plant developers must obtain permits which regulate water quality through the Department of Environmental Quality. Further, power plants discharging into federally-regulated waters also need a National Pollutant Discharge Elimination System permit that covers effluent limitations and sets discharge requirements. This program is intended to ensure that discharges to surface waters do not adversely affect the quality and beneficial uses of such water. Between January 2004 and July 2009, Arizona has approved three new power plants, two of which are simple cycle natural gas plants that do not need water for cooling. The third plant is a concentrating solar thermal plant using a wet recirculating system with cooling towers. According to an official from the Arizona Department or Water Resources, once the plant begins operating, it will use 3,000 acre feet of water annually from groundwater and surface water, under contract from an Irrigation District. Between 1999 and 2002, a large number of applications for power plants in Arizona were filed, most of which were approved. However, at least one plant was denied a Certificate of Environmental Compatibility due to a water supply concern—the potential loss of habitat for an endangered species from possible groundwater depletion. Approved plants used a variety of water sources for cooling, including recycled wastewater, surface water through arrangements with the Central Arizona Project, and groundwater––both directly used or from conversion of agricultural land. No dry cooled power plants have been approved in Arizona, according to state officials. State officials told us dry cooling is too inefficient and costly, but that it may be considered in the future if water shortages become more acute. As of January 2009, California had the nation’s largest population—an estimated 38.3 million people—and grew at a rate of 1.1 percent annually from 2008 to 2009. California has significant variations in water availability, with a long coastline; several large rivers, particularly in the north; mountainous areas that receive substantial snowfall; and arid regions, particularly the Mojave Desert in southeastern California. Statewide, California averages 21.4 inches of rain annually, but has suffered significant droughts for the past three years. For 2007, California accounted for 5.1 percent of U.S. net electricity generation, ranking it 4th nationally. California generates electricity primarily from natural gas (55 percent); nuclear (17 percent); and renewable energy sources––primarily hydroelectric, wind, solar, and geothermal (25 percent). California imports 27 percent of its electricity from other states. California water law depends on whether the water is surface water or groundwater, specifically: Surface water. The use of surface water is subject to both the riparian and appropriative rights doctrines. No permit is needed to act upon riparian surface water rights, which result from ownership of land bordering a water source, and are senior to most appropriative rights. Appropriative rights, on the other hand, must be acquired through the State Water Resources Control Board. Applicants for appropriative rights must show, among other things, that the water will be put to beneficial use. Groundwater. The majority of California’s groundwater is unregulated. Additionally, California does not have a comprehensive groundwater permit process in place, except for groundwater that flows through subterranean streams, which is permitted by the State Water Resources Control Board. California has several policies that directly and indirectly address how thermoelectric power plants can use water. Specifically: California’s State Water Resources Control Board, as the designated state water pollution control agency and issuer of surface water rights, established a policy in 1975 that states that the use of fresh inland waters for power plant cooling will only be approved when it is demonstrated that the use of other water supply sources or other methods of cooling would be environmentally undesirable or economically unsound. Freshwater should be considered the last resort for power plant cooling in California. Since that time, according to officials we spoke with, the Board has encouraged the use of alternative sources of cooling water and alternative cooling technologies. The California Energy Commission (CEC), the state’s principal energy policy and planning organization, in 2003, reiterated the 1975 policy and further required developers to consider whether zero-liquid discharge technologies should be used to reduce water use unless it can be shown that the use of these technologies would be environmentally undesirable or economically unsound. Under these policies, dry cooling and use of alternative water for cooling would be the preferred alternatives. The State Water Resources Control Board discourages the use of once- through cooling in power plants due to potential harm to aquatic organisms. The agency is considering a state policy to require power plants using this technology to begin using other cooling technologies or retire from service. California has a centralized permitting process for new large power plants, including thermoelectric power plants. Developers constructing new power plants with a generating capacity of 50 megawatts or larger must apply for certification with the CEC, the lead state agency for ensuring proposed plants meet requirements of the California Environmental Quality Act and generally overseeing the siting of new power plants. The CEC coordinates review of other state environmental agencies, such as the State Water Resources Control Board and issues all required state permits (air permits, water permits, etc.). Prior to issuing the permits needed to construct a new power plant, the CEC conducts an independent assessment, with public participation, of each proposed plant’s environmental impacts; public health and safety impacts; and compliance with federal, state, and local laws, ordinances, and regulations. As part of its review, CEC staff analyze the effect on other water users of power plant developers’ proposed use of water for cooling and other purposes, access to needed water supplies throughout the life of the plant, and the plant’s impact on the proposed water source and the state’s water supply overall. The CEC also ensures power plant developers have obtained the required water supply agreements; analyzed the feasibility of alternative water sources and cooling technologies; and addressed water supply, water quality, and wastewater disposal impacts. The CEC may require implementation of various measures to mitigate the impacts of water use, if it identifies problems. The CEC’s goal is to complete the entire certification process in 12 months, but public objections, incomplete application submittals, staff shortages, and limited budgets sometimes delay the process. The CEC evaluates several sources of water data before certifying plant applicants’ water use. These include: the developer’s proposals; data from the Department of Water Resources’ groundwater database on water availability and water quality; U.S. Geological Survey data on water availability through its streamflow and groundwater monitoring programs and any specific basin studies; the State Water Resources Control Board’s information on surface and groundwater quality; and computer groundwater models that analyze the long-term yield of the basin. With respect to water quality, the CEC coordinates the issuance of permits relating to water quality for new power plants, but the State Water Resources Control Board sets overall state policy. The Board operates under authority delegated to it by the U.S. Environmental Protection Agency to implement certain federal laws, including the Clean Water Act, as well as authority provided under state laws designed to protect water quality and ensure that the state’s water is put to beneficial uses. Nine Regional Water Boards are delegated responsibility for implementing the statewide water quality control plans and policies, including setting discharge requirements for permits for the National Pollutant Discharge Elimination System Program and issuing the permits. Since 2004, most power plants the CEC has approved or is currently reviewing plan to use dry cooling or a wet recirculating system that uses an alternative water source, as shown in table 6. According to a state official we spoke with, no plants approved to be built in the last 25 years have used once-through cooling technology. Over the last 7 years, the CEC has also commissioned, or been involved in, substantial research into the use and possible effects of using alternative cooling technologies. In 2008, Georgia ranked 9th in population among states, with 9.7 million people, and had the 4th fastest growing population in the U.S. between the years 2000 and 2007. Georgia is historically water rich, receiving approximately 51 inches of precipitation annually, but recent droughts and growing population have prompted additional focus on water supply and management strategies. Georgia ranked 8th in total net electricity generation in 2007, accounting for approximately 3.5 percent of net electricity generation in the United States. Coal and nuclear power are the primary fuel sources for electricity in Georgia, with coal-fired power plants providing more than 60 percent of electricity output. Georgia is a regulated riparian state, meaning that the owners of land adjacent to a water body can choose when, where, and how to use the water. The use must be considered reasonable relative to a competing user, with the courts responsible for resolving disputes about reasonable use. Since the late 1970s, Georgia law has required any water user who withdraws more than an average of 100,000 gallons per day to obtain a withdrawal permit from the Georgia Environmental Protection Division. Georgia does not have a policy or guidance specifically addressing thermoelectric power plants’ water use. However, in response to recent droughts and population growth, the state adopted its first statewide water management plan in 2008. State water regulators we spoke with said they expect the new state water plan to consider how future power generation siting decisions align with state water supplies. Before power plant developers can begin construction, they may be required to obtain certification from the Georgia Public Service Commission and relevant permits from offices such as the Georgia Environmental Protection Division, as follows: Georgia Public Service Commission. Georgia Power Company, the state’s investor-owned utility, is fully regulated by the Public Service Commission and must obtain a certificate of public convenience and necessity prior to constructing new power plants. Other power plant developers, including municipality- and cooperatively-owned power plants and others, are not subject to certification. Public Service Commission officials explained that during the certification process, they balance the need for the new plant and its costs, but they do not consider the impact a plant will have on Georgia’s water supply. However, these officials explained that, in their capacity to ensure utilities charge just and reasonable rates, they could consider the economic impact of using an alternative water source or advanced cooling technology, should a plant propose to use one. Georgia Environmental Protection Division. Any entity seeking to use more than 100,000 gallons of water per day, including power plant developers, must obtain a permit from the Georgia Environmental Protection Division. The Division analyzes the proposed quantity of withdrawals and the water source and determines whether the withdrawal amounts and potential effects for downstream water users are acceptable. In some instances, the Division may place special conditions on power plants to ensure adequate water availability, such as requiring on-site reservoirs or groundwater withdrawals for water use during droughts. In making their decisions, the Georgia Environmental Protection Division reviews the plant’s application and hydrologic data from a number of sources. Water withdrawal applications include many factors, in addition to withdrawal amounts and sources, such as water conservation and drought contingency plans; documentation of growth in water demand, location, and purpose of water withdrawn or diverted; and annual consumption estimates. Other data sources include their own and U.S. Geological Survey (USGS) groundwater data, USGS streamflow data, and existing water use permits. In some instances, the Environmental Protection Division may also use water withdrawal and water quality data collected by the U.S. Army Corps of Engineers if an applicant is downstream of federally-regulated waters. In addition to permitting water use, the Division is also responsible for issuing and enforcing all state permits involving water quality impacts. It is authorized by the Environmental Protection Agency to issue National Pollutant Discharge Elimination System permits that address discharge limits and reporting requirements. According to Division officials, the Division has never denied a water withdrawal permit to a power plant developer on the basis of insufficient water, which they attributed partly to the fact that the staff meets with applicants numerous times before they submit the application to identify and mitigate concerns about water availability. Moreover, they told us that thermoelectric power plant developers have submitted few applications for water withdrawal permits. For example, as shown in table 7, between January 1, 2004, and December 31, 2008, the Division received only 6 water withdrawal applications from thermoelectric power plant developers; of these, it approved 5. An official from the Public Service Commission was unaware of any regulated power plant developers proposing the use of advanced cooling technologies, such as dry cooling or hybrid cooling, over this time period. Georgia Environmental Protection Division officials told us they do not advocate or refuse the use of particular cooling technologies. However, officials said they do not expect to receive applications for once-through cooling plants because federal environmental regulations make the permitting process difficult. EIA forms are not designed to collect information on advanced cooling technologies. Understanding of trends in the adoption of advanced cooling technologies cannot be systematically determined using only EIA data. Cooling system codes: Codes used to classify plant cooling systems may be incomplete, lack explanation, overlap, or contain errors. Cooling system codes are not defined in detail and plants may be uncertain about what cooling system code to use. Inconsistent use of cooling tower codes could potentially make EIA data less valuable and lead to inaccurate or inconsistent data and analysis. Nuclear water data: Water use data (withdrawal, consumption and discharge) and cooling information were discontinued for nuclear plants in 2002. EIA discontinued reporting nuclear water use data and cooling system information due to priorities stemming from budget limitations. Data users must use noncurrent data or seek out an alternate source. If this limitation persists, water data will not be available for any new nuclear plants constructed. EIA and USGS Alternative water sources: It is not possible to comprehensively identify power plants using alternative water sources. EIA forms are not designed to collect information on alternative water sources. According to USGS, budget constraints have limited the amount of water use information the agency can provide. Understanding trends in power plant adoption of alternative water sources is limited. EIA and USGS Frequency: EIA reports data on annual water use, rather than data on water use over shorter time periods, such as monthly. USGS reports 5- year data. EIA’s form 767, used to collect cooling system and water data, was developed and revised in the 1980s, and EIA officials we spoke with were not aware of why an annual time period was originally chosen. According to USGS, budget constraints have limited the amount of water use information the agency can provide. Seasonal trends in water use by power plants are not evident from annual EIA or 5-year USGS data. EIA and USGS Quality: Reporting of some EIA data elements may be inaccurate or inconsistent. USGS data are compiled from many different data sources, and the accuracy and methodology of these sources may vary. Furthermore, USGS state offices have different methods for developing water use estimates, potentially contributing to data inconsistency. Respondents may use different methods to measure or estimate data and instructions may be limited or unclear. Respondents may make mistakes or have nontechnical staff fill out surveys, since EIA’s form for collecting this data does not require technical staff to complete the survey. According to USGS, budget constraints in its water use program kept the agency from implementing improvements it would like to make to its quality control of water use data. Inaccurate and inconsistent data are more challenging to analyze and less relevant for policymakers, water experts and the public seeking to understand water use patterns. Consumption: USGS discontinued reporting of thermoelectric power plant and other water consumption data. According to USGS, budget constraints have caused the agency to make cuts in data reporting. Understanding of trends in power plant water consumption compared to other industries is limited. Analysis to compare thermoelectric power plant withdrawals to consumption is more complicated. Hydrologic code: USGS discontinued reporting thermoelectric power plant and other water use by hydrologic code. It now only reports data by county. According to USGS, budget constraints have caused the agency to make cuts in data reporting. According to some data users, not having data by hydrologic code complicates water analysis, which is often performed by watershed rather than county. Timeliness: Data are reported many years late. For example, data on 2005 water use have not yet been made available to the public. According to USGS, budget constraints have led to limited staff availability for water use data collection and analysis, resulting in reporting delays. Data are outdated and may be less relevant for analysis. In addition to the individuals named above, Jon Ludwigson (Assistant Director), Scott Clayton, Philip Farah, Paige Gilbreath, Randy Jones, Alison O’Neill, Timothy Persons, Kim Raheb, Barbara Timmerman, Walter Vance, and Jimi Yerokun made key contributions to this report. | In 2000, thermoelectric power plants accounted for 39 percent of total U.S. freshwater withdrawals. Traditionally, power plants have withdrawn water from rivers and other water sources to cool the steam used to produce electricity, so that it may be reused to produce more electricity. Some of this water is consumed, and some is discharged back to a water source. In the context of growing demands for both water and electricity, this report discusses (1) approaches to reduce freshwater use by power plants and their drawbacks, (2) states' consideration of water use when reviewing proposals to build power plants, and (3) the usefulness of federal water data to experts and state regulators. GAO reviewed federal water data and studies on cooling technologies. GAO interviewed federal officials, as well as officials from seven selected states. Advanced cooling technologies that rely on air to cool part or all of the steam used in generating electricity and alternative water sources such as treated effluent can reduce freshwater use by thermoelectric power plants. Use of such approaches may lead to environmental benefits from reduced freshwater use, as well as increase developer flexibility in locating a plant. However, these approaches also present certain drawbacks. For example, the use of advanced cooling technologies may result in energy production penalties and higher costs. Similarly, the use of alternative water sources may result in adverse effects on cooling equipment or regulatory compliance issues. Power plant developers must weigh these drawbacks with the benefits of reduced freshwater use when determining which approaches to pursue. Consideration of water use by proposed power plants varies in the states GAO contacted, but the extent of state oversight is influenced by state water laws, related state regulatory policies, and additional layers of state regulatory review. For example, California and Arizona--states that historically faced constrained water supplies, have taken formal steps aimed at minimizing freshwater use at power plants. In contrast, officials in five other states GAO contacted said that their states had not developed official policies regarding water use by power plants and, in some cases, did not require a state permit for water use by new power plants. Federal agencies collect national data on water availability and water use; however, of these data, state water agencies rely on federal water availability data when evaluating power plants' proposals to use freshwater more than federal water use data. Water availability data are collected by the U.S. Geological Survey (USGS) through stream flow gauges, groundwater studies, and monitoring stations. In contrast, federal data on water use are primarily used by experts, federal agencies, and others to identify industry trends. However, these data users identified limitations with the federal water use data that make them less useful for conducting trend analyses and tracking industry changes. For example, the Department of Energy's (DOE) Energy Information Administration (EIA) does not systematically collect information on the use of advanced cooling technologies and other data it collects are incomplete. Similarly, USGS discontinued distribution of data on water consumption by power plants and now only provides information on water withdrawals. Finally, neither EIA nor USGS collect data on power plant developers' use of alternative water sources, which some experts believe is a growing trend in the industry. Because federal data sources are a primary source of national data on water use by various sectors, data users told GAO that without improvements to these data, it becomes more difficult for them to conduct comprehensive analyses of industry trends and limits understanding of changes in the industry. |
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Interior, working with the Department of Agriculture’s Forest Service, has taken steps to help manage perhaps the most daunting challenge to its resource protection mission—protecting lives, private property, and federal resources from the threats of wildland fire. But concerns remain. Interior also faces challenges in managing oil and gas operations on federal lands, adapting to climate change, and resolving natural resource conflicts through collaborative management. The wildland fire problems facing our nation continue to grow. The average annual acreage burned by wildland fires has increased by approximately 70 percent since the 1990s, and appropriations for the federal government’s wildland fire management activities tripled from about $1 billion in fiscal year 1999 to nearly $3 billion in fiscal year 2007. As we have previously reported, a number of factors have contributed to worsening fire seasons and increased firefighting expenditures, including an accumulation of fuels resulting from past land management practices; drought and other stresses, in part related to climate change; and an increase in human development in or near wildlands. While Agriculture’s Forest Service receives the majority of fire management resources, Interior agencies—the National Park Service (NPS); the Bureau of Indian Affairs (BIA); the U.S. Fish and Wildlife Service (FWS); and, particularly, the Bureau of Land Management (BLM)—are key partners in responding to the threats of wildland fire. Consequently, most of our work and recommendations on wildland fire management address agencies in both departments. Specifically, we have called on the agencies to develop a cohesive strategy that identifies options and associated funding to reduce potentially hazardous vegetation and address wildland fire problems. In 1999, to address the problem of excess fuels and their potential to increase the severity of wildland fires and the cost of suppression efforts, we recommended that a cohesive strategy be developed to identify the available long-term options for reducing fuels and the associated funding requirements. Six years later, in 2005, we reiterated the need for a cohesive strategy and broadened our recommendation’s focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. In January 2009, agency officials told us they were working to create such a cohesive strategy, although they could not provide an estimate of when it would be completed. establish clear goals and a strategy to help contain wildland fire costs. In 2007, we reported that the agencies were taking a number of steps intended to help contain wildland fire costs, but had not clearly defined cost-containment goals or developed a strategy for achieving those goals. Agency officials identified several documents that they believed provide clearly defined goals and objectives that make up Interior’s strategy to contain costs. However, the documents lack the clarity and specificity officials in the field need to help manage and contain wildland fire costs. We therefore continue to believe that our recommendations, if effectively implemented, would help the agencies better manage their cost-containment efforts and improve their ability to contain wildland fire costs. continue to improve their processes for allocating fuel reduction funds and selecting fuel reduction projects. Also in 2007, we identified several shortcomings in the agencies’ processes for allocating fuel reduction funds to field units and selecting fuel reduction projects, shortcomings that limited the agency’s ability to ensure that funds are directed where they will reduce risk most effectively. While Interior has taken steps to improve its processes for allocating fuel reduction funds and the information it uses in selecting fuel reduction projects, we believe that Interior must continue these efforts so that it can more effectively use its limited fuel reduction dollars. take steps to improve its use of a new interagency budgeting and planning tool. In 2008, we reported on the Forest Service’s and Interior’s development of a new planning tool known as fire program analysis (FPA). FPA was intended, among other things, to allow the agencies to analyze potential combinations of firefighting assets, and potential strategies for reducing fuels and fighting fires so that they could determine the most cost-effective mix of assets and strategies. While recognizing that FPA represents a significant step forward and shows promise in achieving certain of its objectives, we believe the agencies’ approach to FPA’s development hampers it from meeting other key objectives. We made a number of recommendations designed to enhance FPA and the agencies’ ability to use it, and Interior, in conjunction with the Forest Service, has identified several steps it is considering taking to do so. It is not yet clear how successful these steps will be. Furthermore, the steps the agencies outlined do not address all the shortcomings we identified. We continue to believe agency improvements are essential if the full potential of FPA is to be realized. The number of oil and gas operations that are permitted by BLM for access to federal oil and gas resources has increased dramatically—more than quadrupling from fiscal year 1999 to fiscal years 2006 and 2007—in part as a result of the desire to reduce the country’s dependence on foreign sources of oil and gas. In June 2005, we reported that BLM has struggled to deal with the increase in the permitting workload while also carrying out its responsibility to mitigate the impacts of oil and gas development on land that it manages. Overall, BLM officials told us that staff had to devote increasing amounts of time to processing drilling permits, leaving less time to ensuring the mitigation of the environmental impacts of oil and gas development. While the Interior, Environment, and Related Agencies Appropriation Act of Fiscal Year 2008 required BLM to charge a $4,000 processing fee for drilling permits, the act provided that the appropriation for permit processing would be reduced by the amount of fees received; thus the fee did not provide any additional resources for BLM to increase its monitoring and enforcement activities for oil and gas development. In its fiscal year 2009 budget request, BLM requested authority to (1) permanently implement a cost recovery fee for processing applications for permits to drill, (2) set the cost recovery fee at $4,150 for fiscal year 2009, and (3) deposit the revenues generated from the cost recovery fee in BLM’s Service Charges, Deposits and Forfeitures Account. BLM estimated the cost recovery fee would generate $34 million for fiscal year 2009. Within the energy and minerals budget for fiscal year 2009, BLM also requested a net increase of $7.8 million for oil and gas activities. Just as we have had concerns about BLM’s protection of environmental resources from oil and gas activities, we have had concerns, as we reported in 2003, that FWS’s oversight of oil and gas operations on wildlife refuge lands was not adequate. For example, we found that some refuge managers took extensive measures to oversee operations and enforce environmental standards, while others exercised little or no control. Such disparities occurred for two primary reasons. First, FWS had not officially determined its authority to require permits—which would include environmental conditions to protect refuge resources—of all oil and gas operations in refuges; we believe the agency has such authority. Second, refuge managers lacked guidance, adequate staffing levels, and training to properly oversee oil and gas activities. We also found that FWS was not collecting complete and accurate information on damage to refuge lands as a result of oil and gas operations and not identifying the steps needed to address that damage. In June 2007, we reported that the FWS had generally not taken sufficient actions to address five of the six recommendations we had made in 2003 to improve FWS’s management and oversight of oil and gas activities on national wildlife refuges. A growing body of evidence shows that increasing concentrations of greenhouse gases—primarily carbon dioxide, methane, and nitrous oxide—in the Earth’s atmosphere have resulted in a warmer global climate system, among other changes. In August 2007, we reported that, according to experts, federal land and water resources are vulnerable to a wide range of effects from climate change, some of which are already occurring. These effects include (1) physical effects, such as droughts, floods, glacial melting, and sea level rise; (2) biological effects, such as increases in insect and disease infestations, shifts in species distribution, and changes in the timing of natural events; and (3) economic and social effects, such as adverse impacts on tourism, infrastructure, fishing, and other resource uses. BLM, FWS, and NPS have not made climate change a priority, and the agencies’ strategic plans do not specifically address it. To better enable federal resource management agencies to take into account the existing and potential future effects of climate change on federal resources, we recommended that the Secretary of the Interior and two other departments develop guidance incorporating agencies’ best practices that advises managers on how to address climate change effects on the resources they manage. Interior and the other agencies generally agreed with our recommendation. The effects of a warmer climate have been clearly evident in Alaska. In December 2003, we reported that coastal villages in Alaska are becoming more susceptible to flooding and erosion in part because rising temperatures cause protective shore ice to form later in the year, leaving the villages vulnerable to fall storms. In addition, rising temperatures in recent years have led to widespread thawing of the permafrost (permanently frozen subsoil that is found in over approximately 80 percent of Alaska), causing serious damage. At that time, we found that flooding and erosion affects 184 out of 213, or 86 percent, of Alaska Native villages to some extent, and four villages in imminent danger planned to relocate. Interior’s management of its vast federal estate is largely characterized by the struggle to balance the demand for greater use of its resources with the need to conserve and protect them for the benefit of future generations. In February 2008, we reported that conflicts over the use of our nation’s natural resources, along with increased ecological problems, has led land managers to seek cooperative means to resolve natural resource conflicts and problems. Collaborative resource management is one such approach that communities began using in the 1980s and 1990s. In 2004, an executive order on cooperative conservation encouraged such efforts. Experts generally view collaborative resource management— involving public and private stakeholders in natural resource decisions— as an effective approach for managing natural resources. The benefits that result from using collaborative resource management include less conflict and litigation and improved natural resource conditions, according to experts. Many experts also noted that there are limitations to the approach, such as the time and resources it takes to bring people together to work on a problem and reach a decision. BLM, FWS, NPS, and Agriculture’s Forest Service face challenges in determining whether to participate in a collaborative effort, measuring participation and monitoring results, and sharing agency and group experiences. To enhance the federal government’s support of and participation in collaborative resource management efforts, we recommended that the Council on Environmental Quality, working with the departments of the Interior and of Agriculture take several actions to enhance the federal government’s support of and participation in collaborative resource management efforts, including the preparation of a written plan identifying goals, actions, and time frames for carrying out cooperative conservation activities. Interior generally agreed with our recommendations. We have reported on management weaknesses in Indian and island community programs for a number of years—most recently on serious delays in BIA’s program for determining whether the department will accept land in trust and the need to assist seven island communities— four U.S. territories and three sovereign island nations—with long-standing financial and program management deficiencies. BIA is the primary federal agency charged with implementing federal Indian policy and administering the federal trust responsibility for about 2 million American Indians and Alaska Natives. BIA provides basic services to 562 federally recognized Indian tribes throughout the United States, including natural resources management on about 54 million acres of Indian trust lands. Trust status means that the federal government holds title to the land in trust for tribes or individual Indians; land taken in trust is no longer subject to state and local property taxes and zoning ordinances. In 1980, the department established a regulatory process intended to provide a uniform approach for taking land in trust. While some state and local governments support the federal government’s taking additional land in trust for tribes or individual Indians, others strongly oppose it because of concerns about the impacts on their tax base and jurisdictional control. We reported in July 2006 that while BIA generally followed its regulations for processing land in trust applications from tribes and individual Indians, it had no deadlines for making decisions on them. Specifically, the median processing time for the 87 land in trust applications with decisions in fiscal year 2005 was 1.2 years—ranging from 58 days to almost 19 years. We recommended, among other things, that the department move forward with adopting revisions to the land in trust regulations that include (1) specific time frames for BIA to make a decision once an application is complete and (2) guidelines for providing state and local governments more information on the applications and a longer period of time to provide meaningful comments on the applications. While the department agreed with our recommendations, it has not revised the land in trust regulations. The Secretary of the Interior has varying responsibilities to the island communities of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands, all of which are U.S. territories—as well as to the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau, which are sovereign nations linked with the United States through Compacts of Free Association. The Office of Insular Affairs (OIA), which carries out the department’s responsibilities for the island communities, is to assist the island communities in developing more efficient and effective government by providing financial and technical assistance and to help manage relations between the federal government and the island governments by promoting appropriate federal policies. The island governments have had long-standing financial and program management deficiencies. In December 2006, we reported on serious economic, fiscal, and financial accountability challenges facing American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands. The economic challenges stem from dependence on a few key industries, scarce natural resources, small domestic markets, limited infrastructure, shortages of skilled labor, and reliance on federal grants to fund basic services. In addition, efforts to meet formidable fiscal challenges and build strong economies are hindered by financial reporting that does not provide timely and complete information to management and oversight officials for decision making. As a result of these problems, numerous federal agencies have designated these governments as “high- risk” grantees. To increase the effectiveness of the federal government’s assistance to these island communities, we recommended, among other things, that the department increase coordination activities with other federal grant-making agencies on issues of common concern relating to the insular area governments. The department agreed with our recommendations, stating that they were consistent with OIA’s top priorities and ongoing activities. We will continue to monitor OIA’s actions on our recommendations. Also in December 2006, we reported on challenges facing the Federated States of Micronesia and the Republic of the Marshall Islands. In 2003, the United States approved amended compacts with the countries by signing Compacts of Free Association with the two governments. The amended compacts provide the countries with a combined total of $3.6 billion from 2004 to 2023, with the annual grants declining gradually. The single audits for 2004 and 2005 for both countries reported (1) weaknesses in their ability to account for the use of compact funds and (2) noncompliance with requirements for major federal programs. We recommended, among other things, that the department work with the countries to establish plans to minimize the impact of declining assistance and to fully develop a reliable mechanism for measuring progress towards program goals. Furthermore, in June 2007 we reported that trust funds for both nations may not provide sustainable income after the compact grants end, and we recommended, among other things, improvements in trust fund administration. The department agreed with the recommendations in our December 2006 and June 2007 reports. In our June 2008 assessment of the Compact of Free Association with the Republic of Palau, we reported on the challenges Palau faced in dealing with persistent financial management weaknesses and with achieving long term economic self-sufficiency. We recommended that the department formally consult with the government of Palau regarding Palau’s financial management challenges and target future technical assistance toward building Palau’s financial management capacity. The department concurred with our recommendations. As the steward of more than 500 million acres of federal land, land consolidation through sales and acquisitions and land management are important functions for the Department of the Interior. However, the Federal Land Transaction Facilitation Act of 2000 which, in part, was intended to facilitate land consolidation, has had limited success. In February 2008, we reported that BLM had raised $95.7 million in revenue through May 2007 under the Federal Land Transaction Facilitation Act. About 92 percent of this revenue came from land transactions in Nevada. However, the four land management agencies (BLM, FWS, NPS, and Agriculture’s Forest Service) have spent only $13.3 million of the revenues raised for acquiring certain nonfederal lands, primarily those lying within the boundaries of national parks, forests, wildlife refuges, and other designated areas, known as inholdings, ($10.1 million) or for administrative expenses to prepare land for sales ($3.2 million). The agencies face several challenges to completing future land acquisitions under the act. Most notably, the act requires that the agencies use most of the funds to purchase land in the state in which the funds were raised; this restriction has had the effect of making little revenue available outside of Nevada. If Congress decides to reauthorize the act, we suggested that it consider including additional lands for sale and greater flexibility for acquisitions. We also made a number of recommendations to the agencies to improve the implementation and compliance with the act. Interior generally agreed with our recommendations. In addition, Interior’s Fish and Wildlife Service is unlikely to achieve its goals to protect certain migratory bird habitat, and it is generally not managing a majority of its farmlands. In September 2007, we reported that since the inception of the Small Wetlands Acquisition Program in the late 1950s, FWS has acquired and permanently protected about 3 million acres of wetlands and grasslands in the Prairie Pothole Region. However, at the current pace of acquisitions, it could take FWS about 150 years and billions of dollars to acquire and permanently protect as much as possible of an additional 12 million acres of “high-priority” habitat. Some emerging market forces suggest that FWS may have only several decades before most of its goal acreage is converted to agricultural uses. We also reported in September 2007 that, according to FWS data, since 1986, the Service has received at least 1,400 conservation easements and fee-simple farmlands covering 132,000 acres from the Department of Agriculture’s Farm Service Agency. However, FWS is generally not managing a majority of its farmlands. For 2002 through 2006, FWS has inspected an annual average of only 13 percent of these lands. Because the farmlands are now part of the National Wildlife Refuge System, we found that FWS cannot dispose of unwanted farmlands. As a result, we recommended that FWS develop a proposal to Congress seeking authority for additional flexibility in dealing with farmlands FWS determines may not be in the best interests of the National Wildlife Refuge System. Interior agreed with our recommendations. Interior also faces a challenge in adequately maintaining its facilities and infrastructure. The department owns, builds, purchases, and contracts services for assets such as visitor centers, schools, office buildings, roads, bridges, dams, irrigation systems, and reservoirs; however, repairs and maintenance on these facilities have not been adequately funded. The deterioration of facilities can impair public health and safety, reduce employees’ morale and productivity, and increase the need for costly major repairs or early replacement of structures and equipment. In November 2008, the department estimated that the deferred maintenance backlog for fiscal year 2008 was between $13.2 billion and $19.4 billion (see table 1). Interior is not alone in facing daunting maintenance challenges. In fact, we have identified the management of federal real property, including deferred maintenance issues, as a governmentwide high-risk area since 2003. Interior has made progress addressing prior recommendations to improve information on the maintenance needs of NPS facilities, BIA schools, and BIA irrigation projects. For example, in February 2006 we reported that BIA plans to hire experts in engineering and irrigation to thoroughly assess the condition of all 16 irrigation projects every 5 years to further refine the deferred maintenance estimate for these projects. It completed its first assessment in July 2005, and expects to complete all 16 assessments by 2010. Although Interior has made a concentrated effort to address its deferred maintenance backlog, the dollar estimate of the backlog has continued to escalate. The 2008 backlog estimate is more than 60 percent higher than the 2003 estimate of between $8.1 billion and $11.4 billion. The funds included in the recently enacted stimulus package for Interior may reverse this trend. Interior collects, on average, over $10 billion annually in mineral lease revenues, but many material weaknesses in federal oil and gas management and revenue collection processes and practices place an unknown but significant proportion of royalties and other oil and gas revenues at risk. These weaknesses also raise questions about whether Interior is collecting an appropriate amount of revenue for the rights to explore for, develop, and produce oil and gas on federal lands and waters. With regard to overall revenue collection, in September 2008, we reported that compared with other countries, the United States receives one of the lowest shares of revenue for its oil and gas resources. A number of these other countries and resource owners had responded to higher oil and gas prices by increasing their share of oil and gas revenues to potentially generate substantially more revenue. However, despite significant changes in the oil and gas industry and widely fluctuating prices, Interior has not systematically reexamined how the federal government is compensated for oil and gas on federal lands for over 25 years. Furthermore, we have found that Interior does less to encourage development of its leases than do some state and private landowners. Also in September 2008, we reported that Interior’s Minerals Management Service’s (MMS) management of cash royalty collection lacks key controls, such as the ability to effectively monitor and validate oil and gas company adjustments to self-reported royalty data, including those made after audits have been completed. Furthermore, MMS’s royalty compliance efforts rely too heavily on self-reported data, but the more consistent use of available third-party data as a check on self-reported data could provide greater assurance that royalties are accurately assessed and paid. In another September 2008 report, we found that for MMS’s Royalty-in-Kind program, in which companies provide the federal government with oil or gas in lieu of cash royalty payments, MMS’s oversight of natural gas volumes is less robust than its oversight of oil volumes—a finding that raises questions about the accuracy of company-reported volumes of natural gas from which MMS must determine whether it is receiving its appropriate share of production. In addition, we found that MMS’s annual reports to Congress do not fully describe the performance of the Royalty- in-Kind program and, in some instances, may overstate the benefits of the program. Concerning workforce issues, we reported in June 2005 that BLM has encountered persistent problems in hiring and retaining sufficient and adequately trained staff to keep up with an increasing workload as a result of rapid increases in oil and gas operations on federal lands. For example, between 1999 and 2004, when applications for permits to drill more than tripled, BLM was unable to keep up with the commensurate increase in its workload, in part, as a result of an ineffective workforce planning process, the lack of key data on workload activities, and a lack of resources. BLM’s inability to attract and retain sufficiently trained staff has kept the agency from meeting requirements to inspect the drilling and production of oil and gas on federal lands. Lack of inspection puts federal revenues at risk because inspections have found violations, including errors in the volumes of oil and gas that operators reported. Furthermore, in one of our September 2008 reports, we reported that Interior is not meeting statutory or agency targets for inspecting certain onshore and offshore leases and metering equipment for measuring oil and gas production, raising questions about the accuracy of company-reported oil and gas production figures. As a result, and based on Interior’s comments, we recommended that Interior report to Congress any year in which it does not meet its legal and agency requirements for completing production inspections, along with the cause and a plan for achieving compliance. In 2007 and 2008, we reported on MMS’s implementation of the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 and other authorities for granting royalty relief for oil and gas leases. We found that MMS had issued lease contracts in 1998 and 1999 that failed to include price thresholds above which royalty relief would no longer be applicable. As a result, large volumes of oil and natural gas are exempt from royalties, which significantly reduces the amount of royalty revenues that the federal government can collect. At least $1 billion in royalties has already been lost because of this failure to include price thresholds. We developed a number of scenarios that showed that forgone royalties from leases issued between 1996 and 2000 under the act could be as high as $53 billion. However, there is much uncertainty in this scenario as a result of the inherent difficulties in estimating future production, ongoing litigation over MMS’s authority to set price thresholds for some leases, and widely fluctuating oil and gas prices. Other authorities for granting royalty relief may also affect future royalty revenues. Specifically, under discretionary authority, the Secretary of the Interior administers programs granting relief for certain deep water leases issued after 2000, certain gas wells drilled in shallow waters, and wells nearing the end of their productive lives. In addition, the Energy Policy Act of 2005 mandates relief for leases issued in the Gulf of Mexico during the 5 years following the act’s passage, provides some relief for some gas wells that would not have previously qualified for royalty relief, and addresses relief in certain areas of Alaska where there currently is little or no production. Additional revenues or financial assurances could be generated through hardrock mining operations by amending the General Mining Act of 1872 so that the federal government could collect federal royalties on minerals extracted from U.S. mineral rights and by requiring adequate financial assurances from hardrock mining operations to fully cover estimated reclamation costs. Additional revenues could also be generated by increasing the grazing fee for public lands managed by Interior’s Bureau of Land Management. The General Mining Act of 1872 helped open the West by allowing individuals to obtain exclusive rights to mine billions of dollars worth of hardrock minerals from federal lands without having to pay a federal royalty. In July 2008 we reported that the 12 western states, including Alaska, assess multiple types of royalties on mining operations. States may use similar names for the royalties they assess, but these can vary widely in their forms and rates. Unlike the federal government, these states charge royalties that allow them to share in the proceeds from hardrock minerals extracted from state-owned lands, as well as levy taxes that function like royalties, on private, state, and federal lands. Under BLM regulations, hardrock mining operators who extract gold, silver, copper, and other valuable mineral deposits from land belonging to the United States are required to provide financial assurances, before they begin exploration or mining, to guarantee that the costs to reclaim land disturbed by their operations are paid. However, we reported in June 2005 that BLM did not have a process for ensuring that adequate assurances were in place. When operators with insufficient financial assurances fail to reclaim BLM land disturbed by hardrock mining operations, BLM is left with public land that poses risks to the environment and public health and safety, and requires millions of federal dollars to reclaim. In March 2008, we found that the financial assurances required by BLM were not adequate to fully cover estimated reclamation costs. According to BLM, mine operators had provided financial assurances valued at approximately $982 million to guarantee reclamation costs for 1,463 hardrock operations on BLM land. BLM also estimated that 52 mining operations had financial assurances that amounted to about $28 million less than needed to fully cover estimated reclamation costs. However, we found that the financial assurances for these 52 operations were in fact about $61 million less than needed to fully cover estimated reclamation costs. The $33 million difference between our estimated shortfall and BLM’s occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This calculation approach has the effect of offsetting the shortfalls in some operations with the financial assurances of other operations. However, financial assurances that are greater than the amount required for an operation cannot be transferred to another operation that has inadequate financial assurances. BLM officials agreed that it would be valuable to report the dollar value of the difference between financial assurances in place and required for those operations where financial assurances are inadequate. Ten federal agencies manage grazing on over 22 million acres, with BLM and the Forest Service managing the vast majority of this activity. In total, federal grazing revenue amounted to about $21 million in fiscal year 2004, although grazing fees differ by agency. For example, in 2004, BLM and the Forest Service charged $1.43 per animal unit month, while other federal agencies charged between $0.29 and $112 per animal unit month. We reported in 2005 that while BLM and the Forest Service charged generally much lower fees than other federal agencies and private entities, these fees reflect legislative and executive branch policies to support local economies and ranching communities. Specifically, BLM fees are set by a formula that expired in 1985, but was extended indefinitely by executive order in 1986. This formula takes into account a rancher’s ability to pay and, therefore, the purpose is not primarily to recover the agencies’ costs or capture the fair market value of forage. Instead, the formula is designed to set a fee that helps support ranchers and the western livestock industry. Other federal agencies employ market-based approaches to setting grazing fees. Using this formula, BLM collected about $12 million in receipts in fiscal year 2004, while its costs for implementing its grazing program, including range improvement activities, were about $58 million. Were BLM to implement approaches used by other agencies to set grazing fees, it could help to close the gap between expenditures and receipts and more closely align its fees with market prices. Instead, for 2007, 2008, and 2009, the grazing fee was set at $1.35 per animal unit month, the lowest level allowable under the executive order. We recognize, however, that the purpose and size of BLM’s grazing fee are ultimately for Congress to decide. Mr. Chairman, this concludes our prepared statement. We would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Robin M. Nazzaro or Frank Rusco at (202) 512-3841 or [email protected] and [email protected], respectively. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Jeffery D. Malcolm, Assistant Director, and Ross Campbell. Also contributing to this testimony were Ron Belak, Jonathan Dent, Glenn Fischer, Emil Friberg, Steve Gaty, Richard P. Johnson, Marissa Jones, Carol Kolarik, Carol Herrnstadt Shulman, and Desirée Thorp. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.: January 2003. 2009 Congressional and Presidential Transition: Department of the Interior (Web-based—http://www.gao.gov/transition_2009/agency/doi/). Posthearing Questions: Major Management Challenges at the Department of the Interior. GAO-07-659R. Washington, D.C.: March 28, 2007. Department of the Interior: Major Management Challenges. GAO-07-502T. Washington, D.C.: February 16, 2007. Major Management Challenges at the Department of the Interior (2005 Web-based Update—http://www.gao.gov/pas/2005/doi.htm). Wildland Fire Management: Interagency Budget Tool Needs Further Development to Fully Meet Key Objectives. GAO-09-68. Washington, D.C.: November 24, 2008. Wildland Fire Management: Federal Agencies Lack Key Long- and Short- Term Management Strategies for Using Program Funds Effectively. GAO-08-433T. Washington, D.C.: February 12, 2008. Wildland Fire Management: Better Information and a Systematic Process Could Improve Agencies’ Approach to Allocating Fuel Reduction Funds and Selecting Projects. GAO-07-1168. Washington, D.C.: September 28, 2007. Wildland Fire Management: Lack of Clear Goals or a Strategy Hinders Federal Agencies’ Efforts to Contain the Costs of Fighting Fires. GAO-07-655. Washington, D.C.: June 1, 2007. Wildland Fire Suppression: Lack of Clear Guidance Raises Concerns about Cost Sharing between Federal and Nonfederal Entities. GAO-06-570. Washington, D.C.: May 30, 2006. Wildland Fire Management: Update on Federal Agency Efforts to Develop a Cohesive Wildland Fire Strategy. GAO-06-671R. Washington, D.C.: May 1, 2006. Wildland Fire Management: Important Progress Has Been Made, but Challenges Remain to Completing a Cohesive Strategy. GAO-05-147. Washington, D.C.: January 14, 2005. Wildland Fires: Forest Service and BLM Need Better Information and a Systematic Approach for Assessing the Risks of Environmental Effects. GAO-04-705. Washington, D.C.: June 24, 2004. Wildland Fire Management: Additional Actions Required to Better Identify and Prioritize Lands Needing Fuels Reduction. GAO-03-805. Washington, D.C.: August 15, 2003. Western National Forests: A Cohesive Strategy is Needed to Address Catastrophic Wildfire Threats. GAO/RCED-99-65. Washington, D.C.: April 2, 1999. Endangered Species Act: Many GAO Recommendations Have Been Implemented, but Some Issues Remain Unresolved. GAO-09-225R. Washington, D.C.: December 19, 2008. Federal Land Management: Use of Stewardship Contracting Is Increasing, but Agencies Could Benefit from Better Data and Contracting Strategies. GAO-09-23. Washington, D.C.: November 13, 2008. Bureau of Land Management: Effective Long-Term Options Needed to Manage Unadoptable Wild Horses. GAO-09-77. Washington, D.C.: October 9, 2008. Wildlife Refuges: Changes in Funding, Staffing, and Other Factors Create Concerns about Future Sustainability. GAO-08-797. Washington, D.C.: September 22, 2008. U.S. Fish and Wildlife Service: Endangered Species Act Decision Making. GAO-08-688T. Washington, D.C.: May 21, 2008. Hardrock Mining: Information on Abandoned Mines and Value and Coverage of Financial Assurances on BLM Land. GAO-08-574T. Washington, D.C.: March 12, 2008. Yellowstone Bison: Interagency Plan and Agencies’ Management Need Improvement to Better Address Bison-Cattle Brucellosis Controversy. GAO-08-291. Washington, D.C.: March 7, 2008. Natural Resource Management: Opportunities Exist to Enhance Federal Participation in Collaborative Efforts to Reduce Conflicts and Improve Natural Resource Conditions. GAO-08-262. Washington, D.C.: February 12, 2008. Climate Change: Agencies Should Develop Guidance for Addressing the Effects on Federal Land and Water Resources. GAO-07-863. Washington, D.C.: August 7, 2007. U.S. Fish and Wildlife Service: Opportunities Remain to Improve Oversight and Management of Oil and Gas Activities on National Wildlife Refuges. GAO-07-829R. Washington, DC: June 29, 2007. Endangered Species: Many Factors Affect the Length of Time to Recover Select Species. GAO-06-730. Washington, D.C.: September 6, 2006. Invasive Forest Pests: Lessons Learned from Three Recent Infestations May Aid in Managing Future Efforts. GAO-06-353. Washington, D.C.: April 21, 2006. Endangered Species: Time and Costs Required to Recover Species Are Largely Unknown. GAO-06-463R. Washington, D.C.: April 6, 2006. Wind Power: Impacts on Wildlife and Government Responsibilities for Regulating Development and Protecting Wildlife. GAO-05-906. Washington, D.C.: September 16, 2005. Hardrock Mining: BLM Needs to Better Manage Financial Assurances to Guarantee Coverage of Reclamation Costs. GAO-05-377. Washington, D.C.: June 20, 2005. Oil and Gas Development: Increased Permitting Activity Has Lessened BLM’s Ability to Meet Its Environmental Protection Responsibilities. GAO-05-418. Washington, D.C.: June 17, 2005. Invasive Species: Cooperation and Coordination Are Important for Effective Management of Invasive Weeds. GAO-05-185. Washington, D.C.: February 25, 2005. Oil and Gas Development: Challenges to Agency Decisions and Opportunities for BLM to Standardize Data Collection. GAO-05-124. Washington, D.C.: November 30, 2004. Endangered Species: More Federal Management Attention Is Needed to Improve the Consultation Process. GAO-04-93. Washington, D.C.: March 19, 2004. Invasive Species: Clearer Focus and Greater Commitment Needed to Effectively Manage the Problem. GAO-03-1. Washington, D.C.: October 22, 2002. Indian Issues: BLM’s Program for Issuing Individual Indian Allotments on Public Lands Is No Longer Viable. GAO-07-23R. Washington, D.C.: October 20, 2006. Indian Issues: BIA’s Efforts to Impose Time Frames and Collect Better Data Should Improve the Processing of Land in Trust Applications. GAO-06-781. Washington, D.C.: July 28, 2006. Indian Irrigation: Numerous Issues Need to Be Addressed to Improve Project Management and Financial Sustainability. GAO-06-314. Washington, D.C.: February 24, 2006. Alaska Native Allotments: Conflicts with Utility Rights-of-Way Have Not Been Resolved Through Existing Remedies. GAO-04-923. Washington, D.C.: September 7, 2004. Columbia River Basin: A Multilayered Collection of Directives and Plans Guide Federal Fish and Wildlife Plans. GAO-04-602. Washington, D.C.: June 4, 2004. Alaska Native Villages: Most Are Affected by Flooding and Erosion, but Few Qualify for Federal Assistance. GAO-04-142. Washington, D.C.: December 12, 2003. Commonwealth of the Northern Mariana Islands: Managing Potential Economic Impact of Applying U.S. Immigration Law Requires Coordinated Federal Decisions and Additional Data. GAO-08-791. Washington, D.C.: August 4, 2008. American Samoa: Issues Associated with Potential Changes to the Current System for Adjudicating Matters of Federal Law. GAO-08-655. Washington, D.C.: June 27, 2008. Compact of Free Association: Palau’s Use of and Accountability for U.S. Assistance and Prospects for Economic Self-Sufficiency. GAO-08-732. Washington, D.C.: June 10, 2008. Commonwealth of the Northern Mariana Islands: Pending Legislation Would Apply U.S. Immigration Law to the CNMI with a Transition Period. GAO-08-466. Washington, D.C.: March 28, 2008. Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income. GAO-07-513. Washington, D.C.: June 15, 2007. Compacts of Free Association: Micronesia’s and the Marshall Islands’ Use of Sector Grants. GAO-07-514R. Washington, D.C.: May 25, 2007. Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for Sustainability, Measuring Progress, and Ensuring Accountability. GAO-07-163. Washington, D.C.: December 15, 2006. U.S. Insular Areas: Economic, Fiscal, and Financial Accountability Challenges. GAO-07-119. Washington, D.C.: December 12, 2006. Compacts of Free Association: Development Prospects Remain Limited for Micronesia and the Marshall Islands. GAO-06-590. Washington, D.C.: June 27, 2006. U.S. Insular Areas: Multiple Factors Affect Federal Health Care Funding. GAO-06-75. Washington, D.C.: October 14, 2005. Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Underway, but Planning Challenges Remain. GAO-05-633. Washington, D.C.: July 11, 2005. American Samoa: Accountability for Key Federal Grants Needs Improvement. GAO-05-41. Washington, D.C.: December 17, 2004. Compact of Free Association: Single Audits Demonstrate Accountability Problems over Compact Funds. GAO-04-7. Washington, D.C.: October 7, 2003. Compact of Free Association: An Assessment of Amended Compacts and Related Agreements. GAO-03-890T. Washington, D.C.: June 18, 2003. Federal Land Management: Federal Land Transaction Facilitation Act Restrictions and Management Weaknesses Limit Future Sales and Acquisitions. GAO-08-196. Washington, D.C.: February 5, 2008. Prairie Pothole Region: At the Current Pace of Acquisitions, the U.S. Fish and Wildlife Service Is Unlikely to Achieve Its Habitat Protection Goals for Migratory Birds. GAO-07-1093. Washington, D.C.: September 27, 2007. U.S. Fish and Wildlife Service: Additional Flexibility Needed to Deal with Farmlands Received from the Department of Agriculture. GAO-07-1092. Washington, D.C.: September 18, 2007. Interior’s Land Appraisal Services: Action Needed to Improve Compliance with Appraisal Standards, Increase Efficiency, and Broaden Oversight. GAO-06-1050. Washington, D.C.: September 28, 2006. National Park Service: Major Operations Funding Trends and How Selected Park Units Responded to Those Trends for Fiscal Years 2001 through 2005. GAO-06-431. Washington, D.C.: March 31, 2006. Indian Irrigation Projects: Numerous Issues Need to Be Addressed to Improve Project Management and Financial Sustainability. GAO-06-314. Washington, D.C.: February 24, 2006. Recreation Fees: Comments on the Federal Lands Recreation Enhancement Act, H.R. 3283. GAO-04-745T. Washington, D.C.: May 6, 2004. National Park Service: Efforts Underway to Address Its Maintenance Backlog. GAO-03-1177T. Washington, D.C.: September 27, 2003. Bureau of Indian Affairs Schools: Expenditures in Selected Schools Are Comparable to Similar Public Schools, but Data Are Insufficient to Judge Adequacy of Funding and Formulas. GAO-03-955. Washington, D.C.: September 4, 2003. Bureau of Indian Affairs Schools: New Facilities Management Information System Promising, but Improved Data Accuracy Needed. GAO-03-692. Washington, D.C.: July 31, 2003. National Park Service: Status of Agency Efforts to Address Its Maintenance Backlog. GAO-03-992T. Washington, D.C.: July 8, 2003. Oil and Gas Royalties: MMS’s Oversight of Its Royalty-in-Kind Program Can Be Improved through Additional Use of Production Verification Data and Enhanced Reporting of Financial Benefits and Costs. GAO-08-942R. Washington, D.C.: September 26, 2008. Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk. GAO-08-893R. Washington, D.C.: September 12, 2008. Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues Needs Comprehensive Reassessment. GAO-08-691. Washington, D.C.: September 3, 2008. Oil and Gas Royalties: Litigation over Royalty Relief Could Cost the Federal Government Billions of Dollars. GAO-08-792R. Washington, D.C.: June 5, 2008. Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk. GAO-08-560T. Washington, D.C.: March 11, 2008. Oil and Gas Royalties: A Comparison of the Share of Revenue Received From Oil and Gas Production by the Federal Government and Other Resources. GAO-07-676R. Washington, D.C.: May 1, 2007. Oil and Gas Royalties: Royalty Relief Will Cost the Government Billions of Dollars but Uncertainty Over Future Energy Prices and Production Levels Make Precise Estimates Impossible at this Time. GAO-07-590R. Washington, D.C.: April 12, 2007. Royalties Collection: Ongoing Problems with Interior’s Efforts to Ensure a Fair Return for Taxpayers Require Attention. GAO-07-682T. Washington, D.C.: March 28, 2007. Oil and Gas Royalties: Royalty Relief Will Likely Cost the Government Billions, but the Final Costs Have Yet to Be Determined. GAO-07-369T. Washington, D.C.: January 18, 2007. Royalty Revenues: Total Revenues Have Not Increased at the Same Pace as Rising Oil and Natural Gas Prices due to Decreasing Production Sold. GAO-06-786R. Washington, D.C.: June 21, 2006. Oil and Gas Development: Challenges to Agency Decisions and Opportunities for BLM to Standardize Data Collection. GAO-05-124. Washington, D.C.: November 30, 2004. Mineral Revenues: Cost and Revenue Information Needed to Compare Different Approaches for Collecting Federal Oil and Gas Royalties. GAO-04-448. Washington, D.C.: April 16, 2004. Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind Pilots Is Needed. GAO-03-296. Washington, D.C.: January 9, 2003. Hardrock Mining: Information on State Royalties and Trends in Mineral Imports and Exports. GAO-08-849R. Washington, D.C.: July 21, 2008. Hardrock Mining: Information on Abandoned Mines and Value and Coverage of Financial Assurances on BLM Land. GAO-08-574T. Washington, D.C.: March 12, 2008. Recreation Fees: Agencies Can Better Implement the Federal Lands Recreation Enhancement Act and Account for Fee Revenues. GAO-06-1016. Washington, D.C.: September 22, 2006. National Park Air Tour Fees: Effective Verification and Enforcement Are Needed to Improve Compliance. GAO-06-468. Washington, D.C.: May 11, 2006. Livestock Grazing: Federal Expenditures and Receipts Vary, Depending on the Agency and the Purpose of the Fee Charged. GAO-05-869. Washington, D.C.: September 30, 2005. Hardrock Mining: BLM Needs to Better Manage Financial Assurances to Guarantee Coverage of Reclamation Costs. GAO-05-377. Washington, D.C.: June 20, 2005. Oil and Gas Development: Increased Permitting Activity Has Lessened BLM’s Ability to Meet Its Environmental Protection Responsibilities. GAO-05-418. Washington, D.C.: June 17, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of the Interior is responsible for managing much of the nation's vast natural resources. Its agencies implement an array of programs intended to protect these precious resources for future generations while also allowing certain uses of them, such as oil and gas development and recreation. In some cases, Interior is authorized to collect royalties and fees for these uses. Over the years, GAO has reported on challenges facing Interior as it implements its programs. In addition to basic program management issues, Interior faces difficult choices in balancing its many responsibilities, and in improving the condition of the nation's natural resources and the department's infrastructure, in light of the federal deficit and long-term fiscal challenges facing the nation. This testimony highlights some of the major management challenges facing Interior today. It is based on prior GAO reports. As GAO's previous work has shown, the Department of the Interior faces major management challenges in the following six areas: (1) Strengthening resource protection; (2) Strengthening the accountability of Indian and island community programs; (3) Improving federal land acquisition and management; (4) Reducing Interior's deferred maintenance backlog; (5) Ensuring the accurate collection of royalties; and (6) Enhancing other revenue collections and financial assurances. Interior has not yet developed a cohesive strategy to address wildland fire issues, as GAO recommended in 1999 and 2005. In addition, Interior faces challenges in managing oil and gas operations on federal lands, adapting to climate change, and resolving natural resource conflicts through collaborative management. Having a land base is important to Indian tribes. Concerns remain about delays in decisions about land that Interior will take into trust status. In addition, programs for seven island communities--four U.S. territories and three sovereign island nations--continue to have financial and program management deficiencies. As the steward of more than 500 million acres of federal land, land consolidation through sales and acquisitions and land management are important functions for the department. The Federal Land Transaction Facilitation Act has had limited success and Interior's U.S. Fish and Wildlife Service is unlikely to achieve its goals to protect certain migratory bird habitat and it is generally not managing a majority of its farmlands. While Interior has improved inventory and asset management systems, the dollar estimate of the deferred maintenance backlog has continued to grow. The 2008 estimate of between $13.2 billion and $19.4 billion is more than 60 percent higher than the 2003 estimate. The funds for Interior in the recently enacted stimulus package may reverse this trend. GAO and others have found many material weaknesses in their numerous evaluations of federal oil and gas management and revenue collection processes. These weaknesses place an unknown but significant proportion of royalties and other oil and gas revenues at risk and raise questions about whether Interior is collecting an appropriate amount of revenue for the rights to explore for, develop, and produce oil and gas from federal lands and waters. Additional revenues or financial assurances could be generated by (1) amending the General Mining Act of 1872 to collect federal royalties on gold, silver, copper, and other valuable minerals belonging to the United States, (2) requiring adequate financial assurances from hardrock mining operations to fully cover estimated reclamation costs, and (3) increasing the grazing fee for public lands managed by Interior's Bureau of Land |
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USSTRATCOM’s global missions provide a wide range of capabilities that are intended to respond to a dramatically changing security environment brought about by emerging global, transregional, and asymmetric threats to U.S. national security. Unlike the command’s nuclear deterrence and space operations missions, the command’s global strike; integrated ballistic missile defense; intelligence, surveillance, and reconnaissance; information operations; global command and control; and combating weapons of mass destruction missions had not been previously assigned to a unified command. These newer missions have been performed, mostly ad hoc, by multiple DOD organizations and the military services but did not have a primary joint sponsor and central focus within DOD. The command’s most recent reorganization, begun in late 2004, shifted the day-to-day planning and execution responsibility for most of its missions from its headquarters to several new subordinate organizations. USSTRATCOM intends that its latest organizational construct will provide greater focus, continuity, and performance for its missions and better accommodate the execution of the command’s global responsibilities by reducing organizational layers and enabling communication and information to flow more easily from the most senior levels of leadership to those producing the information. The command envisions that this new organizational construct will reduce the cycle time for reaching and implementing decisions for its missions, increase the effectiveness of the products and services it provides in support of the regional combatant commands, and provide improved access to all of the command’s capabilities. USSTRATCOM, for example, has recently established a joint space operations center, under its Joint Functional Component Command for Space and Global Strike, to more effectively respond to requests from regional combatant commands for space capabilities. As shown in figure 1, the current USSTRATCOM organization is comprised of a command headquarters, service component or supporting commands, joint functional component commands, centers, and task forces. Under the new organization, USSTRATCOM’s headquarters would focus primarily on overseeing tasks for command and control; strategic-level integration; and advocacy, including developing strategy and plans, managing command and control operations and support, and advocating for mission capabilities. It also has responsibility for designating objectives; assigning missions, tasks, forces, and resources; defining policy and concepts; and providing direction to the command’s subordinate organizations. Additionally, USSTRATCOM headquarters has responsibility for planning and deploying forces for the command’s nuclear mission. The reorganization created four new joint functional component commands for (1) space and global strike; (2) integrated missile defense; (3) intelligence, surveillance, and reconnaissance; and (4) network warfare. These commands have day-to-day responsibilities for operational and tactical-level planning and execution and management of forces. The new organization also includes the USSTRATCOM Center for Combating Weapons of Mass Destruction, Joint Information Operations Center, and Joint Task Force for Global Network Operations that work with the command, the unified commands, and mission partners to provide operational solutions to mission-related problems. The command has also geographically aligned many of its subordinate organizations with supporting military services and Defense agencies to leverage the expertise and resources in their respective mission areas. For example, the command has partnered and co-located its Joint Functional Component Command for Intelligence, Surveillance, and Reconnaissance with the Defense Intelligence Agency in the Washington, D.C., area to take advantage of the agency’s capabilities and improve access and coordination with DOD and national intelligence agencies. To further strengthen the partnership between the organizations, the commander of the component command is also the Director of the Defense Intelligence Agency. In response to intelligence information requests from the combatant commanders, the agency would globally prioritize intelligence collection requirements and the joint functional component command would then prioritize and task the appropriate intelligence, surveillance, and reconnaissance assets to best meet those requirements. Appendix IV provides additional information about the command’s key mission organizations. Additionally, the reorganization established new command relationships with the military services to better focus service support. USSTRATCOM accesses capabilities from each of the services through its three service component commands—the Army Forces Strategic Command, Air Force Forces Strategic Command, and Marine Corps Forces Strategic Command—and the Commander, U.S. Navy Fleet Forces Command. Unlike the other services, the Navy Fleet Forces Command is a supporting command rather than a designated service component command to USSTRATCOM. However, Fleet Forces Command’s overarching responsibilities in supporting USSTRATCOM are consistent with those of the other service components. Each service command acts as the primary focal point for its respective service capabilities and has responsibilities for ensuring that forces provided to USSTRATCOM are organized, trained, and equipped to support the command in carrying out its missions and providing the administrative chain of command and control for its respective service forces. Because of its expanded set of missions, USSTRATCOM’s budget has grown significantly from $276.8 million of total obligation authority in then-year dollars in fiscal year 2003 to $500.4 million in fiscal year 2006, excluding appropriations for military personnel and USSTRATCOM service component commands and other supporting agencies. The command’s annual budget is expected to increase to $551.4 million by fiscal year 2011. Table 1 details the command’s historic and projected budget by major appropriations account from fiscal years 2003 through 2011. The command’s budget is comprised mostly of operation and maintenance funding, with lesser amounts of research and development and procurement funding associated with programs for intelligence, information operations, network warfare, command and control, and planning systems. Appendix I provides more details about USSTRATCOM’s budget. Since its establishment, USSTRATCOM’s authorized number of military and civilian positions has increased by about 300. As of October 2005, the command’s overall authorized personnel level was composed of 2,947 military and civilian positions, of which 91 percent were filled. Of the 2,947 positions, military positions comprise about 72 percent of the positions (2,122), with the Air Force providing the largest number of positions (1,256). Civilian positions make up the remaining 28 percent (835). The command has begun to fill positions in its new mission organizations from within its existing authorized personnel levels by transferring positions from its headquarters to the new organizations over a 3-year period beginning with fiscal year 2005. The command’s authorized personnel levels are made up of a relatively few number of skills, although the mix of military skills has changed since 2002. Additional information about USSTRATCOM’s authorized personnel levels is in appendix II. USSTRATCOM has made progress in implementing its new missions and has taken a number of positive actions in each of its mission areas to prepare or update concepts of operations, plans, guidance, and policy; identify resources needed for mission planning and execution; and establish an organization to more effectively manage its responsibilities and provide the range of capabilities across its mission areas. Many of the command’s actions are consistent with the useful practices and lessons learned with high-performing organizations undergoing successful transformations that we have identified in our past work. However, further steps are needed to build on this progress in order to achieve the broad goals envisioned by the President and Secretary of Defense in creating the command. While the command has taken initial steps to include its new missions in its exercise program, USSTRATCOM has not yet fully developed a robust exercise program that integrates exercise support available from the U.S. Joint Forces Command, which can provide planning, training, and exercise tools. In addition, while USSTRATCOM’s leadership has provided general guidance to its mission organizations, it has not provided specific information or identified consistent requirements for achieving full operating capability and most of the command’s new mission organizations have not established clear criteria for determining when they have reached this milestone. Also, while the command has adopted some key management principles, the command has not yet developed strategic goals and outcome-oriented performance measures and criteria for assessing results across the command and in each of its mission areas. Since its establishment, USSTRATCOM has made progress in implementing its new missions and has taken a wide range of positive actions to integrate these missions into its organization, such as developing various plans, concepts, and guidance; establishing procedures and processes; identifying personnel and funding resources; developing new relationships; building communication networks; and providing education, training, and exercises. For example, the command has prepared concepts of operations for its missions and organization, such as operations for network warfare and global integrated missile defense, and has recently approved a concept of operations describing the processes it will use in integrating its diverse capabilities and providing warfighting options to regional combatant commands. Additionally, USSTRATCOM has taken other actions, including (1) establishing collaboration tools and processes to improve communication for planning, execution, and evaluation among its organizations and customers; (2) creating various processes and groups within the command to advocate for the capabilities necessary to accomplish its missions, such as advocating for modification of the Trident II missile to provide an improved near-term conventional global strike capability; and (3) upgrading and expanding its facilities, such as improvements to the command’s headquarters command center. The command has also taken actions to demonstrate the value added of its missions for other combatant commands and DOD organizations. For example, to implement its mission responsibilities for preventing and defending against intrusions into DOD’s critical information network systems, the command’s Joint Task Force for Global Network Operations has recently instituted stringent use controls and trained system users to improve security and reduce vulnerabilities for these systems. As its missions have matured, USSTRATCOM has also undertaken several reorganizations to more effectively manage its responsibilities and provide the range of capabilities across its mission areas. Many of the actions the command has taken to implement its latest reorganization are consistent with the useful practices and lessons learned with high-performing organizations undergoing successful transformations that we have identified in our prior work, including establishing a matrixed, horizontal organizational structure that provides a greater external focus for its customers, forms partnerships with key organizations, and openly shares information. As discussed earlier, its latest reorganization intends to leverage essential competencies of associated components and key supporting agencies and decentralize the responsibility of its headquarters for the day-to-day planning and execution of its primary mission areas to several interdependent mission organizations. While the command’s mission organizations differ in the extent of their maturity, USSTRATCOM has focused considerable attention over the past year on establishing their responsibilities, command and agency relationships, and operational competencies, and assigning personnel to these new organizations. Its senior leadership has also taken an active and visible role in supporting the organizational changes underway. USSTRATCOM has restructured its exercise program to better incorporate its missions and has conducted a few training exercises involving all of its missions and new organizations. While the command is taking steps to address the challenges in more fully including its missions in its exercises, it has not yet fully developed a robust exercise program that integrates exercise support available from the U.S. Joint Forces Command’s Joint Warfighting Center, which can provide planning, training, and exercise tools. USSTRATCOM restructured its exercise program in 2003. It began incorporating its newer missions into its exercises beginning in November 2004 and brought together all of its missions in the same exercise in its two most recent exercises, Global Lightning in November 2005, and Global Thunder in April 2006. Global Lightning is an annual USSTRATCOM-sponsored command-post exercise, which involves the commander and his staff in testing and validating the communications within and between headquarters and simulated forces in deterring a military attack and employing forces as directed. The annual Global Thunder exercise is the command’s main nuclear deterrence field training exercise, which uses actual forces in training commanders, staff, and individual units at all levels of their warfare skills. Another command-post exercise, Global Storm, is designed to cover the command’s missions that are most relevant in the early stages of conflict, such as information operations and intelligence, surveillance, and reconnaissance. The command plans to conduct this exercise annually depending on scheduling and resource considerations. The command faces challenges in effectively executing its exercise program across its missions and new organizations. However, the command is taking some actions to overcome these challenges, and some of these challenges should lessen over time as the command’s missions and organizations mature. First, many of the command’s operational concepts, directives, and instructions used in designing and executing exercises have not yet been approved, developed, or revised to reflect its new organization. For example, at the time of the November 2005 Global Lightning exercise, some USSTRATCOM mission organizations were executing their processes and procedures without the benefit of complete and approved doctrine because several key concepts of operations for its missions, such as the concept of operations for horizontally integrating its missions, were still in draft form. According to USSTRATCOM officials, the command has to prepare plans for an exercise many months in advance even if its doctrine continues to evolve. The officials said that USSTRATCOM incorporates any changes to doctrine and guidance as it develops its exercise plan, but these changes are more difficult to make as the plan becomes more complete and the exercise nears. A USSTRATCOM official told us that doctrine and guidance should become more stable and change less frequently as the command’s missions, organization, and processes mature. Second, several of the command’s new mission organizations are still being established, which has affected their ability to fully participate in the command’s recent exercises and identify exercise objectives. For example, at the time of the November 2005 Global Lightning exercise, the new joint functional component commands had existed for less than 1 year, and the Center for Combating Weapons of Mass Destruction had been established for only 3 months. According to the Chief of Staff for the intelligence, surveillance, and reconnaissance component, the component was not able to establish full connectivity during the exercise because it was still operating out of temporary facilities. Further, the new mission organizations were too immature, did not have staff in place, and lacked the established processes and procedures needed to plan their own objectives for the November 2005 exercise, according to USSTRATCOM officials. Instead, the new organizations’ exercise objectives for the November 2005 Global Lightning exercise were established by the command’s headquarters and linked to a broader set of critical tasks and responsibilities. Moreover, while the command’s Center for Combating Weapons of Mass Destruction personnel participated extensively in the November 2005 Global Lightning exercise, no specific exercise objectives had been developed for the center’s mission area. To begin addressing the challenge of increasing involvement of its new organizations in exercise development, the command has advocated the establishment of an exercise or training group within each of its mission organizations and some groups have been created, such as in the space and global strike and integrated missile defense components. Additionally, in preparation for the next Global Lightning exercise in fall 2006, the mission organizations plan to be more involved in preparing exercise objectives for their mission areas and intend to send their personnel to training workshops conducted by the U.S. Joint Forces Command’s Joint Warfighting Center to learn how to develop these objectives. Third, the command has found it difficult to design an exercise that fully covers all of its responsibilities because its missions are so diverse and their relevancy to the exercise is dependent on the type and stage of a particular crisis. USSTRATCOM’s intent is to design its exercises so as to integrate the unique and interdependent capabilities of its global missions to provide a range of options throughout the various stages of a crisis and possible conflict. For example, the command has found that some of its missions, such as information operations, quickly become overlooked during its exercises as events move from crisis into actual conflict. Moreover, the command believes that its exercise program needs to place greater emphasis on the early stages of a crisis because much of USSTRATCOM’s daily operations are conducted before and just after a crisis has begun. To foster greater inclusion of its missions into its exercises, the command used a series of brief, scripted training events that preceded its first Global Lightning exercise in November 2004 to provide opportunities to incorporate some of its missions, particularly intelligence, surveillance, and reconnaissance. During the November 2005 Global Lightning exercise, the command incorporated a timeline that extended from the early to the later stages of conflict to allow designers to prepare a scenario suitable for a more complete range of the command’s missions. The Commander, U.S. Strategic Command, also has directed that the annual Global Thunder exercise and other training events incorporate multiple missions to provide additional evaluation opportunities. Additionally, the command has designed its Global Storm exercises to specifically focus on those missions that are most pertinent before conflict begins. USSTRATCOM has not fully made use of the exercise support available from the U.S. Joint Forces Command. While USSTRATCOM has taken steps to obtain greater assistance from the Joint Forces Command’s Joint Warfighting Center to help the command address its challenges in executing a robust exercise program, the command and the center have not reached agreement on the extent of support the center will provide. Our past work has shown that robust exercise programs are important for assessing and improving mission capabilities, particularly when multiple organizations are involved in mission execution. Moreover, DOD’s recently issued Strategic Plan for Transforming DOD Training supports an increased training focus for many missions assigned to USSTRATCOM, including combating weapons of mass destruction, global strike, information operations, and ballistic missile defense. U.S. Joint Forces Command has lead responsibility for joint force training, and is responsible for helping combatant commanders to identify training requirements and methods, and for assisting them with executing exercises and other training events. As part of U.S. Joint Forces Command, the Joint Warfighting Center provides support to combatant commands in identifying requirements, objectives, methods, and tools for planning, implementing, and evaluating exercises. The center trains combatant command staff to better design exercise objectives that are clearly linked to the command’s essential tasks. It can also send independent observer teams to an exercise to assess the command’s performance and prepare after-action reports and related assessments. The Under Secretary of Defense for Personnel and Readiness has overall responsibility for ensuring that DOD’s joint training programs and resources are sufficient to produce ready forces and overseeing the implementation of DOD’s training transformation strategy. USSTRATCOM has taken steps to obtain greater assistance from the Joint Warfighting Center in recent exercises. The command, for example, obtained limited support from the center during its April 2006 Global Thunder exercise, including teams to observe the participation and activities of its space and global strike component. However, USSTRATCOM’s requirements have not been typically identified far enough in advance for the center to assign staff and commit resources in providing the full range of requested support. For example, command officials told us that USSTRATCOM sought extensive Joint Warfighting Center support for the November 2005 Global Lightning exercise, but the center had already committed to supporting a U.S. Northern Command exercise that was scheduled over the same time period. The center was able to provide USSTRATCOM indirect support, such as providing simulated video news clippings to add context to the events in the exercise scenario, when the command linked its Global Lightning exercise to the U.S. Northern Command exercise. USSTRATCOM’s relationship with the Joint Warfighting Center is still developing. In the past, the center had a limited working relationship with USSTRATCOM and involvement in its exercises because the command’s exercises had been largely focused on its nuclear deterrence mission, which limited the involvement of other DOD organizations. As a result, the center had not included the level of support for USSTRATCOM’s program that it provided to other combatant commands in its past plans. However, to provide Joint Warfighting Center observers with access to more areas and aspects of its exercises, including activities involving the command’s nuclear deterrence mission, USSTRATCOM is changing its security procedures to grant center observers temporary clearances during the exercises. The Joint Warfighting Center’s recent support for USSTRATCOM’s exercise program has helped the command to better define its requirements for future support, but these requirements continue to evolve. USSTRATCOM officials told us that since requirements for future support from the center have traditionally been determined from prior support experience, the command’s limited relationship with the center in the past and the recent restructuring of the command’s exercise program have not yet provided a basis for determining the support needed from the center. The officials said that the specific requirements for the center’s assistance would be easier to determine as more exercises with the center’s involvement are completed. According to a USSTRATCOM official, a key exercise objective in its April 2006 Global Thunder exercise was to expose center personnel on a limited scale to the command’s exercise program. At the same time, the command would gain exposure to the services provided by the center. A center official told us that this type of interaction with the center would help USSTRATCOM to better define and identify its future requirements for center support. Over the long term, USSTRATCOM plans to seek much greater support from the center but has not yet fully defined its requirements. While the Joint Warfighting Center currently supports only one of USSTRATCOM’s exercises each fiscal year, USSTRATCOM officials told us that the center has committed to supporting both of its annual Global Lightning and Global Thunder exercises for fiscal year 2007, including the use of observation teams to help the command evaluate its performance. However, as of March 2006, center officials told us it was unclear how the center would adjust its current resources to support the November 2006 Global Lightning exercise because of the timing of that exercise and its linkage to a U.S. Pacific Command exercise, for which the center is already planning to provide support. In the long term, a center official told us that while the center plans to provide greater support to USSTRATCOM, the center can better plan and make resources available if it is provided with well-defined requirements 3 to 5 years in advance as other commands do. As a result, without fully providing the U.S. Joint Forces Command with well-defined requirements to plan the necessary resources to support USSTRATCOM’s program, USSTRATCOM may not be able to receive the supported needed to execute a robust exercise program to effectively implement its missions. USSTRATCOM had provided overall guidance to each of its subordinate organizations for assessing two key milestones–initial operating capability and full operating capability–used to implement these organizations. However, this guidance does not fully establish clear and well-documented objectives, goals, or criteria to use in determining when these milestones have been achieved. Our prior work shows that it is important that organizations undergoing major transformations provide clear and complete guidance to subordinate organizations on the requirements and expectations for successful implementation of organizational changes. Each of the new subordinate mission organizations has already declared initial operating capability—the first milestone in implementing these organizations. However, without applying specific criteria, such as the extent to which mission organizations are staffed and trained and their mission tasks implemented, in determining when full operating capability– the second milestone–is achieved, the command may not have an accurate understanding of the extent to which its mission organizations are prepared to effectively carry out their missions. After its most recent reorganization, USSTRATCOM issued implementation directives that provide general guidance for establishing each of the five new subordinate organizations. The directives broadly describe the organizations’ responsibilities, authorities, tasks, personnel and resources requirements, and schedules for implementation. Additionally, the command prepared an implementation plan that summarizes the implementation directives and provides additional direction for establishing the new subordinate organizations, including timelines and implementation tasks. USSTRATCOM also created a reorganization management team working group comprised of representatives from headquarters and the new organizations to assist with and coordinate the reorganization activities. USSTRATCOM’s implementation guidance calls for each new organization to declare initial operating capability and full operating capability, which are key milestones used to indicate the organization’s progress in implementing plans, procedures, and structures and achieving the readiness required to perform its missions. In addition, the guidance provides some general criteria to follow before declaring initial operating capability or full operating capability. For example, the guidance requires that prior to the initial operating capability milestone, each new organization would develop a mission statement; a detailed concept of operations for the organization to manage and execute its assigned forces and missions, including personnel requirements; and a task hand-over plan for the transfer of functions from headquarters. The guidance also requires formal updates on the new organizations’ progress toward achieving the milestones during quarterly command conferences. Table 2 shows that each of the new organizations stated that it had achieved initial operating capability in 2005. The Joint Functional Component Command for Integrated Missile Defense achieved full operating capability in February 2006 and the other four organizations plan to reach this milestone between September 2006 and January 2007. While the implementation guidance provides general criteria for achieving initial and full operating capability, it lacks clarity and specificity for reaching these milestones. The Commander, U.S. Strategic Command, has delegated authority for establishing the new mission organizations and decisions for declaring initial and full operating capability to the senior leaders of these organizations. Headquarters representatives of the reorganization management team told us that a good deal of subjectivity is involved in deciding when each milestone has been achieved. In addition, we found that the commander or director of each new organization has interpreted the milestones differently when developing the organization’s approach and assessment criteria for achieving the milestones. For example, the criteria used by each organization to determine initial operating capability last year varied greatly among the organizations: The commander of the intelligence, surveillance, and reconnaissance component declared reaching the milestone based on such factors as the component having its deputy commander in place, establishing the component’s online Web portal that facilitates external communication across various classified links, and beginning its intelligence campaign planning support for three regional combatant commands. The commander of the integrated missile defense component declared reaching the milestone based on completing preparation of several documents, for example, ballistic missile defense emergency activation plans and a supporting plan for one of the command’s contingency plans; undertaking the process of making operational several required functions, such as ballistic missile defense situational awareness and operational oversight of the ballistic missile defense command and control system; and assuming responsibility for performing most of its directed tasks. The acting deputy commander of the network warfare component told us the component declared initial operating capability on the basis that its mission responsibilities were already being performed by a predecessor organization that became the new component. Space and global strike component officials told us that the component based its initial operating capability decision largely on the results of its performance in events before and during USSTRATCOM’s November 2005 Global Lightning exercise. However, the component did not publish and make available the criteria that would be used to evaluate the component’s performance during the exercise, according to the component’s chief of staff. Similarly, the objectives, goals, and criteria that would be used for determining full operating capability vary among the organizations. According to network warfare component officials, the component plans to base its full operating capability decision on 8 to 10 items that were explained during a briefing to USSTRATCOM officials in early 2005, which include the component having adequate staffing and funding; its tactics, techniques, and procedures guidance approved; and its functions, tasks, and authorities clearly defined. The chief of staff for the space and global strike component told us that the component has considerable criteria for evaluating full operating capability. For example, several concepts of operations related to the component’s mission areas contain tasks that the component needs to perform. Other criteria include such goals as setting up a training program for new staff and developing a visual information panel in its command center. However, the official said that the component has not clearly assembled all of its criteria to make them readily accessible to those outside the component. The integrated missile defense component, which declared full operating capability in February 2006, used criteria that included the component’s assuming responsibilities and tasks delineated in the USSTRATCOM implementation directive, completing facility construction, getting staff trained and certified, developing approved joint mission essential tasks, and initiating reporting of operational readiness. The component considered its full participation in USSTRATCOM’s November 2005 Global Lightning exercise and the incorporation of the lessons learned from the exercise into its participation in a subsequent U.S. Pacific Command exercise as critical factors for declaring full operating capability. Additionally, although the target dates for declaring full operating capability are soon approaching, some of the new organizations have not fully developed the criteria that will be used to assess their milestone decisions. Although the USSTRATCOM Center for Combating Weapons of Mass Destruction plans to achieve the milestone in December 2006, center officials told us in February 2006 that the center is still deciding how to define full operating capability. Similarly, the deputy commander for the intelligence, surveillance, and reconnaissance component told us in April 2006 that the component, which plans to reach the milestone in September 2006, has not fully decided on the criteria it would use because the selection of criteria has not been a high priority among the component’s implementation activities. However, the official told us that the component needs to have its criteria approved about 3 months before it decides to declare its milestone achieved. USSTRATCOM has adopted some key management practices, but the command has not yet fully developed a results-oriented management approach for continuously assessing and benchmarking its performance in achieving desired outcomes and for identifying actions to improve performance. Our prior work and the work of others show that organizations undertaking complex transformations can increase their likelihood of success by adopting a results-oriented management framework, which includes key management practices and results- oriented management tools to guide implementation efforts and progress toward achieving desired outcomes. These tools and practices include establishing long-term goals and objectives and performance measures and criteria for assessing results and value added; strong and inspirational leadership to set the direction, pace, and tone and provide a clear, consistent rationale for implementing the framework; and timelines to achieve results. While USSTRATCOM uses different techniques to review its progress in implementing its missions and responsibilities, these techniques do not provide the range of quantifiable metrics and criteria needed to fully assess the command’s progress toward achieving its goals and objectives and value added. The command’s senior leadership has taken an active role in articulating and supporting the command’s transformation, a factor that we have identified in prior work as critical to success. The Commander, U.S. Strategic Command, has addressed a variety of audiences to discuss the need for changing the way the command is organized in order to be more effective, and has described the needs and reasons for change in command concepts of operations and guidance. USSTRATCOM has also prepared guidance that assigns responsibility and describes the processes for implementing and integrating its missions. For example, to support its most recent reorganization, the command has prepared a draft integrating guidance document intended to provide a consolidated, objective framework describing how the command is organized, as well as its responsibilities, relationships, and processes. It also has issued a more detailed horizontal command-and-control integration concept of operations to identify how it brings together all of its missions and capabilities to support national objectives. Our prior work has shown that successfully transforming organizations have leaders who define and articulate a compelling reason for change; set the direction, pace, and tone for transformation; and assign accountability for results. The command has also created a collection of first principles to better align the command with national defense priorities, focus its efforts for integrating and synchronizing its missions, and provide advocacy for its missions as they mature. Table 3 provides USSTRATCOM’s nine principles, which include establishing a globally focused organization built to collaborate with all elements of national power; establishing operationally interdependent components; and embracing effects-based operations. The command also identified areas of emphasis that contain several key objectives for mission support, such as (1) for combating weapons of mass destruction, integrate and enable capabilities across the DOD enterprise; (2) in organizing for the global fight, embrace horizontal integration; and (3) for global force management, optimize the employment of low-density and high-demand intelligence, surveillance, and reconnaissance systems. However, USSTRATCOM has not yet developed clear, well-defined, outcome-based goals and measures to indicate how the command will measure success, track the progress it is making toward its goals, and give its leaders critical information on which to base decisions for improving the command’s implementation efforts. While the command’s first principles and areas of emphasis provide direction for better focusing its implementation efforts, these principles are process-oriented, tactical goals, rather than long-term, results-oriented strategic goals and objectives that can provide the basis for determining the command’s performance and progress. Our prior work has shown that long-term strategic goals and objectives are important for an organization to explain the results it expects, what it intends to accomplish, and how these goals would be assessed. Outcome- based performance measures should be objective and results oriented with specific target levels to meet performance goals. Measuring performance allows organizations to track progress toward goals and provides crucial information on which to base organizational and management decisions. The command has adopted some processes and metrics to monitor its performance and provide information on its progress in implementing its missions; however, these processes and metrics are largely subjective and do not provide the command with the full range of both quantitative and qualitative outcome-based performance measures it needs to fully assess progress in achieving its goals. Organizations use evaluation and corrective action plans to examine the success of a program and to improve performance by identifying appropriate strategies to meet those goals that were not met. In contrast, USSTRATCOM’s current processes result in largely subjective assessments and are intended to support more limited purposes. For example, according to an official responsible for coordinating the command’s readiness reporting, the command has adapted its readiness reporting process to include inputs from each of the command’s mission organizations and service components. The official said that this process gives the USSTRATCOM commander access to a broad perspective on the command’s overall readiness. However, the readiness reports resulting from the process discuss the commander’s subjective assessment of USSTRATCOM’s ability to execute its missions, based on short-term internal and external factors affecting the command’s operations. Similarly, the command’s annual training assessments are subjective evaluations, based on observations of prior training, exercises, real-world operations, and other factors, which are used to set priorities for future training priorities. USSTRATCOM senior officials told us that the command has not yet established strategic goals and outcome-based performance metrics to fully assess the command’s progress because the command is still sorting out the implementation of its new organizational construct. Although command officials stated they believe such metrics are needed and the command should begin to develop them, they have not yet developed a process or assigned responsibility for developing metrics. While the development of such metrics will present a significant challenge due to the complex nature of the command’s missions, such an effort is needed so that the command can assess its progress and identify areas that need further improvement. For example USSTRATCOM officials believe they can and should develop metrics to assess the extent to which they are efficiently allocating intelligence, surveillance, and reconnaissance systems to optimize the use of high-demand aircraft. Without developing strategic goals and the full range of outcome-based performance measures, the command will lack a process to evaluate its performance, identify areas that may need improvement, and take corrective actions. USSTRATCOM has not clarified the roles and responsibilities of its service component organizations and lacks a commandwide outreach strategy for enhancing its relations with other DOD organizations. Since its most recent reorganization, USSTRATCOM has provided some guidance to its service component commands. However, the command’s guidance is not always specific and service officials believe that additional guidance from USSTRATCOM would help to more clearly define their responsibilities, expectations, and relationships with the command, particularly with its new mission organizations. In addition, USSTRATCOM lacks a commandwide strategy to effectively manage and coordinate its external outreach activities with the large number of commands and organizations it interacts with in executing its diverse missions. Without clear service component guidance and a comprehensive communications strategy, USSTRATCOM’s service components will not have complete information on the command’s expectations for their support and the command may not have the most effective approach for building relationships, promoting its capabilities, and providing the most effective level of support to other combatant commands and organizations. While USSTRATCOM has provided broad guidance to its service components, Army, Navy, and Air Force component officials told us they lack specific guidance that clarifies and provides more detailed information on their responsibilities, requirements, expectations, and relationships with the command and, particularly, its newer mission organizations. Our prior work has shown that it is important for organizations undergoing significant change to provide clear and complete guidance to their subordinate organizations. Without clearly defined, specific guidance, it can be difficult for the service components to effectively organize, plan, and identify resources to provide the expected support. Moreover, the lack of this guidance can also limit the understanding that USSTRATCOM’s headquarters and its organizations have about the components’ organizations, organizational relationships, and range of support they provide. USSTRATCOM has provided guidance to its service components in its concepts of operations, orders, plans, and other documents and through meetings and other activities between command and service component staffs, such as conferences, videoconferences, and command exercises. Guidance and expectations have also been provided during routine and crisis-oriented collaborative planning activities among the command’s organizations and service components. However, USSTRATCOM Army component officials told us that much of the command’s overall guidance, such as USSTRATCOM’s standing operational order for its global strike mission and its overarching concept of operations, is too general and often does not provide enough specific information for the service components to fully understand the command’s requirements and expectations. Our review of USSTRATCOM guidance found that key guidance lists the overarching responsibilities for the command’s service components, such as providing support for the command’s operations and planning and advocacy activities. Some mission-specific guidance, such as the concept of operations for the space and global strike missions, provides additional responsibilities for each of the components that relate to a specific mission area or organization. In particular, this concept of operations assigns the Air Force service component responsibility for establishing an operations center for global strike planning and execution, and for performing day-to-day command and control of space forces assigned to the command. In contrast, much of the remaining guidance we reviewed provided few specific details on what is expected or required to carry out the components’ responsibilities, such as the type of military personnel skills, planning systems, or secure communications lines that are needed to effectively support the command. Additionally, several guidance documents we reviewed that contain references to the services are still in draft, such as the command’s integrating guidance, or need revision as a result of the command’s recent reorganization. For example, in 2004 the command drafted a concept for integrating its missions that included detailed annexes describing the how the command’s service components were to monitor global events affecting U.S. interests; analyze, evaluate, and communicate information; predict likely consequences of military operations on U.S. and adversary forces; and plan and execute operations in support of each of the command’s mission areas. However, according to a USSTRATCOM official the command leadership decided not to include specific expectations for its service components following the decision to reorganize the command and establish the joint functional component commands in late 2004. As a result, the command’s most recently drafted guidance does not yet completely reflect service responsibilities and expectations and unique support that may be required to support USSTRATCOM’s new organization. According to USSTRATCOM officials, the command does not plan to provide additional formal guidance to its service component organizations at this time. The relationships between the command’s service components and new subordinate mission organizations are still evolving. Army component officials told us that USSTRATCOM’s new mission organizations have not yet developed a full understanding of the Army service component’s responsibilities, and as a result, USSTRATCOM’s expectations may not be consistent with the support that can be provided by the Army. For example, the acting chief of staff for USSTRATCOM’s Army service component told us that according to the Joint Staff’s Unified Action Armed Forces policy publication, which clarifies all command relationships and other authorities, the Army’s service component has responsibility for providing Army personnel with training in service- related tasks. The official told us the USSTRATCOM command assumed that training in the use of joint systems, such as secure communications lines operated by the USSTRATCOM command for integrated missile defense, would be done by the service component. However, the respective USSTRATCOM command is responsible for providing any joint training to service personnel. The official said the Army could provide this training if USSTRATCOM defined this requirement in its guidance. Army component officials also told us that the Army can better respond to USSTRATCOM requirements when expectations are more clearly described in guidance and related documents. For example, USSTRATCOM cited a requirement in its draft concept of operations for a small Army detachment to be assigned to USSTRATCOM’s intelligence, surveillance, and reconnaissance command. The Army provided this type of detachment based on that requirement. Similarly, the head of the Eighth Air Force’s air operations center, which is part of the USSTRATCOM Air Force service component, told us that the component has clear guidance about its responsibilities to provide direct support to USSTRATCOM’s space and global strike command, and therefore, has a clear understanding of what is required to support the component. The space and global strike command has provided information on the direct support expected from the Air Force in its concept of operations. However, the official said the requirements and expectations for supporting other USSTRATCOM mission organizations, such as the Joint Functional Component Commands for Intelligence, Surveillance, and Reconnaissance and Network Warfare, are not as clearly known because USSTRATCOM has not yet provided guidance on the required Air Force support for those organizations. According to Navy Fleet Forces Command officials, USSTRATCOM has not provided clear and specific guidance on the command’s responsibilities and expectations, despite its unique relationship to USSTRATCOM. Officials of the Navy Fleet Forces Command told us that the Fleet Forces Command has a unique relationship to USSTRATCOM because it is a supporting command and not a traditional service component. The officials said their command is not formally assigned to and under USSTRATCOM’s operational chain of command, but rather their command provides advice to USSSTRATCOM on the best use of Navy forces and capabilities in support of its missions. The officials said that clear and specific guidance is necessary to provide an understanding of their command’s unique relationship to USSTRATCOM headquarters and organizations. In March 2006, USSTRATCOM, in consultation with the Fleet Forces Command, did issue a command instruction that clarifies the Fleet Forces Command’s relationship with USSTRATCOM and its responsibilities, which include taking part in the command’s collaborative planning processes, participating in its exercise program, and helping USSTRATCOM prepare its readiness review reports. However, while this document helps to clarify the Navy component’s support responsibilities, it neither sets priorities for the Fleet Forces Command nor includes mission-specific requirements. According to service officials, USSTRATCOM’s unique organization, complex planning processes, and global focus are very different than more traditionally organized combatant commands that have clearly defined geographic areas of responsibility. In contrast to more traditional regional combatant commands, USSTRATCOM has constructed a collaborative planning process, which is globally focused, and involves a much broader range of military capabilities. As this planning process continues to evolve, the role and involvement of the service components will change. For example, the director of the Army component’s planning and exercise group told us that USSTRATCOM’s new mission organizations have not always provided well-documented requirements for certain Army capabilities, which has delayed the Army component’s ability to provide the needed capabilities to these organizations. The official told us that in the summer of 2005 the Army component had difficulty in both staffing its office and initially providing information operations capabilities to support command missions because USSTRATCOM had not documented the Army requirements for these capabilities. The Army official said that although the Commander, U.S. Strategic Command, has been satisfied with the Army’s support for this mission area, greater clarity about USSTRATCOM’s expectations would have helped the Army component to better identify its authorized personnel requirements and ensure that the required Army capabilities were more quickly available. Unlike the other service components, however, the Marine Corps Forces component is satisfied with the guidance that has been provided, according to a Marine Corps component official. The official said the component does not need additional guidance at this time because the component has a more limited role and fewer responsibilities than the other services in supporting USSTRATCOM and its organizations. The official said that the Marine Corps’ component of about 20 people largely serves as a conduit to USSTRATCOM to ensure Marine Corps representation and provide inputs, when needed, on command issues. While USSTRATCOM routinely conducts outreach with other combatant commands and organizations, it lacks a common approach across the command because it has not developed a comprehensive, commandwide outreach strategy to effectively manage these activities. Without an outreach strategy, the command and its organizations do not have a consistent, coordinated approach to use in developing and expanding relationships, educating other organizations on the command’s capabilities, and providing the most effective level of support to other commands and organizations. In our prior work in identifying key practices adopted by organizations undergoing successful transformations, we found that it is essential for organizations to adopt a comprehensive communication strategy that reaches out to customers and stakeholders and seeks to genuinely engage them in the organization’s transformation. In particular, successfully transformed organizations have found that by communicating information early and often, organizations are able to build trust and increase understanding among their stakeholders about the purpose of planned changes. Organizations use these communication strategies to provide a common framework for conducting consistent and coordinated outreach throughout their organizations by clearly presenting the organization’s rationale, specific objectives, and desired outcomes of outreach efforts. These strategies also cover the range of integrated information activities to be implemented and clearly articulate how all the various components of the strategy will be coordinated and managed in order to achieve the objectives most efficiently and effectively. Additionally, outreach strategies provide measurable criteria against which to evaluate the outcomes of organizations’ outreach efforts and determine whether any adjustments are necessary. Because USSTRATCOM supports or is supported by a large number of commands and organizations in executing its diverse set of global missions, the command considers its external outreach efforts essential to (1) develop effective relationships and communications, (2) promote and educate others about the value of its missions and capabilities, and (3) obtain information on how the command can best support other organizations. USSTRATCOM and its organizations regularly use a wide range of methods and activities to promote its missions and capabilities to combatant commands, military services, and DOD and other government organizations. These methods and activities include conferences and symposia, exercises and training events, senior leadership visits, exchange of liaison staff, routine meetings, and voice and electronic communication. The command has also established a strategic knowledge integration Web site, which is called SKIWeb, on DOD’s classified computer network to provide information about the command and the status of its activities and allow open exchange among its staff and other individuals with access to the network. While USSTRATCOM officials told us that USSTRATCOM has developed good working relationships with other combatant commands and organizations across DOD since its establishment in 2002, they believe that the command’s missions, capabilities, and authorities are not yet fully understood by others. The USSTRATCOM commander’s summary report for its November 2005 Global Lightning exercise states that while the command has expended a great amount of effort in developing processes and strategies to integrate the command’s missions, the organizations it supports, particularly other combatant commands, have a vague understanding of the “value added” by USSTRATCOM capabilities. The report states that USSTRATCOM’s ability to provide capabilities and influence global events are not clearly understood, nor do some other commands’ headquarters completely understand how to access that capability. For example, in observing the Global Lightning exercise, U.S. Central Command and other participants told us that they were unsure of value added by USSTRATCOM in planning for global strike operations in their theater. However, USSTRATCOM officials said USSTRATCOM brings the full range of capability options into global strike planning, particularly nonkinetic capability options such as computer network operations; other commands are just beginning to see the potential value of these options. Additionally, USSTRATCOM has also had to change the perceptions held by other organizations that the command is responsible only for nuclear deterrence, which was the case with the previous U.S. Strategic Command, but has other essential missions that are global in scope and span all levels of military operations. While some missions, such as nuclear deterrence and military space, are well practiced and have established histories and interactions with outside organizations, others, such as its combating weapons of mass destruction and intelligence, surveillance, and reconnaissance missions, are less mature and still evolving. Further, many of USSTRATCOM authorities, responsibilities, and capabilities are still being refined, clarified, and demonstrated to other organizations in exercises and training events and in real-time military activities. For example, the deputy commander of USSTRATCOM’s intelligence, surveillance, and reconnaissance command told us that USSTRATCOM’s evolving role in providing support for decisions on allocating intelligence, surveillance, and reconnaissance assets is not yet clear to all of the regional combatant commands. The official said that some combatant commands have concerns about how USSTRATCOM responsibilities could affect their ability to exercise operational and tactical control over any assets assigned to their commands. According to the official, these commands do not yet understand that USSTRATCOM’s role is to provide overall management for these assets rather than control their operational use. Moreover, DOD commands and organizations are still getting acquainted with USSTRATCOM’s new organizational construct, particularly the new subordinate organizations that are responsible for the day-to-day management of several command missions. The command’s new organization does not follow the headquarters-centric model, in which information flows vertically, that is used by other combatant commands. According to the Commander, U.S. Strategic Command, horizontal flows of information and command and control run counter to traditional military thinking, which prefers a vertical chain of command. While the new organizational structure has the potential to greatly expand the command’s opportunities to conduct external outreach, relationships and communication links are still being developed or reestablished with other organizations. Each of the command’s organizations conduct numerous outreach activities daily, but these efforts are often not well coordinated and consistently conducted to achieve the most optimal benefit for the command. We also found that USSTRATCOM does not have an approach for comprehensively collecting information on the needs and priorities of the combatant commands and other stakeholders who use its capabilities, information which USSTRATCOM could then use to determine how it can provide the most effective level of support. USSTRATCOM has recognized the need to develop a comprehensive outreach strategy to increase understanding among other combatant commands about the specific capabilities and contributions that the command can provide to their operations. Both of the command’s summary reports for its October 2004 and November 2005 Global Lightning exercises recommended development of an outreach strategy for identifying USSTRATCOM capabilities for the benefit of combatant commands and stakeholders. The November 2005 report recommended that the strategy provide an integrated methodology for conducting effective outreach and education of the command’s capabilities. The report also recommended (1) improving the command’s SKIWeb Web site to allow outside users to more easily identify capabilities, (2) providing briefings and seminar support to the Defense and interagency community, and (3) developing outreach products to provide key information about the command. The report states that much of the understanding and credibility of the command can be achieved though an effective outreach plan that is focused at other commands, at the interagency level, and with the services to demonstrate and provide understanding about its global support capabilities. USSTRATCOM headquarters officials told us that the command does not have any current plans to develop an outreach strategy as recommended in each of the two exercise reports. To provide the most effective level of support to other combatant commands, U.S. Joint Forces Command recently developed an approach that could serve as a best practice in identifying the priorities of the commands it supports for inclusion in an external outreach strategy. Under U.S. Joint Forces Command’s approach, the command asks each of the other combatant commands to provide a list of its top priorities for the type and level of support needed from the command in the coming year. These lists are incorporated into the command’s annual plans and are used to make adjustments in its activities and resources to best meet the needs of its customers. During the year, the command schedules periodic updates with staffs of the other commands to determine to what extent the command is addressing these priorities or whether the priorities have changed. A USSTRATCOM headquarters official responsible for coordinating the command’s priorities with the U.S. Joint Forces Command told us that approach has been helpful for USSTRATCOM in communicating the command’s priorities for support. The official said that USSTRATCOM added to the effectiveness of the approach by preparing a detailed matrix that identified and ranked the command’s priorities and provided contact information for command staff. USSTRATCOM has been assigned a new role in providing the President and the Secretary of Defense with an expanded set of military options to more effectively respond to emerging global, transregional, and asymmetric threats to U.S. national security, including those involving weapons of mass destruction. While the command has made progress in implementing its global missions, its ability to strengthen implementation efforts and ensure that its leadership has critical information on the effectiveness of its missions and organizations will continue to be limited until it identifies long-term support requirements for its exercise program; establishes clear, consistent criteria for assessing the establishment of its newest mission organizations; and fully implements a results-oriented approach for evaluating its progress. The U.S. Joint Forces Command offers a range of capabilities and resources for supporting command exercises. Until it clearly identifies the long-term support it requires from the U.S. Joint Forces Command, and the Joint Forces Command incorporates these requirements into its plans, USSTRATCOM will continue to lack a robust exercise program, which is essential for evaluating its capabilities and identifying areas in need of improvement. Additionally, absent clear, consistent guidance from the command, four new mission organizations that have not yet achieved full operating capability are establishing their own criteria for this milestone, which results in different understandings of what it means to reach this milestone and how it would be evaluated. Without establishing clear, consistent criteria at major points in implementation, the command cannot create a foundation on which to assess and measure the success of these organizations even after full operating capability has been declared. Further, while the command has adopted some elements of a results- oriented management approach, without a process that includes criteria and benchmarks for measuring the progress toward mission goals at all levels of its organization, the command will be limited in its ability to adjust to the many uncertainties surrounding its mission areas, measure the success of its efforts, and target shortfalls and gaps and suggest corrective actions, including any needed adjustments to future goals and milestones. Similarly, without complete and clearly articulated expectations and requirements, the service components will not have the information needed to fully determine the personnel, resources, and capabilities required to support the command and respond to its requests and tasks in a timely way. In addition, in the absence of a commandwide communications strategy to conduct consistent, coordinated outreach to other commands and organizations, USSTRATCOM cannot effectively develop and expand relationships, foster education about its capabilities, and provide the most effective level of support to other commands and organizations. Lastly, without incorporating into its external outreach strategy a systematic tool to help identify the priorities of the combatant commands and organization it supports—similar to one used by the U.S. Joint Forces Command—USSTRATCOM is limited in its ability to fully address the priorities for support of the other commands and organizations, improve feedback, and identify resources needed to respond to these priorities. To better determine and obtain the assistance that can be provided by the U.S. Joint Forces Command’s Joint Warfighting Center in supporting USSTRATCOM’s exercise program, we recommend the Secretary of Defense direct the Commander, U.S. Strategic Command, to fully identify and request in a timely manner the long-term services and resources required from the U.S. Joint Forces Command’s Joint Warfighting Center to support the command’s program and to reach agreement with the U.S. Joint Forces Command on the support to be provided. We further recommend that the Secretary direct the Under Secretary of Defense for Personnel and Readiness and the Commander, U.S. Joint Forces Command, (1) in the near term, to make any possible adjustments among the Joint Warfighting Center’s current resources to more fully support USSTRATCOM’s exercise program; and (2) in the long term, incorporate USSTRATCOM requirements for support in the center’s plans to provide the full range of assistance necessary to help USSTRATCOM execute a robust exercise program. To strengthen USSTRATCOM’s efforts to implement its missions and provide greater visibility of its progress, we recommend that the Secretary of Defense direct the Commander, U.S. Strategic Command, to take the following four actions: Provide clear and complete guidance to the Joint Functional Component Commands for Space and Global Strike, Intelligence, Surveillance, and Reconnaissance, and Network Warfare, and the USSTRATCOM Center for Combating Weapons of Mass Destruction that clearly defines full operating capability and provides specific, common criteria for determining what is required and how it will be assessed. This guidance should be developed, in consultation with these organizations, before each organization declares full operating capability. Develop a comprehensive, results-oriented management process for continuously assessing and benchmarking the command’s overall progress in achieving desired outcomes and for identifying corrective actions to enhance the command’s efforts to implement and integrate its missions. Develop or refine performance measures that clearly demonstrate performance results and ensure that those measures cascade down through the command; assign clear leadership with accountability and authority to implement and sustain the process; and develop and ensure that goals and objectives are clear and achievable and timelines are established. Set a specific time frame for completing development of this process. Provide additional guidance to the command’s service components that clearly defines and provides more specific information about their responsibilities, requirements, relationships, and expectations for supporting the command’s headquarters and subordinate mission organizations. Set a specific time frame for approval of this guidance. Develop and implement a commandwide communications strategy to guide and coordinate USSTRATCOM’s efforts to conduct outreach with other combatant commands and Defense and other organizations to develop effective relationships and communications, promote and educate others about the value of its mission and capabilities, and obtain information on how the command can best support other commands and organizations. This strategy should include the command’s rationale, specific objectives, desired outcomes, and strategies for conducting outreach with other commands and organizations, and criteria against which the command can evaluate the success of its efforts. Given the importance of the new role assigned to USSTRATCOM by the President and the Secretary of Defense to provide an expanded set of military options to more effectively respond to emerging threats to U.S. national security, Congress should consider requiring the Commander, U.S. Strategic Command, to develop a longer-term, comprehensive and transparent, results-oriented management process for continuously assessing and benchmarking the command’s overall progress in achieving desired outcomes and for identifying corrective actions to enhance the command’s efforts to effectively carry out its missions, as outlined in our recommendation to DOD. In developing this process, the Commander, U.S. Strategic Command, should develop and ensure that long-term goals and objectives are clear and achievable and milestones and timelines for achieving desired outcomes are established; develop or refine performance measures that clearly demonstrate performance results and ensure that those measures cascade down through the command; and assign clear leadership with accountability and authority to implement and sustain the process. The Commander, U.S. Strategic Command, should set a specific time frame for developing and implementing this process. Additionally, the Commander should periodically report to Congress on the command’s progress in achieving desired outcomes. DOD’s Assistant Secretary of Defense for International Security Policy provided written comments on a draft of this report. DOD generally agreed with our three recommendations regarding U.S. Joint Forces Command’s support of USSTRATCOM’s exercise program. DOD did not agree with our other four recommendations that USSTRATCOM provide clear and complete guidance to its joint functional component commands on achieving full operating capability; develop a comprehensive results- oriented management process to assess and benchmark the command’s overall progress; provide additional guidance to its service components; and develop and implement a commandwide communications strategy. In regard to these four recommendations, DOD commented that measures are already in place that address the issues raised by the report. We disagree that the actions taken by USSTRATCOM to date fulfill the intent of our recommendations and are complete. While USSTRATCOM has taken some positive actions on these issues, we do not believe that the command’s actions go far enough, are specific enough, or are sufficiently transparent in improving evaluation of the command’s progress in implementing its mission areas, providing more complete guidance to its mission and service component organizations, and strengthening its external communications with other organizations and commands. Therefore, we believe our recommendations are still warranted and we have added a matter for congressional consideration for Congress to direct the Commander, U.S. Strategic Command, to develop and implement a longer-term results-oriented management process for assessing the command’s overall progress and periodically reporting to Congress its progress in achieving desired outcomes. DOD’s comments are reprinted in their entirety in appendix V and more specific information on DOD’s comments on our recommendations and our assessment of these comments follows below. DOD generally agreed with our recommendations regarding USSTRATCOM’s exercise program. Specifically, DOD agreed with our recommendation that USSTRATCOM should identify and request, in a timely manner, the long-term services and resources required from the U.S. Joint Forces Command’s Joint Warfighting Center to support USSTRATCOM’s exercise program. In its comments, DOD said that while the center had provided limited exercise planning, execution, and assessment support to USSTRATCOM, the command and the center have steadily built a relationship over the past year to support USSTRATCOM’s seven mission areas and are jointly solving problems that hindered the center’s support in previous USSTRATCOM exercises. The department partially agreed with our recommendation that the Under Secretary of Defense for Personnel and Readiness and the Commander, U.S. Joint Forces Command, in the near term make any possible adjustments among the Joint Warfighting Center’s current resources to more fully support USSTRATCOM’s program. DOD commented that the Office of the Deputy Under Secretary of Defense for Personnel and Readiness is currently conducting an in-depth review of the joint training programs to determine how it can provide better flexibility and synergism through joint training investments. DOD agreed with our recommendation that the Under Secretary of Defense for Personnel and Readiness and the Commander, U.S. Joint Forces Command, in the long term, incorporate USSTRATCOM’s requirements for support into the Joint Warfighting Center’s plans. DOD commented that its current review of joint training programs intends to match, to the greatest extent possible, joint training requirements and resources, including the training support provided by the U.S. Joint Forces Command. DOD also said while USSTRATCOM’s requirements must compete with other training priorities for joint training funding, the center can better plan and make resources available if USSTRATCOM provides the center with well-defined requirements 3 to 5 years in advance. DOD did not agree with our recommendation that the Commander, U.S. Strategic Command, provide additional guidance to its joint functional component commands that clearly defines full operating capability and provides specific, common criteria for determining what is required and how it will be assessed. DOD commented that the Commander, U.S. Strategic Command, has provided specific guidance in the form of a tailored implementation directive that assigns specific duties, responsibilities, tasks, and authorities to the components. DOD also said that the Commander is continuing to work closely with the component commanders to develop, implement, and assess the measures of progress by which full operating capability will be declared and will report to the Secretary of Defense when the milestone is achieved for each mission area. We believe that the command’s tailored implementation directives do not go far enough in providing clear and specific criteria for assessing whether specific duties, responsibilities, tasks, and authorities assigned to each organization have been met. For example, during our review we found that the components had different interpretations as to what criteria might apply for declaring full operating capability. We believe that it is important for USSTRATCOM and its organizations to have a clear definition of full operating capability and the criteria, or measures of progress, in place as early as possible, by which the achievement of the milestone will be assessed for each of the new mission organizations. These criteria should be complete and readily accessible so the command and its mission organizations will have confidence in the extent that planned capabilities will be achieved at full operating capability. After declaring full operating capability, each of the new organizations will require further actions to more completely implement and enhance their mission capabilities and responsibilities. Establishing clear, documented criteria for assessing and measuring success for declaring full operating capability can provide a baseline and a sound foundation for assessing the future progress of the organization in carrying out its mission responsibilities. DOD also disagreed with our recommendation that USSTRATCOM develop a comprehensive results-oriented management process for continually assessing and benchmarking the command’s overall progress in achieving desired outcomes and for identifying corrective actions to enhance the command’s efforts to implement and integrate its missions. In its comments, DOD stated that a variety of directives, including concepts of operations, articulate the command’s goals and objectives. The department also stated that the command conducts periodic exercises, external inspections, and in-progress reviews to help assess the command’s effectiveness in making operational the assigned mission areas and achieving stated objectives. While these actions by USSTRATCOM may be helpful to the command’s leadership, they do not represent a comprehensive and transparent plan for assessing progress in achieving desired outcomes. Moreover, DOD interpreted our recommendation as being directed at the metrics to be used by the command’s organizations in declaring full operating capability for its missions, which are scheduled to occur by early 2007. However, our recommendation calls for creation of a longer-term, comprehensive, results-oriented management process that would provide the command with a framework for continuously assessing its future progress in achieving desired outcomes in each of its mission areas and the command’s overall goals and objectives. Because of the importance of the command’s new role in providing expanded military options for addressing emerging threats, we continue to believe that creation of a results-oriented management process that establishes long-term goals and objectives, milestones and timelines for achieving desired outcomes, performance measures that clearly demonstrate performance results, and clear leadership to implement and sustain the process is needed. Therefore, we have included a matter for congressional consideration to require the Commander, U.S. Strategic Command, to develop such a process that would improve transparency and accountability of the extent to which the command is achieving desired outcomes in each of its mission areas. DOD also did not agree with our recommendation that the Commander, U.S. Strategic Command, provide additional guidance to the command’s service components that clearly defines and provides more specific information about their responsibilities, requirements, relationships, and expectations for supporting the command’s headquarters and subordinate mission organizations. In its comments, DOD said that the duties and responsibilities of USSTRATCOM and its service components are documented in Joint Publication 0-2, Unified Action Armed Forces. The department also stated that day-to-day liaison activities between the command and the services are provided by on-site service component representatives. While broad guidance is provided in the Joint Staff’s Unified Action Armed Forces publication on the relationships and authorities of the military services in supporting combatant commanders and by USSTRATCOM in various documents, we continue to believe that additional guidance from the Commander, U.S. Strategic Command, to the command’s service components is needed to provide clear and specific information about their responsibilities, requirements, relationships, and expectations for supporting the command’s headquarters and subordinate mission organizations, particularly since the components have expressed a desire for further guidance from the command. As USSTRATCOM continues to implement its new organization and develop capabilities in each of its mission areas, this additional guidance can strengthen relationships with the services by (1) providing better information for the components in effectively organizing, planning, and identifying resources to support the command; and (2) increasing understanding among the command’s headquarters and its organizations about the components’ organizations, organizational relationships, and the range of support they provide. Lastly, DOD disagreed with our recommendation that USSTRATCOM develop and implement a commandwide communications strategy to guide and coordinate the command’s efforts to conduct outreach with other combatant commands and Defense and other organizations. DOD commented that USSTRATCOM provides and promotes insight to all its activities through its classified Web site; maintains a senior officer representative at each of the combatant commands and with the Joint Staff; and, as a supporting command, conducts continuous liaison activities with other combatant commands. DOD also stated that Web- based mission area training for USSTRATCOM missions is available on the U.S. Joint Forces Command’s Web site. However, as discussed in our report, we found that while USSTRATCOM organizations routinely conduct outreach activities to promote its missions and capabilities, these activities are often not well coordinated and consistently conducted to achieve the most optimal benefit for the command. Both of USSTRATCOM commander’s summary reports prepared after its two most recent Global Lightning exercises in 2004 and 2005 recommended that the command develop a comprehensive outreach strategy to increase understanding among other combatant commands about the specific capabilities and contributions that the command can provide to their operations. The November 2005 Global Lightning report also recommended that the strategy provide an integrated methodology for conducting effective outreach and education of the command’s capabilities. Therefore, we continue to believe that USSTRATCOM needs a commandwide communications strategy to provide a framework to effectively manage these activities and a common approach for conducting consistent and coordinated outreach across the command. We are sending copies of this report to interested congressional committees; the Secretary of Defense; Chairman, Joint Chiefs of Staff; the Commander, U.S. Strategic Command; and the Commander, U. S. Joint Forces Command. We will make copies available to others upon request. In addition the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-4402 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Staff members who made key contributions to this report are listed in appendix VI. This appendix provides information on trends and changes we identified in the United States Strategic Command’s (USSTRATCOM) historic and projected budget, from fiscal years 2003 through 2011. To perform our analysis, we identified trends and changes in USSTRATCOM’s budget since its establishment in October 2002 by obtaining and analyzing the command’s historic, current, and projected funding for fiscal years 2003 through 2011. We used data prepared to support the President’s fiscal year 2006 budget request, which were the most current official data available when we conducted and completed our work. We also discussed with USSTRATCOM officials anticipated changes to the budget resulting from the fiscal year 2007 President’s budget request, and efforts taken by the command to identify how its funding is allocated by mission responsibility and subordinate organization. We took steps to assess the reliability of the data used in this analysis, including (1) performing electronic testing of required data elements, (2) comparing the data to another independently prepared data source, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for our purposes. This appendix provides information on trends and changes we identified in the United States Strategic Command’s (USSTRATCOM) military and civilian authorized personnel levels since its establishment in October 2002. Our analysis shows that USSTRATCOM’s overall authorized personnel level has remained relatively stable since 2002, and that the percentage of filled military and civilian positions has increased. The command is transferring positions to its new mission organizations from its headquarters organization, rather than increasing its overall commandwide authorized personnel level. Although the command has expanded the number of professional military skills of its authorized personnel, the majority of its military positions encompass relatively few types of skilled positions. We also determined that while Air Force and Navy military positions continue to make up most of USSTRATCOM’s authorized personnel, the proportion of civilian positions is increasing. To determine how USSTRATCOM’s authorized personnel level has changed since its establishment in 2002, we obtained and reviewed USSTRATCOM projections and historic data that identify (1) the number of authorized civilian and military positions assigned to USSTRATCOM, (2) the number of authorized positions filled by individuals assigned to the command, and (3) the professional military skills associated with the command’s military positions. The data we obtained include USSTRATCOM positions assigned to the command’s headquarters near Omaha, Nebraska, its mission organizations, and to various other locations and assignments. We also obtained the command’s projections for authorized personnel levels for the new mission organizations, and discussed these projections with officials responsible for managing the command’s authorized personnel. In our analysis, we did not consider staff positions from organizations that are supporting several of USSTRATCOM’s mission organizations, such as the Air Force Space Command, Eighth Air Force, Army Space and Missile Defense Command, Defense Intelligence Agency, National Security Agency, Defense Threat Reduction Agency, and Defense Information Systems Agency. The data also do not include part-time reservists or contractors. We took steps to assess the reliability of the data used in this analysis, including (1) performing electronic testing of required data elements, (2) comparing the data to another independently prepared data source, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for our purposes. To address the extent to which the United States Strategic Command (USSTRATCOM) has made progress in implementing its new missions and assessing mission results, we reviewed a wide range of Department of Defense (DOD) and command documentation including USSTRATCOM guidance, plans, directives, speeches and testimony statements, and reports; implementation plans and directives for creating its new mission organizations; and documentation related to DOD’s implementation of its New Triad concept to transform U.S. strategic capabilities. We also spoke with various officials involved in the command’s implementation efforts about their roles, related plans, and actions. When possible, we met with the command and other organizations’ senior leadership to discuss and obtain their views on various command issues, including: Commander, U.S. Strategic Command; Commander, Joint Functional Component Command for Intelligence, Surveillance, and Reconnaissance/Director, Defense Intelligence Agency; Commander, Joint Functional Component Command for Network Warfare/Director, National Security Agency; Commander, Joint Functional Component Command for Integrated Missile Defense/Commander, Army Space and Missile Defense Command; Commander, Joint Task Force for Global Network Operations/Director, Defense Information Systems Agency; Director, USSTRATCOM Center for Combating Weapons of Mass Destruction/Director, Defense Threat Reduction Agency; Commander, Air Force Space Command; and Chief of Staff, U.S. Joint Forces Command. To determine the extent to which USSTRATCOM has a robust exercise program for demonstrating its capabilities, we reviewed the command’s annual training plan, which describes the command’s individual exercises, establishes an exercise schedule, and sets expectations for the participation of the command’s mission organizations. For the November 2005 Global Lightning exercise, we reviewed the exercise plan, collection management plan, after-action report, and final exercise report. We also observed that exercise and discussed the exercise results with the participants. We also reviewed the collection management plan and the after-action report prepared for the April 2006 Global Thunder exercise, and after-action reports prepared for the April 2005 Global Thunder, October 2004 Global Lightning, and October 2003 Global Guardian exercises. We obtained guidance from the Joint Staff that describe the roles and responsibilities of U.S. Joint Forces Command for supporting combatant command exercises. In addition we held discussions with command officials from the exercise and training branch and with other exercise observers to obtain their views on USSTRATCOM efforts to plan and schedule its exercises. We also met with officials from the new joint functional component commands as well as the Joint Task Force for Global Network Operations and the USSTRATCOM Center for Combating Weapons Of Mass Destruction to identify challenges to more fully including their missions in the commands exercises and assist in our understanding of the extent to which the command’s mission organizations were able to participate in the command’s exercises. Command officials also briefed us on the evolution of the command’s exercise program since its establishment, and plans for the future. Finally, we met with officials from the U.S. Joint Forces Command’s Joint Warfighting Center to determine the extent to which they have been involved in identifying requirements, objectives, methods, and tools for planning, implementing, and evaluating USSTRATCOM exercises to strengthen the design and execution of the command’s exercises, such as participant training and independent observer team support and evaluation. To determine the extent to which USSTRATCOM and its mission organizations had developed criteria for assessing their progress toward achieving full operating capability, we reviewed documents from the command and each of the new mission organizations. These documents included the command’s implementation directives for each new mission organization and the overarching command reorganization implementation plan for the current reorganization. We also reviewed briefings from each of the mission organizations that gave status information on the organizations’ efforts towards achieving full operating capability. We held discussions with USSTRATCOM officials who were part of the command’s reorganization management team and with the senior leadership, when possible, to determine their roles and management approach in assisting the mission organizations’ efforts to reach full operating capability and to obtain an understanding of what reaching full operating capability means as a milestone in developing the new USSTRATCOM organization. We met and held discussions with the senior staff of each mission organization on their criteria for measuring the organization’s progress toward full operating capability. To determine the extent to which USSTRATCOM has developed a results- oriented management approach to establish goals, continually track its progress, achieve better synergy among its missions, and gauge the results of its efforts, we reviewed key documentation and interviewed officials to determine what steps, if any, the command has taken to develop and follow this approach. We reviewed relevant GAO reports that identified and reviewed management approaches of other government and private sector organizations. We used the practices and implementation steps identified in these approaches as criteria for reviewing USSTRATCOM documents and for discussions with command officials about their approach to transforming the USSTRATCOM organization. We then compared USSTRATCOM’s approach against these examples of success that we had identified in other organizations to determine the extent to which USSTRATCOM had these elements in place. We reviewed key USSTRATCOM documents, including its first principles (i.e., its long-term goals) related to reporting on the command’s performance and those from its biannual readiness reporting and its annual training assessments. We reviewed the command’s implementation plan and related directives for establishing USSTRATCOM’s joint functional component commands. We compared these documents to implementation plans used by other organizations, including the U.S. Atlantic Command and U.S. Northern Command, and reorganization plans, such as the Report to Congress on the Plan for Organizing the National Nuclear Security Agency and the Department of Homeland Security Reorganization Plan, to determine any differences in the elements and details for implementation that were considered in these plans and the extent to which they had developed, used, or planned to use outcome-based performance goals and measures. To assess the extent to which USSTRATCOM has made progress defining organizational responsibilities and establishing relationships with other DOD commands and organizations, we obtained and reviewed relevant documents and spoke with various officials involved in implementing and advocating for the command’s new missions about its roles and related plans and actions. To determine the extent to which the command has clarified the roles and expectations of its service component organizations, we reviewed command documentation including draft integrating guidance, concepts of operations, orders, plans, and other documents. We met with officials from each of the command’s service component/supporting commands and discussed the extent to which they believed the command’s guidance and expectations was sufficiently clear about their supporting roles. We also discussed with command officials the extent to which guidance was provided to the service components through meetings and other activities. To determine the extent to which USSTRATCOM has developed a common approach and comprehensive strategy to enhance its outreach to numerous DOD organizations on which its success depends, we met with the Commander, U.S. Strategic Command, and with officials in the command’s directorate responsible for advocacy. We also met with senior leadership in all of the subordinate mission organizations to understand the extent to which a clear, coordinated, and unified outreach strategy is in place and to identify the range of methods and activities the command and its subordinate mission organizations use to engage and promote its missions and capabilities with combatant commands, military services, and DOD and other government organizations. We met with officials at the U.S. Joint Forces Command and U.S. Northern Command and discussed command relationships, the ways that USSTRATCOM officials performed outreach with these organizations, sought their viewpoint on lessons that should be learned in communicating the command’s missions and responsibilities, and their perspectives on USSTRATCOM progress. During USSTRATCOM’s Global Lightning exercise in November 2005, we also obtained insights from participants on the command’s effectiveness at performing its outreach activities. We also reviewed several GAO reports that addressed key practices organizations should implement during a significant reorganization or transformation. We used the reports to identify successful communication and outreach practices employed by other U.S. and foreign government organizations. We reviewed the USSTRATCOM commander’s summary report for its November 2005 Global Lightning exercise to identify any lessons learned, from participating in the exercise with two other combatant commands, on the success of the command’s outreach efforts. During our review, we obtained and analyzed USSTRATCOM budget and authorized personnel data to identify trends in acquiring the resources, personnel levels, and skills needed to implement the command’s missions. We took steps to assess the reliability of the data used in these analyses, including (1) performing electronic testing of required data elements, (2) comparing the data to other independently prepared data sources, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for our purposes. For additional methodological details about how we performed our analyses, see appendixes I and II. We performed our work from May 2005 through June 2006 in accordance with generally accepted government auditing standards. In conducting our work, we contacted officials at the command’s headquarters, service, and functional components; think-tank organizations; and other relevant stakeholders. Table 6 provides information on the organizations and offices contacted during our review. The United States Strategic Command (USSTRATCOM) organization is comprised of a command headquarters, joint functional component commands, task forces, and centers, which are located around one of four metropolitan areas: Omaha, Nebraska; Colorado Springs, Colorado; San Antonio, Texas; and Washington, D.C. Each of the command’s organizations is supported by a primary Defense agency or service partner organization. Table 7 shows the primary responsibilities and related information for key USSTRATCOM organizations. In addition to the individual named above, Gwendolyn R. Jaffe, Assistant Director; Alissa H. Czyz; David G. Hubbell; Amanda M. Leissoo; Kevin L. O’Neill; Roderick W. Rodgers; and Mark J. Wielgoszynski, Analyst- in-Charge, made key contributions to this report. | In 2002, the President and Secretary of Defense called for the creation of the United States Strategic Command (USSTRATCOM) to anticipate and counter global threats. Currently, USSTRATCOM has responsibility for seven mission areas including nuclear deterrence and integrated missile defense. GAO was asked to determine the extent to which USSTRATCOM has made progress in (1) implementing its new missions and assessing mission results and (2) defining organizational responsibilities and establishing relationships with other Department of Defense (DOD) commands and organizations. To assess progress, GAO compared USSTRATCOM's efforts with lessons learned in implementing successful organizational transformations. Since its establishment in 2002, USSTRATCOM has made progress in implementing its new missions by taking a wide range of actions such as developing concepts of operations for its new missions, establishing processes and procedures, and identifying and obtaining personnel and resources needed to begin operations. However, further steps are needed to build on this progress in order to achieve the broad goals envisioned by the President and Secretary of Defense in creating the command. While the command's leadership recognizes the need to build on progress to date and has some additional actions underway to expand and enhance capabilities in its seven mission areas, GAO identified several areas in which more specific actions are needed to help the command achieve its vision. Specifically, the command has taken initial steps to include its new missions in its exercise program but has not yet fully developed a robust exercise program that integrates exercise support available from the U.S. Joint Forces Command, which can provide USSTRATCOM with several planning, training, and evaluation tools. In addition, most of USSTRATCOM's new mission organizations have not established clear criteria for determining when they will reach full operating capability. Furthermore, USSTRATCOM has not developed performance measures and criteria for assessing results across the command and in each of its mission areas. GAO's prior work examining organizational change and defense transformation shows that each of these tools is important for transforming organizations to increase their likelihood of success, particularly when multiple organizations are involved in mission execution. Developing plans in each of these areas should help the command demonstrate it can provide added value to the combatant commanders and give the President an expanded set of military options for responding to future threats--two key DOD goals. USSTRATCOM has also made progress in establishing an overall organizational framework and identifying subordinate mission organizations that have responsibility for the daily management of operations. However, it has not fully clarified roles and expectations of its service component organizations and had not developed a commandwide approach for enhancing outreach to other DOD organizations. While USSTRATCOM has provided some guidance to its service component organizations, because this guidance has not been specific or well documented, the Army, Navy, and Air Force do not fully understand their expectations in providing support to the command. In addition, while USSTRATCOM conducts some outreach with other combatant commands and organizations, it lacks a commandwide approach to effectively manage outreach activities. GAO has previously found that it is essential for organizations to develop a comprehensive communication strategy that seeks to engage customers and stakeholders. Providing additional guidance and developing a communications strategy should help USSTRATCOM's service component organizations to better understand their roles and enable the command to build effective relationships with other commands. |
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TEA-21 authorized a total of $36 billion in “guaranteed” funding for a variety of transit programs, including financial assistance to states and localities to develop, operate, and maintain transit systems. Under one of these programs, New Starts, FTA identifies and funds worthy fixed- guideway transit projects, including heavy, light, and commuter rail; ferry; and certain bus projects (such as bus rapid transit). We have recognized the New Starts program as a model that the federal government could use for approving other transportation projects. FTA generally funds New Starts projects through full funding grant agreements (FFGAs). An FFGA establishes the terms and conditions for federal participation in a project, including the maximum amount of federal funds available for the project, as well as the project’s scope, schedule, and cost. By statute, the federal funding share for a New Starts project cannot exceed 80 percent of its net cost. To obtain an FFGA, projects must go through an extensive process from a regional multimodal transportation planning process to preliminary engineering to final design and construction. (See fig. 1.) As required by TEA-21, New Starts projects must emerge from a regional, multimodal transportation planning process. The first two phases of the New Starts process—systems planning and alternatives analysis—address this requirement. The systems planning phase identifies the transportation needs of a region, while the alternatives analysis phase provides information on the benefits, costs, and impacts of different corridor-level options, such as rail lines or bus routes. The alternatives analysis phase results in the selection of a locally preferred alternative—which is intended to be the New Starts project that FTA evaluates for funding. After a locally preferred alternative is selected, project sponsors submit a request to FTA for entry into the preliminary engineering phase. Following completion of preliminary engineering, the project may be approved by FTA to advance into final design, after which the project may be approved by FTA for an FFGA and proceed to construction. FTA oversees the management of projects from the preliminary engineering phase through construction and evaluates the projects for advancement into each phase of the process, as well as annually for the New Starts report to Congress. To determine whether a project should receive federal funds, FTA’s New Starts evaluation process assigns ratings on the basis of a variety of financial and project justification criteria and determines an overall rating. These criteria are identified in TEA-21 and reflect a broad range of benefits and effects of the proposed projects, such as capital and operating finance plans, mobility improvements, and cost-effectiveness. As figure 2 shows, FTA has developed a series of measures for the project justification criteria. FTA assigns proposed projects a rating of “high,” “medium-high,” “medium,” “low-medium,” or “low” for each criterion. The individual criterion ratings are combined into the summary financial and project justification ratings. However, FTA does not weigh each individual criterion equally when calculating the summary financial and project justification ratings. For the summary project justification rating, FTA uses primarily two criteria—cost-effectiveness and land use. Each of these criteria account for 50 percent of the summary project justification. Although FTA considers the full range of criteria, according to an FTA official, the other criteria do not produce meaningful distinctions among projects and, therefore, are not given an official weight in the ratings process. FTA plans to consider revisions to the measures for the other criteria after the authorizing legislation is passed. On the basis of the summary project justification and financial ratings, FTA develops the overall project rating. (Table 1 describes the criteria FTA uses to assign overall project ratings.) The exceptions to the evaluation process are statutorily “exempt” projects, which are those that request less than $25 million in New Starts funding. These projects are not required to submit project justification information and do not receive ratings. Last year, we reported that FTA implemented two changes to the New Starts process for the fiscal year 2004 cycle. (These changes are shaded in fig. 2.) First, FTA changed the calculation of the cost-effectiveness and mobility improvements criteria by adopting the Transportation System User Benefits (TSUB) measure. This measure replaced the “cost per new rider” measure that had been used in past ratings cycles. According to FTA, the new measure reflects an important goal of any major transportation investment—reducing the amount of travel time that people incur for taking a trip (i.e., the cost of mobility). In contrast to the “cost per new rider” measure, the new measure considers travel time savings to both new and existing transit system riders. Second, in response to appropriations committee reports, FTA instituted a preference policy favoring projects that seek a federal New Starts share of no more than 60 percent of the total project cost. Under this preference policy, FTA gives projects seeking a federal share of New Starts funding greater than 60 percent a “low” financial rating, which further results in a “not recommended” overall project rating. As required by statute, FTA uses the evaluation and ratings process, along with its consideration of the stage of development of New Starts projects, to decide which projects to recommend to Congress for funding. Although many projects receive an overall rating of “recommended” or “highly recommended,” only a few are proposed for FFGAs in a given fiscal year. FTA proposes “recommended” or “highly recommended” projects for FFGAs when it believes that the projects will be able to meet certain conditions during the fiscal year that the proposals are made. These conditions include the following: The local contribution to funding for the project must be made available for distribution. The project must be in the final design phase and have progressed to the point where uncertainties about costs, benefits, and impacts (e.g., environmental or financial) are minimized. The project must meet FTA’s tests for readiness and technical capacity, which confirm that there are no cost, project scope, or local financial commitment issues remaining. Of the 38 projects evaluated for the fiscal year 2005 cycle, 29 were rated and 9 were statutorily exempt from the rating process because they requested less than $25 million in New Starts funding. While the project ratings for the fiscal year 2005 cycle reflect a general improvement over the previous year, ratings are not as high as those achieved for the fiscal year 2003 cycle. FTA proposed 7 projects for funding for the fiscal year 2005 cycle, including 5 projects for FFGAs. The remaining 2 projects were considered to be “meritorious and worthy of funding” and FTA proposed a total of $50 million for these projects—substantially more than amounts proposed for similar projects in prior years. FTA did not, however, clearly explain to project sponsors how it decides which projects will be recommended for funding outside of FFGAs or what they must do to qualify for such a recommendation. FTA implemented two changes to its evaluation and ratings process for the fiscal year 2004 cycle: implementation of a new cost-effectiveness measure and adoption of the 60 percent federal New Starts share preference policy that contributed to lower ratings. Although many of those projects were able to overcome challenges with the new measure for the current cycle, ratings reflected that some projects were still unable to generate reliable local travel forecasts. Also, while the majority of the projects evaluated during the current cycle requested a federal New Starts share of less than 60 percent, some project sponsors raised concerns about FTA’s preference policy, including the challenges associated with securing the local funding share. Project ratings are generally higher for the fiscal year 2005 cycle than for the fiscal year 2004 cycle but are still lower than ratings for fiscal year 2003. Of the 38 projects FTA evaluated for the fiscal year 2005 cycle, 29 were rated, and 9 were statutorily exempt from the ratings process because project sponsors requested less than $25 million in New Starts funding. Figure 3 shows that the percentage of projects that received ratings of “recommended” or “highly recommended” rose from 44 percent for the fiscal year 2004 cycle to 59 percent for the fiscal year 2005 cycle. FTA attributes the increase in “recommended” projects over last year’s total to improved submissions, notably improved financial plans, and a better understanding of and increased comfort with the estimation of project benefits among project sponsors. In addition, FTA rated 7 projects as “not recommended” and designated 5 projects as “not rated.” According to FTA, most of the projects that received a rating of “not recommended” submitted poor financial plans—that is, plans that FTA considered overly optimistic in their assumptions about costs and revenue growth, or demonstrated no commitment of funds. For the projects that received a rating of “not rated,” either FTA had significant concerns with the travel forecasts submitted by the project sponsor or the project sponsor did not provide all of the information necessary for a complete submission. (See app. II for a full listing of ratings for projects evaluated for the fiscal year 2005 cycle.) FTA proposed 7 projects for funding for the fiscal year 2005 cycle. FTA proposed 5 of the 7 projects for FFGAs, including Cleveland, Euclid Corridor Transportation Project; Las Vegas, Resort Corridor Fixed Guideway; New York, Long Island Rail Road East Side Access; Phoenix, Central Phoenix/East Valley Light Rail Transit (LRT) Corridor; and Pittsburgh, North Shore LRT Connector. These projects are expected to be ready for FFGAs by the end of fiscal year 2005. The total costs of these 5 projects are estimated to be $7.6 billion. The total federal New Starts share is expected to be $3.7 billion. In addition, FTA considered 2 other projects in final design to be meritorious and recommended a total of $50 million for these projects in fiscal year 2005. FTA proposed $30 million for the Charlotte South Corridor LRT Project and $20 million for the Raleigh Regional Rail Project— substantially more than amounts proposed for similar projects in prior years. According to the fiscal year 2005 New Starts report, these meritorious projects are “located in areas that are highly congested or rapidly growing, and that have demonstrated a high level of local financial commitment and strong support from local citizens, businesses, and elected officials.” However, the report does not clearly explain to project sponsors how FTA decides which projects will be recommended for funding outside of FFGAs or what they must do to qualify for such a recommendation. FTA officials explained that the 2 projects considered to be meritorious this cycle are closer to being ready for an FFGA than the other projects evaluated; however, FTA did not believe the 2 projects would be ready for an FFGA in fiscal year 2005. FTA officials also told us that decisions to recommend funding for projects outside of FFGAs are made on an annual basis and are dependent on the readiness of the projects and the availability of funds after funding for existing or new FFGAs is allocated. This explanation, however, is not included in its New Starts report or other published guidance. FTA has funded similar projects in the past. For example, for the fiscal year 2003 cycle, FTA considered 5 projects in preliminary engineering to be meritorious. At that time, FTA had proposed $4 million for 4 of the 5 projects and $15 million for the remaining project. FTA reported in its annual New Starts report that the 5 projects “may be ready to progress through final design and construction by the end of fiscal year 2003.” However, by the fiscal year 2005 cycle, only 1 of the projects had an FFGA. The remaining 4 projects were either being proposed for an FFGA for the fiscal year 2005 cycle (3) or still in preliminary engineering (1). Therefore, in the past, FTA’s recommendation for funding for projects considered to be meritorious does not guarantee that a project will advance to final design and construction as quickly as anticipated. Project sponsors continue to experience challenges calculating cost- effectiveness. Last year, we reported that many project sponsors experienced difficulties that prevented them from producing accurate local travel forecasts to calculate the TSUB measure, resulting in 11 projects designated as “not rated” for cost-effectiveness. Since that time, the sponsors for 8 of those 11 projects were able to submit sufficient information to receive a rating for cost-effectiveness, suggesting that they were able to overcome the travel forecasting problem that they had experienced during the first year of the measure’s implementation. However, 6 additional project sponsors were unable to generate reliable local travel forecasts and thus could not calculate a valid TSUB value for the fiscal year 2005 cycle, resulting in a total of 9 of the 29 projects designated as “not rated” for cost-effectiveness. According to FTA, the major problem in implementing the measure this cycle stemmed from problems with the underlying local travel forecasting models, not FTA’s software or the TSUB measure. For example, FTA noted that 22 of the 29 projects rated this year required some involvement by FTA to improve the accuracy of their travel forecasts. Last year, we recommended that FTA issue additional guidance describing its expectations regarding the local travel forecasting models and the specific types of data FTA requires to calculate the measure. FTA concurred with this recommendation and provided additional guidance in its updated reporting instructions, issued in June 2003, and has continued to provide technical assistance to project sponsors. Despite the difficulties encountered in implementing TSUB, FTA and most of the project sponsors we interviewed believe that this new measure is an improvement over the “cost per new rider” measure because it takes into account a broader set of benefits to transit riders. These benefits include reductions in walk times, wait times, ride times, and numbers of transfers, all of which produce perceived savings in travel time or “travel time benefits” for new riders as well as existing transit riders. By contrast, the “cost per new rider” measure recognized benefits only for new transit riders and did not measure benefits to existing transit riders. Although the majority of project sponsors we interviewed believe the new measure is an improvement over the old one, many raised concerns about the implementation of TSUB, including the approach for calculating TSUB and the weight FTA applies to the cost-effectiveness criterion. For example, they were concerned that the measure did not capture all benefits that accrue to the transportation corridor, notably for highway users; the amount of time provided to incorporate changes to their local travel forecasting software was insufficient; and the weight FTA applies to the cost-effectiveness criterion is disproportional to other criteria. Specifically, many project sponsors were unclear about the basis for a 45-minute cap on travel time savings included in the calculation of TSUB. According to an FTA official, this cap allows FTA to limit travel time savings to less than 45 minutes, which they feel is appropriate, when examining the benefits of each project. FTA’s experience has been that time savings in excess of 45 minutes is usually due to problems with the local travel forecasting model. However, FTA has allowed for exceptions to the cap in the past if well justified by local project sponsors. FTA assigns a significant weight to the cost-effectiveness criterion in comparison with other criteria used to calculate the project justification rating. According to the New Starts report, cost-effectiveness accounts for 50 percent of the project justification rating. Land use accounts for the other 50 percent. Thus, although cost-effectiveness accounts for 50 percent of the project justification rating, a “low” cost-effectiveness rating can be offset by a “high” land use rating. This appears to be the case for the majority of projects proposed for funding for the fiscal year 2005 cycle. As table 2 shows, five of the seven projects proposed for funding received a “low-medium” cost-effectiveness rating. However, the projects’ land use ratings raised their summary project justification ratings to “medium,” which allowed them to receive an overall “recommended” rating. FTA instituted a policy favoring projects that seek a federal New Starts share of no more than 60 percent of the total project cost in fiscal year 2004. According to FTA, this preference policy responded to language contained in a conference report, prepared in November 2001, by the House Appropriations Committee. The report states “the conferees direct FTA not to sign any new FFGAs after September 30, 2002, that have a maximum federal share of higher than 60 percent.” Similar language has been included in all subsequent appropriations committee reports. Further, FTA officials told us that this policy would allow more projects to receive funding by spreading limited resources among them and ensure that local governments whose regions stand to receive substantial benefits for the project play a major role in funding such projects. However, when FTA implemented the 60 percent policy, it did not amend its regulations to support the change in policy or its current procedures. As a result, we noted last year that FTA did not provide an opportunity for public comment on the impact of the preference policy. We further advised that explicitly stating criteria and procedures in regulations would ensure that project sponsors were fully aware of the preference policy. Accordingly, last year we recommended that FTA amend its regulations governing the New Starts share for projects to reflect its current policy. FTA disagreed with our recommendation, noting it was not required to issue regulations because the policy was not legally binding. Moreover, according to FTA officials, the preference policy is explained in both the fiscal year 2004 and 2005 New Starts reports and in its June 2003 reporting instructions. Although FTA’s preference policy, as expressed in the recent New Starts report, favors projects that request a federal New Starts share of no more than 60 percent, FTA is encouraging project sponsors to request an even lower federal New Starts share. Specifically, some project sponsors have stated that FTA encourages project sponsors to propose a federal New Starts share of no more than 50 percent—which is consistent with the administration’s reauthorization proposal. This push for a lower New Starts share is reflected in FTA’s rating process. As table 3 indicates, the lower the amount of New Starts funding requested, the higher the New Starts share rating. According to the New Starts report, the non-New Starts share rating accounts for 20 percent of a project’s financial rating. The project sponsors we contacted expressed concerns about the preference policy. Although the majority of the projects evaluated during the current cycle requested a federal New Starts share of less than 60 percent, many of the project sponsors we interviewed indicated that they had proposed a share that was in line with FTA’s policy in order to remain competitive. More than half of those interviewed told us they faced difficulties in advancing New Starts projects under such a policy. For example, some project sponsors told us that transit projects have a difficult time competing with highway projects in the local planning process because highway projects typically require a 20 percent local match, whereas New Starts projects require a match of at least 40 percent. Other project sponsors described the limited resources available at the local level to advance New Starts projects. A number of project sponsors also expressed concerns about FTA’s efforts to lower the federal New Starts share to 50 percent. For example, one project sponsor indicated that their project would have to drop out of the process, others indicated that the projects would have to be redesigned, and one project sponsor indicated that requesting a lower federal New Starts share would weaken the project’s financial plan. According to the fiscal year 2005 New Starts report, projects that request more than a 60 percent federal New Starts share are not recommended to Congress for FFGAs. Specifically, the fiscal year 2005 New Starts report states that “projects seeking a federal New Starts share over 60 percent of total costs are given a ‘low’ rating for local financial commitment, regardless of the ratings received for the capital plan and operating plan. This ‘low’ rating further results in a ‘not recommended’ overall project rating.” Projects receiving an overall “not recommended” rating are not proposed for an FFGA. An FTA official told us that for the fiscal year 2005 cycle, no project received an overall “not recommended” rating solely due to this policy preference. The enabling legislation for this program states that federal grants are to be for 80 percent of the net project cost, unless the grant recipient requests a lower grant percentage. TEA-21 required FTA to consider the strength of the local financial commitment, including the extent to which the project will have a federal New Starts share of less than 80 percent. In our view, FTA’s policy to favor projects with a lower federal share is permissible as long as projects are not required to request less than an 80 percent federal New Starts share in order to be considered for recommendation for an FFGA. FTA’s description of the preference policy in its fiscal year 2005 New Starts report suggests that this policy is absolute in that projects proposing more than a 60 percent federal New Starts share will not be recommended for an FFGA. However, FTA has assured us that this is a general preference and it may make exceptions to this policy. FTA has agreed to clarify in its upcoming reporting instructions that this is a general preference policy, thus allowing for the possibility of exceptions. FTA instituted two new requirements for New Starts projects for the fiscal year 2005 cycle that were independent of the rating process. First, FTA required project sponsors to submit a supplemental document—a “make the case” document—that articulates the benefits of the proposed New Starts project. Project sponsors are expected to “make the case” by describing why the project is needed and why it is the best alternative available to meet these needs. According to an FTA official, the “make the case” document is intended to help FTA interpret the data produced by the local travel forecasting models. For example, the supplemental document could be used to explain unusual results produced by the local travel forecasts. In addition, an FTA official stated that the document would aid FTA in preparing the profile summaries of projects for the annual New Starts reports. FTA officials note, however, that many of the “make the case” submissions for the current cycle did not meet their expectations. For example, some of the submissions provided only a justification of the need for a corridor improvement; others consisted solely of a summary of financial and political commitment. An FTA official acknowledged that FTA could have done a better job in defining the purpose of the document and stated that FTA plans to provide more guidance in the near future. The second new requirement instituted for the fiscal year 2005 cycle is a risk assessment. The risk assessments are intended to identify the issues that could affect schedule or cost, as well as the probability that they will do so. It is also used as a project management tool by the project sponsor and an FTA oversight tool. FTA’s project management oversight contractors have been conducting the assessments, focusing on the projects that are closest to receiving an FFGA. As of May 2004, FTA has completed risk assessments for four projects. Eventually, FTA intends to conduct risk assessments on projects in earlier phases of development. FTA officials plan to issue more guidance on this new requirement. In addition, FTA continues to share and exchange information with project sponsors through FTA-sponsored roundtables and New Starts workshops. The administration’s fiscal year 2005 budget proposal requests $1.5 billion for the New Starts program, a $225 million increase over the amount appropriated for fiscal year 2004. Proposed legislation to reauthorize federal surface transportation programs in the House and Senate would expand the New Starts program to include a wider variety of transit projects as well as streamline the New Starts evaluation process for projects requesting less than $75 million in New Starts funding, among other things. Project sponsors had mixed reactions to these proposals and called for clear definitions. In its budget proposal for fiscal year 2005, the administration requests $1.5 billion for the construction of new transit systems and the expansion of existing systems through the New Starts program—an increase of $225 million, or 15 percent, over the amount appropriated for fiscal year 2004. Figure 4 illustrates the specific allocations FTA has proposed for fiscal year 2005, including the following: $931 million (61 percent) would be allocated among 26 projects under construction with existing FFGAs, $295 million (19 percent) would be allocated among the 5 projects proposed for new FFGAs, $151 million (10 percent) would be allocated among other projects in final design and preliminary engineering that do not have existing FFGAs, and $50 million (3 percent) would be allocated for 2 projects considered to be meritorious by FTA. Proposed FFGAs ($295 million) Existing FFGAs ($931 million) FTA has limited commitment authority remaining—about $200 million— through June 2004. According to FTA officials, the commitment authority for fiscal year 2005 and beyond will be addressed in the next surface transportation authorization legislation. FTA officials told us that neither the amount of commitment authority remaining nor the delay in reauthorizing TEA-21 affected the number of projects proposed for an FFGA for the fiscal year 2005 cycle. However, FTA officials noted that FTA will not be able to execute all 5 proposed FFGAs until additional commitment authority is provided through congressional authorization. Congress is currently considering legislation that would reauthorize all surface transportation programs, including the New Starts program. Both the Senate and House bills contain a number of provisions and initiatives for the New Starts program. Some of the key provisions of these bills would (1) streamline the evaluation process for projects under $75 million, (2) expand the definition of eligible projects, (3) change the ratings categories, and (4) maintain the maximum federal New Starts share at 80 percent. The project sponsors we interviewed had mixed reactions to these provisions. In addition, most of the sponsors called for clear definitions to any changes to the New Starts process. Streamline the New Starts evaluation process for projects under $75 million. The Senate proposal would allow the Secretary of Transportation discretion to develop a streamlined evaluation process for projects requesting less than $75 million in New Starts funds. This provision would eliminate the “exempt” classification for projects requesting less than $25 million in New Starts funding and would allow FTA to analyze and rate all projects through a streamlined process. The House proposal would establish a “Small Starts” program for projects requesting between $25 million and $75 million in New Starts funding, and these projects would be evaluated through a streamlined ratings process. In addition, the House proposal would maintain the exempt classification allowing projects requesting less than $25 million in New Starts funding to be exempt from the evaluation and ratings process. Most project sponsors we interviewed were supportive of implementing a streamlined evaluation process for less expensive projects. Some stated that a less robust evaluation process for less expensive projects makes sense, and others said it would allow cities to consider a range of potential projects without having to develop an expensive project. However, some said that clear definitions and criteria would be necessary in implementing the streamlined evaluation process. Expand the definition of eligible projects. Currently, TEA-21 limits New Starts funding to fixed-guideway projects. Both the House and Senate reauthorization proposals would allow certain nonfixed-guideway transit projects (e.g., bus rapid transit operating in nonexclusive lanes) to be eligible for New Starts funding, opening the program up to projects that currently are ineligible. Specifically, the Senate proposal would allow nonfixed-guideway projects requesting less than $75 million to be eligible for New Starts funding. The House proposal would expand New Starts funding eligibility to include nonfixed-guideway projects with a majority of fixed-guideway components seeking between $25 million and $75 million, as part of its “Small Starts” initiative. The majority of project sponsors we interviewed supported this initiative, some noting that broadening the program to include nonfixed-guideway projects would open more transit possibilities for localities. However, some project sponsors did express concerns about the already high demand on New Starts funding and noted that nonfixed-guideway projects could receive funds through other federal programs or capital funds. As a result, a number of project sponsors that support expanding the program said increased and/or separate funding and a clear definition of eligible projects are needed. Others were reluctant to support the expansion of New Starts to include nonfixed-guideways projects, citing a lack of funds and the importance of maintaining the fixed-guideway focus of New Starts. Change the rating categories. Under TEA-21, FTA assigns summary ratings of “highly recommended,” “recommended,” and “not recommended” to projects requesting New Starts funding. The Senate reauthorization proposal would revise the current rating system and implement five levels of ratings: “high,” “medium-high,” “medium,” “medium-low,” and “low.” The House proposal would maintain the current ratings system. Project sponsors were unsure of the impact of the proposed changes, and a few requested clearly defined criteria for each new rating category. Some sponsors told us they were not concerned with the ratings scale as long as it was clearly defined. Other project sponsors said they did not care what the new rating categories were called—they just want to know what rating is needed to secure an FFGA. In addition, two sponsors said the new system could be more easily conveyed to local officials. Maintain a maximum New Starts share at 80 percent. Currently, TEA- 21 allows a maximum New Starts share of 80 percent for individual projects. Both the House and the Senate versions of the TEA-21 reauthorization proposals would maintain the maximum New Starts share at 80 percent, in contrast to the administration’s reauthorization proposal, which would lower the maximum New Starts share to 50 percent. Furthermore, the House bill specifically prohibits FTA from requiring a nonfederal share that is more than 20 percent of the project’s cost. Currently, FTA is encouraging project sponsors to request no more than 50 percent in New Starts funding for their projects. As noted earlier, some project sponsors we interviewed were concerned about the potential impact of reducing the New Starts share to 50 percent, including the effect of this change on the balance between highway and transit project funding. All 26 projects with existing FFGAs have not received funds as scheduled— that is, the amount of funding appropriated was less than the amount scheduled in the FFGA. FFGAs are multiyear contractual agreements between FTA and project sponsors for a specified amount of funding, which are subject to the annual appropriations process. The full amount of funding is committed to the projects over a set period, and the FFGA contains a schedule of annual federal payments to fulfill FTA’s commitment. According to FTA, all completed New Starts projects received the total FFGA amount but not necessarily according to the original FFGA schedule. FTA will continue to request funds to be appropriated to meet the amounts authorized in existing FFGAs. As of March 2004, the 26 projects have received a total of $294 million, or 5 percent, less than the amount authorized by the projects’ FFGAs. The amount and timing of the differences in funding varied for each project, but all 26 projects with FFGAs received less than the scheduled amount at some point. As of March 2004, 7 had received over 10 percent less than the scheduled amount, 2 had received between 5 and 10 percent less than scheduled, and 17 projects had received up to 5 percent less than scheduled. The timing of the differences in funding also varied. Some projects experienced substantial differences between appropriated and scheduled amounts at the beginning or near the end of their FFGA, but it was more common for projects to experience funding differences throughout. (See app. III for the total amount of differences for each project with an existing FFGA.) Several factors contributed to projects receiving less New Starts funding than scheduled. The amount of funding authorized by an FFGA is subject to the annual appropriations process and, therefore, differences may arise because of congressional decision making. In addition, projects receive less than the amounts authorized by the FFGAs because FTA retains 1 percent of the funding provided each year to cover the cost of its project management oversight. According to FTA officials, each year FTA requests funding to cover the project management oversight costs, but these funds are typically not appropriated. FTA may also request that less New Starts funding be appropriated to a project than scheduled by the FFGA if it is concerned about a specific project’s progress; however, FTA officials said they rarely recommend less funding than is scheduled. Faced with these variances in funding, project officials we interviewed have developed methods to mitigate the impact of receiving less than the scheduled annual amount for their project. Some project officials entered into partnerships with the state and/or local government. For example, one transit agency arranged for the state to contribute more funds early on in the project and, as a result, the funding schedule did not adversely affect the project. Other projects implemented interim funding mechanisms to cover any FFGA variances, including issuing bonds or loans to generate necessary funds. None of the 5 project officials we contacted had to change the scope or schedule of their project solely due to funding variances. However, officials from these projects said that interim financing ultimately increased the cost of the project. For example, the Portland Interstate MAX project incurred approximately $3 million in borrowing costs, which equaled 4 percent of the total local commitment to the project. To receive an FFGA, projects must go through a lengthy evaluation process by FTA—from planning to preliminary engineering to final design. The steps for advancing through the evaluation process and securing an FFGA are well documented in FTA’s New Starts reports and other published guidance. Documentation of these steps is important to ensure a common understanding among projects sponsors and to increase the transparency of the process. Like other programs, the transparency of the New Starts process is critical in ensuring that project sponsors view the process as fair and objective. Although the process for securing an FFGA is well-defined, FTA’s identification of meritorious projects—and the subsequent proposed funding of these projects—is not. While FTA officials were able to provide us additional insight regarding funding recommendations for these projects, FTA’s New Starts reports and other published guidance are not clear in its meaning. In particular, the rationale for the funding recommendation for these two projects in FTA’s New Starts Report for Fiscal Year 2005 is very broad and lacks necessary detail. FTA does not explain how it decides which projects will be recommended for funding outside of FFGAs and what project sponsors must do to qualify for such a recommendation. In addition, FTA did not justify the level of funding proposed for these projects for fiscal year 2005—which is a substantial increase compared to amounts proposed for similar projects in the past. Consequently, it is difficult to understand why these two meritorious projects are more worthy of funding than other projects in the pipeline. The implementation of FTA’s policy favoring projects requesting a federal New Starts share of less than 60 percent also continues to create challenges for some project sponsors and raises concerns. According to FTA, its policy is in response to language contained in appropriations committee reports and will result in more projects receiving funding by spreading limited resources among them and ensuring that local governments whose regions would benefit from the project play a major role in funding such projects. However, many of the project sponsors we interviewed experienced challenges in trying to secure a larger local match to comply with FTA’s preference policy. Several project sponsors also stated that FTA’s push for a lower federal New Starts share would likely affect their decision to advance future transit projects. Therefore, it is important for FTA to understand how this policy affects local decision making with regard to proposing and funding New Starts projects, as well as whether the policy is maximizing New Starts funds and local participation. To ensure that FTA’s New Starts evaluation process and policies are objective, transparent, and comply with federal statute, we recommend that the Secretary of Transportation direct the Administrator, FTA, to take the following two actions: Clearly explain the basis on which it decides which projects will be recommended for funding outside of FFGAs, such as projects considered to be meritorious, and what projects must do to qualify for such a recommendation. These explanations should be included in FTA’s annual New Starts report and other published New Starts guidance. FTA should also examine the impact of its preference policy on projects currently in the evaluation process, as well as projects in the early planning stages, and examine whether its policy results in maximizing New Starts funds and local participation. We provided a draft of this report to the Department of Transportation for review and comment. Officials from the Department and FTA, including the Associate Administrator for Planning and the Environment, indicated that they generally agreed with the report and its recommendations. According to FTA officials, the FTA New Starts program has been recognized as well- managed, with consistent, proven results and accomplishments. They recognized, however, the need to further improve program guidance and operation. Specifically, FTA agreed to more clearly explain, in its guidance to project sponsors, the basis on which it decides which projects will be recommended for funding outside of FFGAs. In addition, in the draft of this report, we recommended that FTA revise its guidance to clarify that exceptions to the preference policy are permissible. In discussions with FTA officials about the draft of this report, FTA agreed to clarify the preference policy by clearly stating it is a general, rather than an absolute, preference in its upcoming reporting instructions and other appropriate sources, making a recommendation to take such action unnecessary. Therefore, we eliminated our recommendation on this matter in our final report. Finally, FTA officials also provided technical clarifications, which we incorporated as appropriate. We are sending copies of this report to congressional committees with responsibilities for transit issues; the Secretary of Transportation; the Administrator, Federal Transit Administration; and the Director, Office of Management and Budget. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions on matters discussed in this report, please contact me at [email protected]. GAO contacts and key contributors to this report are listed in appendix IV. To address our objectives, we reviewed the administration’s fiscal year 2005 budget request and legislative reauthorization proposals, the Federal Transit Administration’s (FTA) annual New Starts reports, records on funding authorized and appropriated to projects with existing full funding grant agreements (FFGAs), and federal statutes pertaining to the New Starts program. In addition, we interviewed FTA officials and representatives from the American Public Transportation Association and attended FTA’s New Starts roundtable with project sponsors in April 2004. We also conducted semistructured interviews with project sponsors from 15 projects in preliminary engineering or final design to gain their perspectives on recent and proposed changes to the New Starts program and 5 projects with FFGAs to discuss their experiences in dealing with shortfalls in federal funding for their New Starts projects. (See table 4 for a listing of all projects contacted.) The results of these interviews are not generalizable to all project sponsors, however we used multiple criteria in selecting the projects to ensure we evaluated a diverse group of projects. Specifically, to select the 15 projects in preliminary engineering or final design, we considered projects’ overall ratings for the fiscal year 2005 cycle, mobility and cost-effectiveness ratings for fiscal years 2003 to 2005, percentage of New Starts funding requested for fiscal years 2003 through 2005, total cost, and location. We obtained this information from FTA’s annual New Starts reports for fiscal years 2003 through 2005. In selecting the 5 projects with FFGAs, we considered the size and timing of any differences between the amount of funding authorized in projects’ FFGAs and the amount of funding appropriated to the projects for fiscal years 1998 through 2004. We obtained information on the amount of funding authorized and appropriated to projects with existing FFGAs from FTA. To ensure the reliability of information presented in this report, we interviewed FTA officials about FTA’s policies and procedures for compiling the annual New Starts reports, including FTA’s data collection and verification practices for New Starts information. We also reviewed documentation for the database FTA uses to compile, analyze, and store data for New Starts projects. In addition, during our semistructured interviews with project sponsors, we asked about the accuracy of the information about their projects presented in the annual New Starts reports. Finally, we tested the reliability of FTA’s records of the amount of funding authorized and appropriated to projects with existing FFGAs by comparing a nonprobability sample of the records with FFGAs. We concluded that the FTA information presented is sufficiently reliable for the purposes of this report. Projects with existing full funding grant agreements (FFGAs) Baltimore–Central Light Rail Transit (LRT) Double Tracking Chicago–North Central Corridor Commuter Rail Chicago–Union Pacific West Line Extension Fort Lauderdale–South Florida Commuter Rail Upgrades Northern New Jersey–Hudson Bergen Minimal Operating Segment (MOS1) Northern New Jersey–Hudson Bergen (MOS2) Projects considered to be meritorious. Total authorized and scheduled in full funding ($360,785) ($12,418,193) ($4,824,837) ($2,137,215) ($1,237,615) ($5,969,600) ($35,158,211) ($24,992,274) ($11,210,695) ($663,339) ($2,670,672) ($16,455,206) ($2,402,995) ($313,896) Total authorized and scheduled in full funding ($1,342,076) ($1,120,854) ($41,584,710) ($1,127,405) ($3,719,376) ($41,489,474) ($7,382,694) ($9,659,711) ($54,818,940) ($1,186,586) ($53,383) ($10,132,887) In addition to the individuals named above, other key contributors to this report were Chris Bonham, Jay Cherlow, Elizabeth Eisenstadt, Rita Grieco, Kara Finnegan Irving, Elizabeth McNally, Sara Ann Moessbauer, and Stacey Thompson. 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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To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | The Transportation Equity Act for the 21st Century (TEA-21) and subsequent legislation authorized about $8.3 billion in guaranteed funding for the Federal Transit Administration's (FTA) New Starts program, which funds fixed guideway transit projects, such as rail and trolley projects, through FFGAs. GAO assessed the New Starts process for the fiscal year 2005 cycle. GAO identified (1) the number of projects that were evaluated, rated, and proposed for new FFGAs and how recent changes to the process were reflected in ratings; (2) the proposed funding commitments in the administration's budget request and legislative reauthorization proposals; and (3) the extent to which amounts appropriated since 1998 fulfilled FFGAs. For the fiscal year 2005 cycle, FTA evaluated 38 projects, rated 29 projects, and proposed 7 projects for funding. FTA recommended 5 of the 7 projects for full funding grant agreements (FFGAs). FTA considered the remaining 2 projects to be meritorious and recommended a total of $50 million for these projects in fiscal year 2005. However, FTA does not clearly explain how it decides which projects will be recommended for funding outside of FFGAs or what project sponsors must do to qualify for such a recommendation. Last year, in response to language contained in appropriations committee reports, FTA instituted a policy favoring projects that seek a federal New Starts share of no more than 60 percent of the total project cost--even though the law allows projects to seek up to 80 percent--in its recommendation for FFGAs. According to FTA officials, this policy allows more projects to receive funding and ensures that local governments play a major role in funding such projects. FTA describes the 60 percent policy as a general preference; however, FTA's fiscal year 2005 New Starts report suggests that this policy is absolute in that projects proposing more than a 60 percent federal New Starts share will not be recommended for an FFGA. Therefore, FTA agreed to describe the policy as a general preference in future reporting instructions, thus allowing for the possibility of exceptions. Although most of the projects evaluated during the current cycle proposed a federal New Starts share of less than 60 percent of total project costs, some project sponsors GAO interviewed raised concerns about the difficulties of securing the local funding share. However, the overall impact of this policy on projects is unknown. The administration's fiscal year 2005 budget proposal requests $1.5 billion for the New Starts program, a $225 million increase over the amount appropriated for the fiscal year 2004 cycle. Congress is currently considering legislative reauthorization proposals, which contain a number of provisions and initiatives for the New Starts program including streamlining the New Starts evaluation process for projects requesting less than $75 million in New Starts funds, expanding the definition of eligible projects, changing the ratings categories, and maintaining the maximum federal New Starts share at 80 percent of total project cost. Project sponsors GAO interviewed had varying views on these provisions, but most said that clear definitions would be needed for any proposed changes to the New Starts process. All 26 projects with existing FFGAs have not received funds as scheduled--the amount of funding appropriated was less than the amount authorized and scheduled by the FFGA. According to FTA, all completed projects have received the total amount authorized in the FFGAs, but not necessarily according to the original FFGA schedule. As of March 2004, the 26 projects have received a total of $294 million, or 5 percent, less than the amount scheduled by the projects' FFGAs. The amount and timing of differences varied for each project. Project sponsors GAO interviewed have developed methods to mitigate the impact of receiving less than the scheduled annual amount for their project, but these methods can generate additional costs. |
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The use of information technology has created many benefits for agencies such as IRS in achieving their missions and providing information and services to the public, but extensive reliance on computerized information also creates challenges in securing that information from various threats. Information security is especially important for government agencies, where maintaining the public’s trust is essential. Without proper safeguards, computer systems are vulnerable to individuals and groups with malicious intentions who can intrude and use their access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Cyber-based threats to information systems and cyber-related critical infrastructure can come from sources internal and external to the organization. Internal threats include errors or mistakes, as well as fraudulent or malevolent acts by employees or contractors working within an organization. External threats include the ever-growing number of cyber-based attacks that can come from a variety of sources such as hackers, criminals, and foreign nations. Our previous reports, and those by federal inspectors general, describe persistent information security weaknesses that place federal agencies, including IRS, at risk of disruption, fraud, or inappropriate disclosure of sensitive information. Accordingly, we have designated information security as a governmentwide high-risk area since 1997, a designation that remains in force today. Information security is essential to creating and maintaining effective internal controls. The Federal Managers’ Financial Integrity Act of 1982 requires the Comptroller General to prescribe standards for internal control in federal agencies. The 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 term internal control is synonymous with the term management control, which covers all aspects of an agency’s operations (programmatic, financial, and compliance). The attitude and philosophy of management toward information systems can have a profound effect on internal control. Information system controls consist of those internal controls that are dependent on information systems processing and include general controls (security management, access controls, configuration management, segregation of duties, and contingency planning) at the entity, system, and business process application levels; business process application controls (input, processing, output, master file, interface, and data management system controls); and user controls (controls performed by people interacting with information systems). Recognizing the importance of securing federal agencies’ information systems, Congress enacted the Federal Information Security Management Act of 2002 (FISMA) to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program for the information and information systems that support the operations and assets of the agency, using a risk-based approach to information security management. Such a program includes assessing risk; developing and implementing cost-effective security plans, policies, and procedures; providing security awareness and specialized training; testing and evaluating the effectiveness of controls; planning, implementing, evaluating, and documenting remedial actions to address information security deficiencies; and ensuring continuity of operations. The act also assigned to the National Institute of Standards and Technology (NIST) the responsibility for developing standards and guidelines that include minimum information security requirements. IRS collects taxes, processes tax returns, and enforces federal tax laws. In fiscal years 2012 and 2011, IRS collected about $2.5 trillion and $2.4 trillion, respectively, in federal tax payments, processed hundreds of millions of tax and information returns, and paid about $373 billion and about $416 billion, respectively, in refunds to taxpayers. Further, the size and complexity of IRS add unique operational challenges. IRS employs more than 100,000 people in its Washington, D.C., headquarters and more than 650 offices in all 50 states and U.S. territories and in some U.S. embassies and consulates. IRS relies extensively on computerized systems to support its financial and mission-related operations. To manage its data and information, the agency operates three enterprise computing centers located in Detroit, Michigan; Martinsburg, West Virginia; and Memphis, Tennessee. IRS also collects and maintains a significant amount of personal and financial information on each U.S. taxpayer. Protecting the confidentiality of this sensitive information is paramount; otherwise, taxpayers could be exposed to loss of privacy and to financial loss and damages resulting from identity theft or other financial crimes. The Commissioner of Internal Revenue has overall responsibility for ensuring the confidentiality, integrity, and availability of the information and information systems that support the agency and its operations. FISMA requires the Chief Information Officer (CIO) or comparable official at a federal agency to be responsible for developing and maintaining an information security program. IRS has delegated this responsibility to the Associate CIO for Cybersecurity, who heads the Office of Cybersecurity. The Office of Cybersecurity’s mission is to protect taxpayer information and the IRS’s systems, services, and data from internal and external cybersecurity-related threats by implementing security practices in planning, implementation, risk management, and operations. IRS develops and publishes its information security policies, guidelines, standards, and procedures in its Internal Revenue Manual and other documents in order for IRS divisions and offices to carry out their respective responsibilities in information security. In October 2012, the Treasury Inspector General for Tax Administration (TIGTA) stated that security of taxpayer data, including securing computer systems, was the top priority in its list of top 10 management challenges for IRS in fiscal year 2013. IRS had implemented numerous controls over its systems, including controls for identification and authentication, authorization, cryptography, audit and monitoring, physical security, configuration management, and contingency planning. However, it had not always effectively implemented access and other controls to protect the confidentiality, integrity, and availability of its financial systems and information. These weaknesses and others in IRS’s security program increase the risk that taxpayer and other sensitive information could be disclosed or modified without authorization. A basic management objective for any organization is to protect the resources that support its critical operations from unauthorized access. Organizations accomplish this objective by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Access controls include those related to user identification and authentication, authorization, cryptography, audit and monitoring, and physical security. However, IRS did not fully implement effective controls in these areas. Without adequate access controls, unauthorized individuals may be able to log in, access sensitive information, and make undetected changes or deletions for malicious purposes or personal gain. In addition, authorized individuals may be able to intentionally or unintentionally view, add, modify, or delete data they should not have been given access to. A computer system needs to be able to identify and authenticate each user or system so that activities can be linked and traced to a specific individual or system. An organization does this by assigning a unique account to each user or process, and in so doing, the system is able to distinguish one user or process from another—a process called identification. The system also needs to establish the validity of a claimed identity by requesting some kind of information, such as a password—a process known as authentication. NIST also recommends using multifactor authentication to access user accounts via a network. Multifactor authentication involves using two or more factors to achieve authentication. Factors include something you know (e.g., password or personal identification number), something you have (e.g., cryptographic identification device or token), or something you are (e.g., biometric). The combination of identification and authentication—such as user account- password combinations—provides the basis for establishing accountability and for controlling access to the system. IRS’s Internal Revenue Manual specifies security configurations for its database systems and network support systems that cover how authentications are to be performed and how passwords are to be configured. The manual also requires the use of a strong password for authentication (defined as a minimum of eight characters, containing at least one numeric or special character, and a mixture of at least one uppercase and one lowercase letter), and that passwords be set to expire every 90 days. IRS improved identification and authentication controls for certain databases, one of their major operating systems, and network infrastructure systems. Specifically: some database configurations were more securely configured such that the source of user logins was more restrictive and password controls were strengthened; improved password controls were implemented for servers using the UNIX operating system; and important data transmissions used to operate their network infrastructure were authenticated. However, a number of identification and authentication control weaknesses continued to reduce IRS’s ability to effectively control access to systems and data. For example: authentication controls for certain databases were not set to prevent passwords were stored without adequate controls to prevent them from being disclosed; and controls over complexity and age of passwords for some databases were not adequate. Further, the agency sometimes used passwords that could be easily guessed and had not changed some passwords in nearly 2 years. In addition, the username and password for a database was stored in clear text in a file that was named so that its contents were easy to guess. Unauthorized use of this username and password would expose system information and render sensitive data vulnerable to unauthorized access. The vulnerability was compounded by the fact that the unauthorized access would be virtually undetectable since no unusual system activity would be involved—the unauthorized access would be via a valid username and password. As a result of these weaknesses, IRS had reduced ability to control who was accessing its systems and data. Authorization is the process of granting or denying access rights and permissions to a protected resource, such as a network, a system, an application, a function, or a file. A key component of granting or denying an access right is the concept of least privilege. Least privilege is a basic principle for securing computer resources and data. It means that users are granted only those access rights and permissions that they need to perform their official duties. According to NIST, access control policies and access enforcement mechanisms are employed by organizations to control access between users (or processes acting on behalf of users) and objects in the information system. Furthermore, it notes that access enforcement mechanisms are employed at the application level, when necessary, to provide increased information security for the organization. According to the Internal Revenue Manual, the agency should implement access control measures that provide protection from unauthorized alteration, loss, unavailability, or disclosure of information. The manual also requires that system access be granted based on the principle of least privilege, which allows access at the minimum level necessary to support a user’s job duties. IRS had strengthened several authorization controls, including: eliminating certain database vulnerabilities that had previously reduced the agency’s ability to enforce least privilege; improving isolation of mainframe processing environments to more effectively restrict access; strengthening an application login process to prevent users from exceeding their approved access levels; and restricting privileges to important files stored on a network server. However, numerous authorization control weaknesses existed in IRS’s computing environment, including: Access privileges allowed all users of IRS’s internal network to read and write files containing sensitive system information, including passwords, that were used to support automated data transfer operations between numerous systems. Unauthorized access privileges to these files jeopardized the integrity of the data and the availability of applications. Administrators had more access than needed in certain instances. On one server, IRS had configured multiple databases supporting different business units to operate using the same username. As a result, any administrator with access to the username could have access to all databases, exceed his or her job duties, and affect IRS’s ability to control the integrity of the data. For one system reviewed, database administrators were inadvertently granted privileges to administer the servers used by the database. Although IRS had recently tested an application, and contrary to least privilege principles, users of that application could view sensitive system information by using unintended capabilities in the user interface of the application. Subsequent to our site visit, IRS officials advised us that corrective actions had been taken in the form of programming changes to the next version of the application. However, we have not verified that these actions have been completed. Until IRS appropriately controls users’ access to its systems and effectively implements its procedures for authorization, the agency has limited assurance that its information resources are being protected from unauthorized access, alteration, and disclosure. Cryptography underlies many of the mechanisms used to enforce the confidentiality and integrity of critical and sensitive information. A basic element of cryptography is encryption, which is used to transform plain text into cipher text using a special value known as a key and a mathematical process known as an algorithm. According to IRS policy, the confidentiality of transmitted data must be protected by encrypting the data to prevent unauthorized disclosure. In addition, the policy states that the use of insecure protocols should be restricted because their widespread use can allow passwords, taxpayer information, and other sensitive data to be transmitted unencrypted across its internal network. IRS has made progress in its implementation of data encryption controls, particularly in protecting sensitive information transmitted across its internal network. However, user IDs, passwords, and data continued to be transmitted frequently without encryption. Further, many of IRS’s servers were configured to weakly encrypt passwords in a manner that did not effectively prevent the passwords from being disclosed during transmission. IRS officials advised us that the weak server password encryption configuration was the result of incompatibilities between some systems that had to decrypt passwords and was expected to be resolved soon after the conclusion of our audit. Until the existing weaknesses and the newly-identified weakness are corrected, IRS’s ability to reliably control access to some systems and data is undermined. To establish individual accountability, monitor compliance with security and configuration management policies, and investigate security violations, it is crucial to determine what, when, and by whom specific actions have been taken on a system. Agencies accomplish this by implementing system or security software that provides an audit trail—a log of system activity—that it can use to determine the source of a transaction or attempted transaction and to monitor user activity. The way in which organizations configure system or security software determines the nature and extent of information that can be provided by the audit trail. To be effective, agencies should configure their software to collect and maintain audit trails that are sufficient to track security-relevant events. The Internal Revenue Manual requires that audit logging be enabled and configured on all systems to aid in the detection of security violations, performance problems, and flaws in applications. Additionally, the manual states that security controls in information systems shall be monitored on an ongoing basis. To enhance its auditing and monitoring capabilities, IRS established several activities designed to support detection of questionable or unauthorized access to financial applications and data and to support its response. The Enterprise Security Audit Trails (ESAT) Project Management Office is designed to assist in audit and monitoring activities by detecting questionable or unauthorized access to financial applications and data. For fiscal year 2012, this office continued to implement new procedures building on its initiatives. For example, at the time of our review, the office had enabled and configured audit logging in place for 23 systems. In addition, for a key financial system, the Office of the Chief Financial Officer documented monitoring procedures, which staff used to review the key financial system’s ESAT audit logs. However, IRS did not always effectively implement audit and monitoring controls on internal systems. Specifically, the agency did not have controls in place to detect inappropriate access between the mainframe systems used for tax processing and financial management. Data stored on disks in these systems could be accessed by a user who had been allowed access to one or more processing environments, such as development, test, or production. In addition, two of IRS’s testing environments that share disk storage with the tax and financial management processing environments did not have routine monitoring oversight. The agency had also not enabled logging for a database supporting an important tax-processing application. IRS had detected this shortcoming; however, corrective actions are not scheduled to be completed for more than 2 years. Further, IRS was not consistently logging administrator activity, and certain production files on the mainframe could be changed without these changes being logged. Without effective audit and monitoring, IRS’s ability to establish individual accountability, monitor compliance with security and configuration management policies, and investigate security violations is limited. Physical security controls are important for protecting computer facilities and resources from sabotage, theft, accidental or deliberate damage, and unauthorized access. These controls involve restricting physical access to computer resources, usually by limiting access to the buildings and rooms in which they are housed and periodically reviewing the access granted in order to ensure that access continues to be appropriate. At IRS, physical access control measures, such as physical access cards that are used to permit or deny access to certain areas of a facility, are vital to safeguarding facilities, computing resources, and information from internal and external threats. The Internal Revenue Manual requires an inventory of nonphoto ID cards at least once every 24 hours, including a signature on the inventory form to verify that the inventory has been completed. In addition, it requires access controls that safeguard assets against possible theft and malicious actions and requires department managers of restricted areas to review, validate, sign, and date the authorized access list for restricted areas on a monthly basis and then forward the list to the physical security office for review. IRS implemented numerous physical security controls at its enterprise computing centers to safeguard assets against possible theft and malicious actions. For example, IRS ensured guard personnel consistently conducted inventories of nonphoto ID cards, and directed the guard personnel at enterprise computing centers to sign the inventories in accordance with policy. In addition, the agency sufficiently restricted access to unattended consoles within the computing centers. However, physical security controls were not always effectively implemented. For example, visitor physical access cards to restricted areas at one computing center provided unauthorized access to other restricted areas within the center, and regular reviews of individuals with an ongoing need to access restricted areas at one of the three computing centers were not being conducted monthly to ensure that such access was still appropriate. We previously made recommendations in fiscal year 2011 to address both of these issues. Because employees and visitors may be allowed inappropriate access to restricted areas, IRS has reduced assurance that its computing resources and sensitive information are being adequately protected from unauthorized access. In addition to access controls, other controls should be in place to ensure the confidentiality, integrity, and availability of an organization’s information. These controls include policies, procedures, and techniques for securely configuring information systems and planning for continuity of operations. Weaknesses in system configurations have increased the risk of unauthorized use, disclosure, modification, or loss of information to financial and tax processing systems and taxpayer data. Configuration management involves, among other things, (1) verifying the correctness of the security settings in the operating systems, applications, or computing and network devices and (2) obtaining reasonable assurance that systems are configured and operating securely and as intended. Patch management, a component of configuration management, is an important element in mitigating the risks associated with software vulnerabilities. When a software vulnerability is discovered, the software vendor may develop and distribute a patch or work-around to mitigate the vulnerability. Without the patch, an attacker can exploit a vulnerability not yet mitigated, and read, modify, or delete sensitive information; disrupt operations; or launch attacks against systems at another organization. Outdated and unsupported software is more vulnerable to attack and exploitation because vendors no longer provide updates, including security updates. Change control procedures, yet another component of configuration management, are important to ensure that only authorized and fully tested systems are placed in operation. To ensure that changes to systems are necessary, work as intended, and do not result in the loss of data or program integrity, such changes should be documented, authorized, tested, and independently reviewed. Accordingly, the Internal Revenue Manual states that IRS will manage systems to reduce vulnerabilities by promptly installing patches. Specifically, it states that security patches should be applied within 30 days, and hardware and software on network devices should be promptly maintained and updated in response to identified vulnerabilities. The manual also states that system administrators should ensure the version of the operation system being used is one for which the vendor continues to offer standardized technical support. IRS did not always ensure its systems were securely configured, as illustrated in the following examples: Servers were not consistently configured to have strong controls. Eight of 19 servers reviewed lacked a security setting to enforce standard configuration updates, resulting in weaker controls for these servers. The agency’s automated change management process could be circumvented because individuals had privileges that allowed them to make changes to mainframe applications. IRS has made progress in replacing outdated systems but did not always apply patches to its systems in a timely manner. During fiscal year 2012, the agency replaced older systems to ensure ongoing vendor technical support. However, as we have previously reported, it did not patch its systems within 30 days.account processing had not been patched for several months despite the issuance of critical patches and another database used for operations support was missing key patches. IRS officials stated that these situations resulted from restrictions on making changes to systems during the tax filing season. Other servers were also not patched due to system performance problems. According to IRS, these systems were patched subsequent to our site visits, but we have not yet verified this information. The agency also has an initiative underway to resolve its lack of patch management during tax filing season. For example, a database supporting tax Until IRS more completely follows its change management policies and improves the timeliness of applying patches, the agency will continue to face an increased risk that unauthorized and/or unintended system changes may not be prevented, detected, or corrected in a timely manner. Contingency planning, which includes developing contingency and business continuity plans, should be performed to ensure that when unexpected events occur, essential operations can continue without interruption or can be promptly resumed, and that sensitive data are protected. NIST guidance states that agencies should develop and implement contingency plans that describe activities associated with backing up and restoring a system after a disruption or failure. The plans should be updated and include information such as contacts, resources, and description of files in order to restore the application in the event of a disaster. In addition, the plans should be tested to determine their effectiveness and the agency’s readiness to execute the plans. In addition, conducting a business impact analysis is a key step in the contingency planning process. A business impact analysis is an analysis of information technology system requirements, processes, and interdependencies used to characterize system contingency requirements and priorities in the event of a significant disruption. Moreover, it correlates the system with the critical mission/business processes and services provided and, based on that information, characterizes the consequences of a disruption. The Internal Revenue Manual requires the agency to develop, test, and maintain information system contingency plans for all systems, and to review and update these plans. The manual also requires a business impact analysis for each system, and includes steps for completing this process. In addition, according to the manual, IRS shall implement and enforce backup procedures for all systems and information. IRS had processes in place to ensure recovery of their information system resources through continuity of operations, which included contingency plans and their associated test plans, as well as business impact analyses. The agency had appropriately documented and maintained current contingency plans and business impact analyses, and had tested the contingency plans for each of the six major systems we reviewed, and had the appropriate back-up procedures in place to ensure recovery of its data and information system resources. A key reason for the information security weaknesses in IRS’s financial and tax-processing systems was that, although the agency has developed and documented a comprehensive agencywide information security program, it had not effectively implemented certain elements of its information security program. An entitywide information security management program should establish a framework and continuous cycle of activity for assessing risk, developing and implementing effective security procedures, and monitoring the effectiveness of these procedures. FISMA requires each agency to develop, document, and implement an information security program that, among other things, includes periodic assessments of the risk and magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems; policies and procedures that (1) are based on risk assessments, (2) cost-effectively reduce information security risks to an acceptable level, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; plans for providing adequate information security for networks, facilities, and systems; security awareness training to inform personnel of information security risks and of their responsibilities in complying with agency policies and procedures, as well as training personnel with significant security 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 no less than annually, and that include testing of management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in its information security policies, procedures, or practices; and procedures for detecting, reporting, and responding to security incidents. Further, the current administration has made continuous monitoring of federal information systems a top cybersecurity priority. Continuous monitoring of security controls employed within or inherited by the system is an important aspect of managing risk to information from the operation and use of information systems. Conducting a thorough point-in-time assessment of the deployed security controls is a necessary but not sufficient practice to demonstrate security due diligence. An effective information security program also includes a rigorous continuous monitoring program integrated into the system development life cycle. The objective of continuous monitoring is to determine if the set of deployed security controls continue to be effective over time in light of the inevitable changes that occur. Such monitoring is intended to assist in maintaining an ongoing awareness of information security, vulnerabilities, and threats to support agency risk management decisions. The monitoring of security controls using automated support tools facilitates near real-time risk management. As described by NIST, the information security continuous monitoring process for developing a continuous monitoring strategy and implementing a continuous monitoring program consists of the following steps: define a continuous monitoring strategy; establish a continuous monitoring program that determines metrics analyze security-related information and report findings; and the frequency of monitoring and assessments; implement the monitoring program; respond with mitigation actions or reject, avoid, transfer, or accept risk; and review and update the monitoring strategy and program. According to NIST, effective continuous monitoring begins with development of a strategy that addresses requirements and activities at each organizational tier. Each tier monitors security metrics and assesses security control effectiveness with established monitoring and assessment frequencies and status reports customized to support tier- specific decision making. The Internal Revenue Manual states that the agency should document its continuous monitoring strategy as defined by NIST guidance. IRS had implemented a comprehensive information security program, as illustrated by the following examples: IRS had developed and documented an IT security risk management policy that required all sensitive applications to be periodically assessed for the risk and magnitude of harm that could result from vulnerabilities and potential threats. The agency had developed policies and procedures that considered risk, appropriately addressed purpose, scope, roles, responsibilities, and compliance, and were approved by management. IRS had developed and documented security plans for all of the major systems we reviewed that addressed policies and procedures for providing management, operational, and technical controls. IRS had processes in place for providing employees with security awareness and specialized training. All employees with specific security-related roles and newly-hired employees that we reviewed met or exceeded the required minimum security awareness and specialized training hours. The agency had implemented numerous processes for testing and evaluating the effectiveness of controls, and told us that it had previously identified many of the issues we raised in this report. IRS also tested its general ledger system for tax transactions in its current operating environment. IRS had completed actions to address 61 of the 118 recommendations we reported in fiscal year 2011 that were still unresolved at the time of our last review. IRS had a process in place to ensure that Computer Security Incident Response Center incident tickets were opened, managed, and closed in accordance with IRS’s policies and procedures governing incident detection, handling, and response. IRS had also started numerous initiatives that covered various control areas, such as addressing weak passwords, restricting network access, improving security for shared services, and ensuring regular penetration testing and vulnerability scans. However, not all elements of IRS’s information security program had been effectively implemented, as illustrated in the following examples: Although IRS had developed and documented information security policies and procedures covering key topics such as risk assessments, security awareness training, testing and evaluation of security controls, configuration management, continuity of operations, and incident response, shortcomings existed with policies and procedures. Although IRS has a specific policy limiting global access privilege assignments in a manner that allows all users to access specific files on their mainframe systems, that policy only covered one of the two methods available for granting all users access. IRS’s audit and monitoring policies and procedures did not comprehensively address users accessing files used by one processing environment from a different environment. IRS’s policies and procedures for installing Oracle databases allowed for all of the databases operating on a single server to be configured such that they all run under the same system account, potentially allowing users more access than needed to perform their jobs. IRS’s policies did not cover situations where data storage is shared between systems, which creates potential for changes made in one system to affect other systems. IRS’s security standards for systems that support tax processing and financial management contained information that was several years out of date, which had resulted in less secure system configurations. The agency did not have a procedure in place to reconcile certain access privileges. Although IRS had processes in place for providing employees with security awareness and specialized training, the agency did not always ensure that contractors received security awareness training. The Internal Revenue Manual requires that all new employees and contractors receive security awareness training within the first 10 working days. For fiscal year 2012, more than half of the contractors we evaluated were not in compliance with IRS’ security awareness training requirement. In addition, the agency allowed contractors to complete the required training within 6 months of their start date rather than within the first 10 working days, as required. We have previously made a recommendation to address contractor security awareness training.IRS’s procedures for testing and evaluating controls were not always effective. A key element of an information security program is conducting tests and evaluations of policies, procedures, and controls to determine whether they are effective and operating as intended. However, for one financial reporting system that we reviewed, the testing methodology did not always determine whether required authentication controls were operating effectively. Testers did not verify that controls required by policy were actually implemented on the system. Consequently, we identified control weaknesses that had not been detected by IRS. Also, IRS had not identified some of the other issues raised in this report, including weaknesses involving passwords and excessive access privileges, although they were readily detectable. Additionally, IRS’s mainframe security monitoring had not detected several instances of noncompliance with its policies. Although IRS had a process in place for evaluating and tracking remedial actions, it did not always effectively validate that corrective actions had been taken, or whether the actions addressed the weakness. The Internal Revenue Manual requires that IRS track the status of resolution of all weaknesses and verify that each weakness has been corrected before closing it. During the audit period, IRS informed us that it had addressed 58 of the 118 previous information system security-related recommendations we had made that remained unresolved at the end of our prior audit. However, we determined that 13 (about 22 percent) of the 58 had actually not yet been fully resolved. We previously made a recommendation to address this issue. IRS has not fully documented its continuous monitoring strategy. The agency created a diagram that logically depicts certain information security continuous monitoring data flows and activities, had developed various standard operating procedures, and is collecting, analyzing, and reporting on certain data. However, it does not have a strategy that defines requirements and activities at each organizational tier, mission/business processes, and information systems, nor does it define monitoring and assessment metrics and frequencies. Until IRS effectively implements all key elements of its information security program, the agency will not have reasonable assurance that computing resources are consistently and effectively protected from inadvertent or deliberate misuse, including fraud or destruction. IRS has continued to make important progress in addressing information security control weaknesses, and in improving its internal control over financial reporting. During fiscal year 2012, IRS management devoted attention and resources to addressing information security controls, and resolved a significant number of the information security control deficiencies that we have previously reported. Nevertheless, information security weaknesses remain in access and other information system controls over IRS’s financial and tax-processing systems, affecting the confidentiality, integrity, and availability of financial and sensitive taxpayer data. The financial and taxpayer information on IRS systems will remain particularly vulnerable to internal threats until the agency (1) addresses weaknesses pertaining to identification and authentication, authorization, cryptography, audit and monitoring, physical security, and configuration management and (2) effectively implements key components of its comprehensive information security program that ensure processes intended to test, monitor, and evaluate internal controls are appropriately detecting vulnerabilities, including developing and implementing a strategy for continuous monitoring efforts and improving validation of corrective actions; and policies are up-to-date, and reflect the current operating environment. These deficiencies are the basis of our determination that IRS had a significant deficiency in internal control over financial reporting related to information security in fiscal year 2012. Continued and consistent management commitment and attention to an effective information security program will be essential to the maintenance of, and continued improvements in, the agency’s information security controls. In addition to implementing our previous recommendations, we are recommending that the Acting Commissioner of Internal Revenue take the following four actions to effectively implement key components of the IRS information security program: Update policies and procedures to ensure that they address (1) both methods available for granting all users access to mainframe resources, (2) audit and monitoring of access from one processing environment to another, (3) use of appropriate accounts by multiple databases on a single server, (4) data storage shared between systems, (5) out-of-date security standards, and (6) reconciliation of access privileges; update test and evaluation methodology to ensure that it determines whether authentication controls are operating effectively; update mainframe test and evaluation processes to improve periodic monitoring of compliance with IRS policies; and fully document a continuous monitoring strategy that includes requirements and activities definitions at each organizational tier. We are also making 30 detailed recommendations in a separate report with limited distribution. These recommendations consist of actions to be taken to correct specific information security weaknesses related to identification and authentication, authorization, cryptography, audit and monitoring, and configuration management. In providing written comments (reprinted in app. II) on a draft of this report, the Acting Commissioner of Internal Revenue stated that the security and privacy of taxpayer and financial information is of the utmost importance to the agency and that IRS will provide a detailed corrective action plan addressing each of our recommendations. Further, the Acting Commissioner stated that the integrity of IRS’s financial systems continues to be sound. However, as we noted in this report, although IRS has continued to make important progress in addressing information security control weaknesses, it had not always effectively implemented access and other controls to protect the confidentiality, integrity, and availability of its financial systems and information. The effective implementation of our recommendations in this report and in our previous reports will assist IRS in protecting taxpayer and financial information. This report contains recommendations to you. As you know, 31 U.S.C. § 720 requires the head of a federal agency to submit a written statement of the actions taken on our recommendations to the Senate Committee on Homeland Security and Governmental Affairs and to the House Committee on Oversight and Government Reform not later than 60 days from the date of the report and to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this report. Because agency personnel serve as the primary source of information on the status of recommendations, we request that the agency also provide us with a copy of the agency’s statement of action to serve as preliminary information on the status of open recommendations. We are also sending copies of this report to the Secretary of the Treasury, the Treasury Inspector General for Tax Administration, and interested congressional parties. If you have any questions regarding this report, please contact Nancy R. Kingsbury at (202) 512-2700 or Gregory C. Wilshusen at (202) 512-6244. We can also be reached by e-mail at [email protected] and [email protected]. Key contributors to this report are listed in appendix III. The objective of our review was to determine whether controls over key financial and tax-processing systems were effective in protecting the confidentiality, integrity, and availability of financial and sensitive taxpayer information at the Internal Revenue Service (IRS). To do this, we examined IRS information security policies, plans, and procedures; tested controls over key financial applications; and interviewed key agency officials in order to (1) assess the effectiveness of corrective actions taken by IRS to address weaknesses we previously reported and (2) determine whether any additional weaknesses existed. This work was performed in connection with our audit of IRS’s fiscal years 2012 and 2011 financial statements for the purpose of supporting our opinion on internal control over the preparation of those statements and may not be sufficient for other purposes. To determine whether controls over key financial and tax-processing systems were effective, we considered the results of our evaluation of IRS’s actions to mitigate previously reported weaknesses, and performed new audit work at the three enterprise computing centers located in Detroit, Michigan; Martinsburg, West Virginia; and Memphis, Tennessee, as well as IRS facilities in New Carrollton, Maryland; Beckley, West Virginia; Ogden, Utah; Philadelphia, Pennsylvania; and Washington, D.C. We concentrated our evaluation on threats emanating from sources internal to IRS’s computer networks. Considering systems that directly or indirectly support the processing of material transactions that are reflected in the agency’s financial statements, we focused our technical work on the general support systems that directly or indirectly support key financial and taxpayer information systems such as, the Integrated Financial System; Account Management System; Graphic Data Interface; Electronic Federal Payment Posting System; Online 5081; Web Requesting Tracking System and Integrated Procurement System; Custodial Detail Database—including the Net Tax Refund Report; Automated Trust Fund Recovery Systems, Automated Interface to the National Finance Center; Redesign Revenue Accounting Control System; Customer Account Data Engine; Individual Masterfiles and Business Masterfiles; and the Integrated Data Retrieval System. Our evaluation was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information; National Institute of Standards and Technology guidance; and IRS policies, procedures, practices, and standards. We evaluated controls by testing Domain Name Servers to determine if unnecessary services were running and if operating systems and software were current; examining IRS’s implementation of encryption to secure transmissions on its internal network; reviewing physical security processes and procedures at each of the enterprise computing centers; reviewing access control/privileges of user accounts to determine if system access was assigned based on least privilege and consideration of incompatible duties; testing the complexity, expiration, and policy for passwords on databases to determine if strong password management was being enforced; testing servers and network devices to determine if adequate control configurations were in place; evaluating the mainframe operating system controls that support the operation of applications and databases that support revenue accounting; evaluating the controls of mainframe configurations that shared disk storage with multiple mainframe processing environments; reviewing access configurations on selected systems and database configurations; examining the status of patching for selected databases and system components to ensure that patches are up to date; reviewing IRS’s process for reviewing risk assessments to determine if risk assessments were being reviewed at least annually; examining documentation to determine the extent to which IRS was performing internal controls reviews of key financial systems; and testing the design of two key applications to determine if the applications’ access controls were effective. Using the requirements in the Federal Information Security Management Act of 2002, which established elements for an effective agencywide information security program, we reviewed and evaluated IRS’s implementation of its security program by analyzing IRS’s process for reviewing risk assessments to determine whether the assessments were up to date, documented, and approved; reviewing IRS’s policies, procedures, practices, and standards to determine whether its security management program was documented, approved, and up to date; reviewing IRS’s system security plans for specified systems to determine the extent to which the plans were reviewed, and included information as required by NIST; verifying whether employees with security-related responsibilities had received specialized training within the year; analyzing documentation to determine if the effectiveness of security controls is periodically assessed; reviewing IRS’s actions to correct weaknesses to determine if they had effectively mitigated or resolved the vulnerability or control deficiency; reviewing IRS’s Computer Security Incident Response Center incident tickets to determine if security violations and activities were reported and investigated; and reviewing continuity-of-operations planning documentation for six systems to determine if such plans were appropriately documented and tested. In addition, we discussed with management officials and key security representatives, such as those from IRS’s Computer Security Incident Response Center and Office of Cybersecurity, as well as the three computing centers, whether information security controls were in place, adequately designed, and operating effectively. We performed our audit from March 2012 to March 2013 in accordance with U.S. generally accepted government auditing standards. We believe our audit provides a reasonable basis for our opinions and other conclusions in this report. In addition to the individuals named above, David Hayes and Jeffrey Knott (assistant directors), Bruce Cain, Mark Canter, Kristi Dorsey, Jennifer R. Franks, Nancy Glover, Mickie Gray, J. Andrew Long, Linda Kochersberger, Kevin Metcalfe, Eugene Stevens, Michael Stevens, and Daniel Swartz made key contributions to this report. | The Internal Revenue Service (IRS) has a demanding responsibility in collecting taxes, processing tax returns, and enforcing the nation's tax laws. It relies extensively on computerized systems to support its financial and mission-related operations and on information security controls to protect the financial and sensitive taxpayer information that resides on those systems. As part of its audit of IRS's fiscal years 2012 and 2011 financial statements, GAO assessed whether controls over key financial and tax-processing systems are effective in ensuring the confidentiality, integrity, and availability of financial and sensitive taxpayer information. To do this, GAO examined IRS information security policies, plans, and procedures; tested controls over key financial applications; and interviewed key agency officials at eight sites. IRS continued to make progress in addressing information security control weaknesses, improving its internal control over financial reporting. During fiscal year 2012, IRS management devoted attention and resources to addressing information security controls, and resolved a significant number of the information security control deficiencies that GAO previously reported. Notable among these efforts were the (1) formation of cross-functional working groups tasked with the identification and remediation of specific at-risk control areas, (2) improvement in controls over the encryption of data transferred between accounting systems, and (3) upgrades to critical network devices on the agency's internal network system. However, serious weaknesses remain that could affect the confidentiality, integrity, and availability of financial and sensitive taxpayer data. For example, the agency had not always (1) implemented effective controls for identifying and authenticating users, such as enforcing password complexity on certain servers; (2) appropriately restricted access to its mainframe environment; (3) effectively monitored the mainframe environment; or (4) ensured that current patches had been installed on systems to protect against known vulnerabilities. An underlying reason for these weaknesses is that IRS has not effectively implemented portions of its information security program. The agency has established a comprehensive framework for the program, and continued to make strides with various initiatives designed to improve its controls; however, certain components of the program did not always function as intended. For example, IRS's testing procedures over a financial reporting system that GAO reviewed did not always determine whether required controls were operating effectively and consequently, GAO identified control weaknesses that had not been detected by IRS. In addition, the agency had not updated an important policy concerning security standards for IRS's main tax processing environment to include current software versions and control capabilities. Further, although IRS indicated that it had addressed 58 of the previous information system security-related recommendations GAO made, 13 (about 22 percent) of the 58 had actually not yet been fully resolved. Continued and consistent management commitment and attention to an effective information security program will be essential to the maintenance of, and continued improvements in, its information system controls. Until IRS takes additional steps to (1) more effectively implement its testing and monitoring capabilities, (2) ensure that policies and procedures are updated, and (3) address unresolved and newly identified control deficiencies, its financial and taxpayer data will remain vulnerable to inappropriate use, modification, or disclosure, possibly without being detected. These deficiencies, along with shortcomings in the information security program, were the basis of GAO's determination that IRS had a significant deficiency in its internal control over financial reporting systems for fiscal year 2012. GAO recommends that IRS take four actions to more effectively implement portions of its information security program. In a separate report with limited distribution, GAO is recommending that IRS take 30 specific actions to address newly identified control weaknesses. In commenting on a draft of this report, IRS agreed to develop a detailed corrective action plan to address each recommendation. |
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The original U.N. Headquarters complex, located in New York City, was considered among the most modern facilities when it was constructed between 1949 and 1952. The United States financed construction of the original complex—the General Assembly, Secretariat, and Conference Building—by providing the United Nations with a no-interest loan equivalent to about $420 million in 2003 dollars. The rest of the complex— the Dag Hammarskjöld Library, the underground North Lawn Extension, South Annex, and Unitar Building—was built between 1960 and 1982 and was funded through the U.N. regular budget or private donations (see fig. 1). Currently, the complex accommodates the needs of 191 U.N. member countries and approximately 4,700 U.N. staff. However, the U.N. buildings do not conform to current safety, fire, and building codes and do not meet U.N. technology or security requirements. The United Nations estimates it would cost more than $2 billion over 25 years for repairs and system replacements in the absence of a major renovation. In June 2001, we reported that the Secretary-General’s first Capital Master Plan had defined the need for renovation, established the Secretary- General’s expectations for the project, and provided options for a multiyear effort to renovate the headquarters. The General Assembly reviewed the plan and approved $8 million to further develop the conceptual designs and associated cost estimates for the renovation. The General Assembly agreed with the Secretary-General’s assumptions, which provided the framework for the renovation planning. These assumptions included the following: The headquarters complex would remain at its current location in New York. The complex should be energy efficient, free of hazardous materials, and compliant with host city building, fire, and safety codes. The complex should meet all reasonable security requirements. Disruption to the work of the United Nations should be kept to a minimum. In August 2002, the Secretary-General presented the General Assembly with a more detailed Capital Master Plan and endorsed a renovation approach that included the temporary relocation of most U.N. staff and delegates to “swing space” in a proposed new building (see fig. 2 for the swing space location and app. II for more information on the renovation approach). In December 2002, the General Assembly adopted a resolution endorsing the renovation approach and approved $25.5 million for detailed designs and cost estimates to be developed in 2003. The General Assembly also approved $26 million to complete the design process in 2004–2005. The General Assembly does not plan to make a final decision on whether to proceed with the renovation until financing is secured. In developing the renovation conceptual plan and cost estimate, U.N. officials, their architect-engineering firm, and subconsultants followed a reasonable planning process that was consistent with leading practices. In addition, U.N. officials and their security subconsultant followed a process consistent with recognized guidelines to develop plans for improving security at the U.N. complex. The United Nations is still in the early planning stages of the project—the first phase of a five-phase process. For this reason, changes to the scope and cost of the proposed renovation are to be expected. The overall U.N. process to develop a conceptual plan followed leading facility acquisition practices. Competitively procured an architect-engineering firm. U.N. renovation officials used a competitive process to procure the services of an architect-engineering firm (see app. III for the names of the firms involved). The United Nations received 15 responses to its request for proposals from firms representing six different countries. In 2001, the United Nations selected and hired an architect-engineering firm to prepare a comprehensive renovation design concept and cost analysis. The architect-engineering firm used subconsultants with recognized expertise in construction disciplines such as cost estimation, security, and structural engineering. Obtained assessments of the complex’s condition. The architect- engineering firm and subconsultants reviewed condition assessments conducted in 1998 and performed additional inspections and assessments of the complex’s condition as needed. For example, they completed a new assessment of the Secretariat Building’s deteriorating window structure. U.N. officials subsequently concluded that it was more cost effective to replace the window structure than to renovate it, as had been previously planned. Retained firm to review the renovation conceptual plan. U.N. officials retained the services of a consulting engineer to assist them in reviewing the conceptual planning reports and recommendations. Involved U.N. managers in the planning. U.N. officials involved facility managers, such as those responsible for building and program management, security, and information technology, in the planning process to ensure that the renovation would meet their needs. The managers were asked to verify the conditions and problems identified by the architect-engineering firm and subconsultants and comment on whether the proposals would address their needs. To develop a preliminary cost estimate, U.N. officials and the cost estimating subconsultant followed industry best practices established by the Construction Industry Institute. Defined the scope of the project and work plan, including responsibilities, schedule, and project budget. U.N. officials identified the building improvements that were to be included in the project scope: replacing heating, air conditioning, and electrical systems; refurbishing the window structure on the Secretariat Building; enhancing security measures; and modernizing communication and technology capabilities. The U.N. contract with the architect-engineering firm established the schedule for the cost estimating subconsultant to submit three cost estimates for approval. To compare the renovation approach budgets, U.N. officials also instructed the cost estimating subconsultant to develop one renovation approach within the budget parameters of the 2000 Capital Master Plan. Standardized the cost estimate format. U.N. officials used a standardized cost estimate format, including elements such as professional fees, labor and material costs, design and construction contingencies, and escalation costs to account for inflation. The standardized format enables U.N. officials to compare current and future cost estimates as the project progresses through the design process. Reviewed and checked cost estimate. U.N. officials reviewed the cost estimate to ensure that the conceptual planning estimates were within acceptable cost parameters. For the final review, U.N. officials hired a cost estimating consultant to peer review the cost estimate. While the peer reviewer’s assumptions were more conservative than the subconsultant’s assumptions, the peer reviewer’s cost estimate was within 5 percent of the subconsultant’s cost estimate. Based on the peer review, U.N. officials adjusted the cost estimate. Documented and reported the final cost estimate and range of accuracy. The cost estimating subconsultant delivered the final cost estimate, including contingencies that are meant to reflect the accuracy of the estimate, to U.N. renovation officials for the 2002 Capital Master Plan in August 2002. Consistent with industry practices, the subconsultant added a design contingency to allow for changes that typically occur during the design process. The subconsultant also added a construction contingency to allow for unforeseen or unknown costs. For example, structural conditions hidden by current construction may conflict with planned renovations and require contract changes. After the terrorist attacks of September 11, 2001, the United Nations enhanced security at the U.N. complex and added security measures to the Capital Master Plan (see app. IV for further information). U.N. officials and the U.N. security subconsultant identified the additional security measures through a process consistent with recognized security risk management guidelines. We have previously reported on these guidelines, which members of the U.S. intelligence and defense community follow and can provide a sound foundation for effective security. Identified the assets to be protected and the impact of their potential loss. The security subconsultant identified assets at the United Nations to be protected, such as the buildings and the perimeter. The United Nations also evaluated the importance of each asset, the potential impact of its loss, and the methods to maintain operations if the assets were lost or damaged. Identified threats to those assets. U.N. security officials consulted with relevant federal and local U.S. officials to assess changing threats to the United Nations. According to U.N. officials and the security subconsultant, they designed the security initiative in the Capital Master Plan to address these threat levels. Identified vulnerabilities. The security subconsultant reviewed five previous vulnerability assessments and conducted their own assessment of the entire complex to verify vulnerabilities and identify needed security upgrades. Assessed risks (potential for loss or damage) and determined priorities. Following security guidelines from the U.S. Interagency Security Committee, the security subconsultant developed a risk assessment that reflected its analysis of the threats to the U.N. complex and its vulnerabilities. Based on the risk assessment, U.N. officials then prioritized the security needs of the complex. According to an expert from the Interagency Security Committee, the risk assessment process used to develop the planned security upgrades was reasonable based on the consultant’s report to the United Nations. Identified countermeasures that mitigate risks. The security subconsultant used the risk assessment to identify and recommend more than 100 security measures for the Capital Master Plan. U.N. officials organized these security upgrades into two components—those in the baseline scope of the Capital Master Plan and those in a package of options. The security risk management guidelines are not a rigid set of procedures, but rather recognized steps to ensure that critical issues are considered when designing a security program. Additionally, U.N. security officials sought peer review input from other U.N. departments and public and private sector security experts when designing the security program. According to security officials from the Departments of State, Defense, and Energy and the General Services Administration, the U.N. process for developing the security initiatives in the Capital Master Plan was reasonable. U.N. officials have completed only the first phase of the renovation process by developing a conceptual plan for the proposed renovation. While U.N. planning efforts for the renovation have been reasonable so far, many decisions that can affect the project scope, schedule, and cost have yet to be made. For example, the General Assembly must decide whether it wants to include certain options that were proposed in the 2002 Capital Master Plan, such as installing extra back-up generators beyond those required by current building codes. Events outside U.N. officials’ influence, such as the availability of construction materials and labor, may also change the scope, schedule, and cost. In addition, the preliminary cost estimate is likely to change as the design phase progresses and decisions affecting the project’s scope are made. Construction Industry Institute research suggests that the final cost of a project may vary by plus or minus 30 to 50 percent of the estimated cost at this early phase of a project. While the United Nations has completed the conceptual planning phase, there are four remaining phases that renovation projects undergo, based on typical best practices in the design and construction industry (see fig. 3). Conceptual Planning—Various feasibility studies are typically conducted to define the scope of work based on owner expectations for performance, quality, cost, and schedule. The need for temporary space and the options for meeting this need are identified. Several alternative design solutions are identified, and one approach is selected. Design—The design matures into final construction documents comprising the drawings and specifications from which bids can be solicited. Estimated cost and schedule issues receive increasingly intense oversight as this phase proceeds. The project scope defined at this phase will greatly determine the cost of the project. In addition, the cost of scope changes made after the design phase are higher. Procurement—This phase refers to owner procurement of long lead- time equipment, such as unique or large electrical or mechanical equipment. Delays in the delivery of this equipment could affect the phasing and sequence of construction work and potentially cause delays. Construction—To execute the design, the services of a competitively procured construction contractor and specialty contractors and consultants are employed. The biggest challenge is the management of changes from the owner, design problems, or unknown conditions on the site. Construction is considered complete when the owner accepts occupancy of the building; however, work may continue for some time to identify and correct deficiencies in the construction work. Start-up—Start-up begins with occupancy of the building and entails the testing of individual and systems components to measure and compare their performance against the original design criteria. The Secretary-General has indicated that the United Nations anticipates that the United States would provide a no-interest loan to finance the U.N. renovation. Should the United States agree to finance the renovation in this manner, we estimate that the financial impact of the renovation to the federal government would be over $700 million. This amount would vary depending on the terms and conditions of the financing arrangement. In addition, we estimate that over a 30-year period, the federal government would not realize tax receipts of as much as $108 million (2003 present value dollars) on the federally tax-exempt bonds that would finance construction of the proposed swing space. The U.N. Development Corporation is seeking federal tax exempt status for the bonds it plans to issue to finance the swing space building. We estimate the potential financial impact to the federal government as both lender to United Nations and member state would be over $700 million for a $1.2 billion no-interest loan. As a lender of a subsidized loan to the United Nations, the federal government would forego future interest payments and assume the risk of a potential U.N. default on the loan. The estimated financial impact to the federal government of a no-interest loan for $1,193 million (repayable over 25 years) would be about $563 million for the interest subsidy to cover foregone interest payments and $28 million for the default subsidy that covers the risk of a potential U.N. default (see table 1). If the United States provided a subsidized loan with interest rates of 1 percent or 2 percent, the federal government would provide an interest subsidy of $443 million and $322 million, respectively. If the United States agrees to finance the renovation, Congress would be asked to appropriate the interest and default subsidies before the loan is made, as provided for under U.S. credit reform law. As a member of the United Nations, the United States may also be assessed an additional amount to repay the loan principal. We estimate that the net present value of the U.S. assessment for the principal repayments made over a 25-year period would be $126 million. These repayments would need to be appropriated yearly. In estimating the financial impact to the federal government, we made several assumptions. We assumed that the federal government would disburse funds to the United Nations as a line of credit rather than a lump- sum payment. The federal government would disburse the funds each year over a 5-year construction period. To model the size of the disbursements, we used the latest U.N. estimates of the funds it would need each year to pay its contractors during the renovation. We assumed that the United Nations would repay the loan over the subsequent 25 years in equal semiannual payments based on an additional assessment of member states. Since the United States is assessed 22 percent of U.N. operating costs, we assumed the federal government would repay 22 percent of the loan principal. However, because the United States does not currently allow its U.N. assessments to go toward interest payments on U.N. external borrowing, we assumed that the federal government would not repay any of the interest on a 1 percent or 2 percent loan. Finally, we used the U.N. preliminary cost estimate of $1,193 million from the 2002 Capital Master Plan for the renovation, which includes scope options that the United Nations has yet to decide on. The federal government would also not realize tax receipts if the U.N. Development Corporation is granted tax exempt status for its construction bonds. We estimate that the unrealized tax receipts over 30 years could be as high as $108 million in 2003 present value dollars. This estimate assumes that the U.N. Development Corporation would issue bonds for $350 million—the estimated construction cost for the swing space. We also assumed that without the tax exemption, the bonds would earn 6.4 percent interest and the average marginal tax rate would be 31 percent. According to corporation officials, the corporation would pay a higher interest rate on the bonds if it could not secure a tax exemption. The higher interest rate would raise the cost of financing the construction, which the corporation would then pass on to the United Nations in higher lease costs. Corporation officials stated that the United Nations could not afford the lease under its current operating budget without the tax exemption. To continue the planning process, key efforts must be pursued and critical milestones met. Given the General Assembly’s decision in December 2002 to proceed with design, the United Nations is seeking a financing commitment from the United States for the renovation. Neither the United States nor the United Nations have specified the nature of a financing commitment, according to U.S. and U.N. officials. Once an acceptable commitment is secured, the General Assembly will decide whether to proceed with the renovation, and the United Nations will be able to sign a lease with the U.N. Development Corporation. The corporation is also working to resolve a number of issues before it can begin construction on the swing space building in 2004. Figure 4 shows that securing a financing commitment is the next milestone in the renovation process. The Secretary-General anticipates that the United States will offer a no-interest loan to finance the renovation. For the United Nations to remain on its current renovation schedule, the United States would have to make a commitment to finance the renovation by October 2003. However, U.S. and U.N. officials stated that neither the United States nor the United Nations have specified the nature of a financing commitment. According to U.N. officials, the General Assembly will not make a decision to move forward with the renovation or sign a lease for the proposed swing space building without a financing commitment. According to U.N. Development Corporation officials, they will not begin construction on the proposed swing space building until the United Nations signs a lease. The corporation needs a signed lease before it can issue bonds to finance the construction of the swing space building. For the renovation project to stay on schedule, the proposed swing space building would have to be available for occupancy in early 2006. The U.N. Development Corporation must resolve two key issues in 2003 for the swing space to be available to the United Nations in 2006. First, the U.N. Development Corporation is seeking to obtain state and city approval to secure ownership of the proposed swing space site by the end of 2003 (see fig. 5). According to corporation officials, New York state approval is necessary because the site is currently part of a city park and lies outside of the corporation’s development zone. Corporation officials also said they are currently working to obtain support within the local community, which has expressed concerns about the loss of the park space. To compensate the community, the corporation proposes to build a bike path along the East River and the U.N. complex. However, according to corporation officials, as of April 2003, no agreement had been reached. Once the issues with the community group are resolved, the corporation must seek New York state legislation by June 2003 to add the proposed construction site to its development district, according to corporation officials. The corporation will then seek New York City approval of its plans for the site. City officials have expressed support for the swing space construction. Second, the corporation is seeking a federal tax exemption for the bonds it would issue to finance the swing space construction in early 2004. According to corporation officials, without a tax exemption, the annual lease cost to the United Nations could increase substantially, thereby making the project economically unfeasible. Under the 1986 Tax Reform Act, the U.N. Development Corporation and similar organizations lost the ability to issue bonds that are exempt from federal taxes. Corporation officials stated that they are working with members of Congress to introduce legislation that would restore a tax exemption for the swing space construction. As the project moves into the critical design phase, the United Nations has begun the process to hire a consultant who will manage and oversee the final design and eventual renovation of the U.N. complex. These initial efforts are important as they lay the foundation for the project management plan to ensure that the project’s scope, schedule, and costs are effectively controlled. In addition, U.N. oversight bodies anticipate additional resources and are developing audit plans to conduct oversight of the renovation project. The Department of State and the U.S. Mission to the United Nations have also initiated efforts to monitor the project. The United States has a substantial interest in monitoring the project, particularly if the United States agrees to finance it. A well-defined project management plan and adequate project management staff will be essential for the United Nations to successfully complete the renovation on time and within budget. U.N. officials recognize the need and importance of a project management plan and adequate staff to implement the plan. In January 2002, the United Nations hired a project management consultant to help develop a broad framework for a project management plan. The consultant noted that once the United Nations establishes a project management team, it will need to develop its project management plan with detailed procedures. The consultant provided best practices recommendations for creating a project management plan to control costs and effectively implement the renovation. As of January 2003, the United Nations had started the process to hire a consultant to provide project management services, including developing the project management plan and then supporting the United Nations in managing the project through the design phase. Based on the U.N. project management consultant’s report and Construction Industry Institute research, an effective project management plan will help the United Nations control costs and schedule. An effective project management plan includes three key elements. First, a clearly defined scope of work that remains relatively stable will provide the basis for project decisions. The scope should clearly define the project content and parameters, schedules, milestones for execution, budgets, and expected project outcomes. Second, policies and procedures that effectively manage scope and construction changes are important. These policies and procedures should provide a means for analyzing and documenting the reasons for changes and the implications of changes on cost, schedule, and quality. Third, timely and accurate progress reports on scope, cost, and schedule are important as a means of informing all relevant parties and coordinating changes. Regular reporting would identify key project issues that require discussion and impending issues that require resolution. While the United Nations recognizes the significance of developing a project management plan, it is important that the United Nations continues to incorporate best practices to ensure the plan’s effectiveness. Project management staff are essential to controlling schedule and cost changes because they will guide decision making and coordinate resources throughout the project. Project management staff would represent the United Nations as the owner of the project and facilitate coordination and communication between the design firms and construction contractors. The United Nations does not currently have sufficient staff to manage the project effectively but, according to U.N. officials, plans to hire additional staff and/or contractors. The United Nations added seven staff to its Capital Master Plan team during the conceptual planning phase, including two security officials, and plans to augment its management capability during design. In February 2003, the United Nations appointed an Assistant Secretary-General as the full-time executive director of the Capital Master Plan management project. As of March 2003, the United Nations had 12 people on the renovation project management staff. The United Nations is evaluating options for acquiring additional expertise and anticipates having a management team of 20 staff and contractors during the design phase and a team of about 40 staff at the peak of construction. In a February 2003 resolution, the General Assembly stressed the importance of oversight in implementing the Capital Master Plan and requested the Board of Auditors and all relevant oversight bodies, such as the Office of Internal Oversight Services, to initiate immediate oversight activities. In our last report, we noted that the Office of Internal Oversight Services did not have the expertise to perform an oversight role, but the office had agreed to assume such responsibility by hiring people with the necessary skills. Since then, the office has assigned one staff member to begin researching the Capital Master Plan on a part-time basis. However, the office has not developed a plan detailing the oversight functions it plans to pursue or hired additional staff. Officials from the oversight office stated that it has requested funding so that it can hire contractors to help evaluate the Capital Master Plan, the project management plan, and the security upgrades. The officials anticipate that these contractors would have architectural and construction skills and knowledge of New York City building codes. The Board of Auditors had not yet conducted oversight of the Capital Master Plan but plans to complete an audit strategy by June 2003. The board has decided to review financial accounts, compliance with U.N. procurement regulations, and the effectiveness of Capital Master Plan management. After the board completes its audit strategy, it plans to determine the additional resources and expertise it needs to conduct oversight of the renovation. According to a board official, the United Nations approved initial funding of $35,000 in April 2003 to cover the audit of Capital Master Plan activities during 2003. However, the board will require additional resources for oversight as the renovation progresses. The United States has a substantial interest in the renovation project and its costs, particularly since the Secretary-General anticipates U.S. financing. As the project goes forward, the United States will decide whether to finance the renovation and will take part in other key decisions. The Department of State, the lead foreign affairs agency responsible for developing and implementing U.S. policy toward the United Nations, has assembled a task force to monitor U.N. implementation of the Capital Master Plan. While Department of State officials have consulted with other U.S. government officials concerning the renovation project, they have not yet created a formal framework that defines the task force’s mission and program goals. In addition, a department official stated that they do not have the expertise to undertake effective monitoring of the project as it progresses. In our June 2001 report, we recommended that the Department of State develop a comprehensive U.S. position on matters pertaining to the renovation. We further recommended that if the United States were to take a position in support of the renovation, the department should consider obtaining expertise in construction management and financing. In June 2001, the department took a position in support of renovating the U.N. headquarters complex and created an interagency task force to monitor the renovation project in August 2002. The task force consists of six officials from the department and the Office of Management and Budget who work part-time on task force activities and a point-person at the U.S. Mission to the United Nations who monitors U.N. renovation planning efforts. In addition, a senior official at the Ambassador level represents U.S. concerns on the renovation project to the United Nations and other member state representatives. To assist the task force, the department has also retained a part-time consultant with building construction and security experience. Although the Department of State has organized the task force, it has yet to develop an interagency framework that sets forth the task force’s mission or program goals. To monitor the project and coordinate the U.S. decision on whether to finance the renovation, the department will undertake diplomatic, federal financing and budgeting, and construction activities that will require participation from numerous government officials and organizations with the necessary expertise. A framework that describes the task force’s mission, program goals, and coordinating mechanisms will help ensure that each organization has a clear understanding of its role, responsibilities, and expectations. The development of this framework is important because the task force’s monitoring role is likely to continue through the four remaining phases of the renovation project. Furthermore, with established mission and program goals, the department could specify resource needs, including appropriate skills needed to achieve a successful outcome of the project. As the renovation proceeds and the management of the project increases in magnitude and complexity, the department can identify and obtain the critical skills that will be needed to monitor the project. Department officials have stated that they lacked the needed expertise to monitor a renovation project of this magnitude. It is also important that the task force is staffed appropriately because the Department of State will have a number of key questions and issues to address over the life of the project, particularly if the United States agrees to finance the renovation. Some key questions and issues to be addressed include the following: If the United States offers to finance the renovation, how would it structure a loan to the United Nations? What should be the loan’s terms and conditions? Would the United States provide a loan that fully funds the renovation project? If there are cost increases during the renovation, would the United States provide additional financing and, if so, under what terms and conditions? Does the United Nations have internal controls in place to effectively manage changes in costs, scope, and schedule throughout the design and construction of the project? To what extent are U.N. officials coordinating the renovation design and construction with that of the proposed new visitors center? What types of incentives will the United Nations include in its contracts with design and construction firms to ensure that their work meets U.N. expectations? Since the design phase provides the greatest opportunity to make decisions that could minimize future building maintenance and operating costs, to what extent are these future costs being considered during the design phase? How will U.N. officials ensure that value-engineering principles—a formal technique used by contractors or independent teams to identify methods of constructing projects more economically—are applied during the design and construction phases? The department’s position on each of these issues and the level of monitoring it will undertake will drive its resource and expertise needs. The United Nations has used a reasonable process thus far to develop its renovation plans, but it is still early in the project and changes in the schedule and cost estimates are to be expected. While the General Assembly has funded the project’s design, a commitment to finance the renovation will be needed by October 2003 for the United Nations to remain on its current schedule and sign a lease for the swing space. If the planned swing space is not available, the United Nations will have to reconsider its renovation approach, potentially leading to delays in the renovation process. The United States, however, has not yet taken a position on whether or how to finance the renovation. In addition, careful management and oversight of a project of this magnitude and complexity will be necessary to minimize schedule and scope changes. The renovation’s completion, final cost, and quality could be adversely affected if the United Nations does not provide adequate staff to manage the renovation and establish careful controls to limit scope changes. Continued monitoring by the Department of State will be critical as the project progresses and various issues arise, particularly if the United States finances the renovation. We recommend that the Secretary of State, in consultation with appropriate administration officials and other U.N. members, direct the U.S. representative to the United Nations to encourage the United Nations to complete and implement an effective project management plan that will guide decision making and coordination throughout the renovation project, and encourage the United Nations to provide the Office of Internal Oversight and the Board of Auditors with the resources needed to conduct effective oversight of the Capital Master Plan as the project progresses. In addition, to ensure that U.S. interests are effectively represented as the United Nations proceeds through the design phase, we recommend that the Secretary of State define the mission and program goals of the task force currently monitoring U.S. participation in the Capital Master Plan. We further recommend that the Secretary determine the expertise the task force needs to fulfill its role and ensure that it has the resources necessary to monitor the project over its duration. In commenting on a draft of this report, the United Nations and Department of State agreed with our findings and recommendations. However, the Board of Auditors disagreed with our recommendation calling for resources for the board to conduct oversight. A board official stated in April 2003 that the United Nations approved $35,000 for the board to conduct oversight of the $1.2 billion renovation project. We modified our recommendation to acknowledge the board’s initial funding, but we continue to recommend funding for the board’s oversight function over the course of the 6-year renovation project. Ensuring that the board has the necessary resources to conduct oversight will be important throughout the renovation. The board also provided technical comments to our report, which we incorporated as appropriate. Written comments from the United Nations, Department of State, Office of Internal Oversight Services, and Board of Auditors, along with our response, are in appendixes V through VIII. We provided the Office of Management and Budget with a draft of our report, but the office did not provide any comments. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of State; the U.S. Ambassador to the United Nations; the Director, U.S. Office of Management and Budget; the U.N. Secretary-General; and interested congressional committees. We also 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) 512-8979. Additional GAO contacts and staff acknowledgments are listed in Appendix IX. To assess the reasonableness of the process used by the Secretariat for project planning and development, including the cost estimate and security plans, we reviewed U.N. records, including reports developed by the architect-engineering firm and security assessments prepared for the United Nations. We also researched industry practices related to construction project planning and development, cost estimating, and security plan development. We compared the Secretariat’s efforts in project planning and cost estimating with industry practices as identified by the Federal Facilities Council and the Construction Industry Institute. We also reviewed the assumptions supporting the cost estimates, including contingencies and swing space costs. In assessing the process the Secretariat used to develop its security plan, we used industry-recognized guidelines as criteria. We also obtained input from U.S. federal agency security experts on the process used to develop the United Nations’ security plan. In addition, we reviewed other recently implemented or planned security initiatives and their interface with the security components of the Capital Master Plan. We discussed various aspects of the project, including the process by which the Capital Master Plan was developed, with U.N. renovation project staff and consultants. To assess the potential financial impact to the federal government of the renovation, we modeled the financial impact of a no-interest, 1 percent, and 2 percent loan to the United Nations. We did not assess the financial impact to the federal government of the renovation if the United Nations sought other financing options, or if the United Nations did not undertake the renovation and repaired or replaced major building systems as they failed. We reviewed the most current renovation cost estimates, the renovation cash flow statement, the U.N. Development Corporation cost estimate for swing space, interest rates for corporate and tax-exempt bonds, interest rate assumptions in the President’s budget for fiscal year 2004 and the Economic Report of the President (1999), and the 1948 loan agreement between the United Nations and the United States. We used the Office of Management and Budget’s Credit Subsidy Calculator to estimate the interest and default subsidies for interest-subsidized loans under various terms. In doing so, we made several key assumptions including the interest rate, the U.S. disbursal of funds, and a repayment plan. We then discussed our assumptions with Department of State, Congressional Budget Office, and Office of Management Budget officials. To analyze the critical milestones remaining in the renovation project, we reviewed the critical paths and the estimated schedules for the U.N. renovation and the U.N. Development Corporation’s proposed swing space building. We compared these critical paths and linked them to illustrate the necessary milestones and their sequence. We then clarified the sequence and duration of these milestones in interviews with Capital Master Plan staff at the United Nations, officials at the U.N. Development Corporation, and officials at the Department of State. In addition, we consulted with construction industry experts and legal counsel within GAO to evaluate and comment on the validity of the milestones’ sequence. To assess U.N. and Department of State efforts to monitor and oversee the renovation, we reviewed U.N. documents such as the Capital Master Plan, the U.N. renovation project management plan, the U.N. resolution pertaining to oversight of the Capital Master Plan, and the mission statements of the Office of Internal Oversight Services and the Board of Auditors. We subsequently spoke with U.N. and Department of State officials to determine their past and anticipated oversight roles and responsibilities in the U.N. renovation. In addition, we discussed the personnel required to adequately oversee the renovation, the funding received and requested for renovation monitoring, and the procedures in place for decision making and oversight. In conducting our review, we received the full cooperation of the United Nations, U.N. Development Corporation, U.S. Mission to the United Nations, and the Department of State. We conducted our review between June 2002 and April 2003, in accordance with generally accepted government auditing standards. In the August 2002 Capital Master Plan, the U.N. Secretary-General presented two approaches to renovating the U.N. headquarters complex. According to the Capital Master Plan, the unique conference room needs of the United Nations were a driving factor in the Secretary-General’s development of these approaches. The two approaches include temporarily relocating most U.N. activities during much of the construction work to swing space in a proposed new building near the U.N. complex (see fig. 6), or rotating U.N. staff through more limited swing space in a new four-story building constructed on the U.N. headquarters complex where the South Annex is currently located. The Secretary-General endorsed the first approach, and the General Assembly approved the development of renovation designs based on that approach. Under the first approach, most U.N. staff and activities would temporarily relocate to swing space in a proposed new office building near the U.N. complex during much of the renovation. U.N. consultants estimated that the renovation would take less than 5 years to complete and cost about $1.2 billion. As shown in table 2, the cost estimate includes a baseline scope— removing asbestos; replacing the electrical, plumbing, and climate control systems; and installing an upgraded fire suppression system. The cost estimate also includes leasing swing space for 4 years from the U.N. Development Corporation, a New York State nonprofit public benefit corporation tasked with constructing and leasing office space to the United Nations. Additional cost factors include the replacement of the Secretariat Building’s window structure and additional scope options that the General Assembly has not yet decided to include in the renovation. These options include additional safety and security measures, emergency backup provisions, and sustainability measures to address environmental goals. The cost estimate excludes construction of an additional conference room on the complex and security upgrades that the United Nations will complete before the renovation begins. The U.N. Development Corporation has offered to construct the swing space building. The new office building would be built on a park next to the U.N. Headquarters complex and connected to the existing complex by a tunnel. The United Nations currently plans to sign a long-term lease for the building with the U.N. Development Corporation. The building would be used as swing space during the 4 years of the renovation. Afterwards, the United Nations would relocate most of its New York City staff that currently work in office space outside the Headquarters complex to the swing space building. This would include relocating staff out of office space in two buildings currently leased from the U.N. Development Corporation. According to corporation officials, the corporation could then be able sell these two buildings and provide the proceeds to New York City. Under the second approach, the United Nations would replace the South Annex, a two-story building on the U.N. Headquarters complex, with a four- story building to use as swing space. The United Nations would lease additional office space as needed for swing space. The renovation work would occur in stages with five to ten floors of the U.N. Headquarters renovated while staff rotate through the swing space. To avoid excessive disruption, the meeting rooms would be renovated at night and on weekends. Under this approach, the renovation would take 6 years and cost more than $1.3 billion (see table 3). The total cost estimate is higher under Approach 2 because the renovation work would occur in stages since the limited swing space could not house all U.N. headquarters staff. Also, the United Nations would construct an additional conference room on the Headquarters complex. Under this approach, the swing space cost—replacing the South Annex and additional commercial leasing—would be less than leasing a swing space building from the U.N. Development Corporation. As with Approach 1, this cost estimate includes replacement of the Secretariat Building’s window structure and various scope options that the General Assembly has not yet decided to include. This cost estimate also excludes the security upgrades that the United Nations will complete before renovation begins. Although Approach 2 would cause the least disruption because meeting chambers would be renovated when the rooms were not in use, the risk of cost overruns, delays, and disturbance, and the perceived risk of exposure to asbestos is higher. Table 4 presents the firms that were involved in the conceptual planning process and noted in this report as consultants to the United Nations or subconsultants to the U.N. architect-engineering firm. In response to the terrorist attacks of September 11, 2001, the United Nations implemented emergency security measures and also accelerated its plans to implement some of the security measures that had been originally planned for the renovation. The United Nations also worked with its consultants to enhance the security component of the revised Capital Master Plan. According to U.N. officials, to more effectively coordinate the interface between the upgrades made after September 11, 2001, and the security measures in the Capital Master Plan, the United Nations has hired the same consultant to work on both packages, assigned some internal staff to oversee both projects, and calculated the cost of any overlap in security upgrade initiatives. As shown in figure 7, the recent and planned security measures for the U.N. Headquarters complex comprise four initiatives. This emergency initiative was introduced in December 2001 in response to the September 11, 2001 terrorist attacks. In late 2001, the United Nations organized a Senior Emergency Management Group to deal with major emergency situations at the U.N. Headquarters. The Secretary-General identified the most immediate, short-term security needs and requested additional funding. These measures, estimated to cost $3.7 million, included enhancements to the perimeter security and upgrades to the emergency response system on the complex and were largely implemented by March 2002. The strengthening security initiative also came as a result of the assessments the United Nations conducted after September 11, 2001. This initiative includes more long-term upgrades relative to the urgent measures implemented under the previous initiative. Some of the upgrades in this initiative (worth approximately $17 million) were part of the Capital Master Plan and their implementation was accelerated because of heightened security concerns. This initiative includes an upgraded access control system for the entire complex and renovations to the existing security control room. As of April 2003, the United Nations is designing these upgrades; U.N. officials expect them to be in place in 2004 at a total cost of $26 million. The U.N. security design consultant made 114 recommendations for the 2002 Capital Master Plan. The U.N. security staff, along with the consultant, prioritized those recommendations, creating a list of “highest priority” upgrades. These upgrades, totaling $77 million, were included as part of the baseline scope for the 2002 Capital Master Plan. The upgrades encompass additional visitor access control and blast resistance materials in certain areas on the complex. This initiative includes the U.N. security consultant’s remaining recommendations that were either (1) not the highest priority or (2) required coordination with New York City. Totaling $30 million, these upgrades include strengthening the building structure and installing vehicle barriers on some roads adjacent to the complex. The following are GAO’s comments on the letter from the U. N. Board of Auditors dated May 9, 2003. 1. The board stated that the United Nations had approved funds for the audit of the Capital Master Plan. A board official stated that approximately $35,000 was approved in April 2003 to conduct oversight of the renovation. We have included this information in the report. We modified our recommendation to acknowledge the board’s initial funding, but continue to recommend funding for the board’s oversight function over the course of the six-year renovation project. 2. We modified the report to reflect the board’s comment. 3. We modified the report to reflect the board’s comment. 4. See comment 1. 5. We modified the report to reflect the board’s comment. 6. We modified the report to reflect the board’s comment. 7. No change made. The comment does not provide additional clarity to the report. 8. See comment 1. Since the renovation is likely to continue for a number of years, ensuring that the board has the necessary resources to conduct oversight throughout the project will be critical. Accordingly, we have modified our recommendation to clarify our position. In addition to the individuals named above, Bruce Kutnick, Ronald King, Valérie L. Nowak, Maria Edelstein, Jeffrey T. Larson, Julia A. Roberts, Lynn Cothern, Jonathan Rose, and Barbara Shields made significant contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO Mailing Lists” under “Order GAO Products” heading. | The United Nations (U.N.) estimates that its planned renovation of the seven buildings on the Headquarters complex could cost almost $1.2 billion. As the host country and the largest contributor to the United Nations, the United States has a significant interest in this project. This report (1) assesses the reasonableness of the U.N. process to develop the renovation plans, (2) analyzes the potential cost to the United States, (3) identifies critical milestones before construction can begin, and (4) discusses efforts to monitor and oversee the project. U.N. officials followed a reasonable process consistent with leading industry practices and recognized guidelines in developing the headquarters renovation plan--the first phase of a five-phase renovation process. As the project advances, changes in scope, schedule, and cost are to be expected. To finance the renovation, the Secretary-General anticipates a no-interest loan from the United States. However, U.S. and U.N. officials stated that neither the United States nor the United Nations have specified the nature of any financing commitment. GAO estimates that the financial impact of the renovation to the federal government, including providing a $1.2 billion no-interest loan and repaying a share as a U.N. member, would be over $700 million, depending on the loan terms and conditions. Several critical milestones must be met for construction to begin as planned, including securing a financing commitment and signing a lease for a building where U.N. staff and delegates would relocate during the renovation. As the renovation project progresses, additional management, oversight, and monitoring is needed. The United Nations plans to complete a project management plan, which would help the United Nations control cost and schedule. While the United Nations has approved initial funding for the Board of Auditors to conduct oversight of the renovation and the board is preparing its audit strategy, the Office of Internal Oversight Services does not have the resources or audit strategies needed to effectively conduct oversight of the renovation. The Department of State has assembled a task force to monitor the renovation, but the department will need to define the task force's mission and program goals. Doing so would allow the department to develop strategies for employing the appropriate skill mix needed to achieve a successful outcome for the task force. |
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About 90 percent of the estimated $49 billion Recovery Act funding to be provided to states and localities in fiscal year 2009 will be through health, transportation and education programs. Within these categories, the three largest programs are increased Medicaid Federal Medical Assistance Percentage (FMAP) grant awards, funds for highway infrastructure investment, and the State Fiscal Stabilization Fund (SFSF). Table 1 shows the breakout of funding available for these three programs in the 16 selected states and the District. The Recovery Act funding for these 17 jurisdictions accounts for a little less than two-thirds of total Recovery Act funding for these three programs. The 16 states and the District have drawn down approximately $7.96 billion in increased FMAP grant awards for the period October 1, 2008, through April 1, 2009. The increased FMAP is for state expenditures for Medicaid services. The receipt of this increased FMAP may reduce the state share for their Medicaid programs. States have reported using funds made available as a result of the increased FMAP for a variety of purposes. For example, states and the District most frequently reported using these funds to maintain their current level of Medicaid eligibility and benefits, cover their increased Medicaid caseloads-which are primarily populations that are sensitive to economic downturns, including children and families, and to offset their state general fund deficits, thereby avoiding layoffs and other measures detrimental to economic recovery. States are undertaking planning activities to identify projects, obtain approval at the state and federal level, and move them to contracting and implementation. Some state officials told us they were focusing on construction and maintenance projects, such as road and bridge repairs. Before they can expend Recovery Act funds, states must reach agreement with the Department of Transportation on the specific projects; as of April 16, 2009, two of the 16 states had agreements covering more than 50 percent of their states’ apportioned funds, and three states did not have agreement on any projects. While a few, including Mississippi and Iowa had already executed contracts, most of the 16 states were planning to solicit bids in April or May. Thus, states generally had not yet expended significant amounts of Recovery Act funds. The states and the District must apply to the Department of Education for SFSF funds. Education will award funds once it determines that an application contains key assurances and information on how the state will use the funds. As of April 20, applications from three states had met that determination-South Dakota, and two of GAO’s sample states, California and Illinois. The applications from other states are being developed and submitted and have not yet been awarded. The states and the District report that SFSF funds will be used to hire and retain teachers, reduce the potential for layoffs, cover budget shortfalls, and restore funding cuts to programs. Planning continues for the use of Recovery Act funds. Figure 1 below shows the projected timing when funds will be made available to states and localities. State planning activities include appointing Recovery Czars, establishing task forces and other entities, and developing public websites to solicit input and publicize selected projects. In many states, legislative authorization is needed before the state can receive and/or expend funds or make changes to programs or eligibility requirements. Accountability Approaches We found that the selected states and the District are taking various approaches to ensure that internal controls are in place to manage risk up- front; they are assessing known risks and developing plans to address those risks. However, officials in most of the states and the District expressed concerns regarding the lack of Recovery Act funding provided for accountability and oversight. Due to fiscal constraints, many states reported significant declines in the number of oversight staff—limiting their ability to ensure proper implementation and management of Recovery Act funds. State auditors are also planning their work including conducting required single audits and testing compliance with federal requirements. The single audit process is important for effective oversight but can be modified to be a more timely and effective audit and oversight tool for the Recovery Act and OMB is weighing options on how to modify it. Nearly half of the estimated spending programs in the Recovery Act will be administered by non-federal entities. State officials suggested opportunities to improve communication in several areas. For example, they wish to be notified when Recovery Act funds are made available directly to prime recipients within their state that are not state agencies. An important objective of the Recovery Act is to preserve and create jobs and promote economic recovery. Officials in nine of the 16 states and the District expressed concern about determining jobs created and retained under the Recovery Act, as well as methodologies that can be used for estimation of each. OMB has moved out quickly to guide implementation of the Recovery Act. As OMB’s initiatives move forward, it has opportunities to build upon its efforts to date by addressing several important issues. The Director of OMB should: adjust the single audit process to provide for review of the design of internal controls during 2009 over programs to receive Recovery Act funding, before significant expenditures in 2010. continue efforts to identify methodologies that can be used to determine jobs created and retained from projects funded by the Recovery Act. evaluate current requirements to determine whether sufficient, reliable and timely information is being collected before adding further data collection requirements. The Director of OMB should clarify what Recovery Act funds can be used to support state efforts to ensure accountability and oversight. The Director of OMB should provide timely and efficient notification to (1) prime recipients in states and localities when funds are made available for their use, (2) states, where the state is not the primary recipient of funds, but has a state-wide interest in this information, and (3) all recipients, on planned releases of federal agency guidance and whether additional guidance or modifications are expected. We provided the Director of the Office of Management and Budget with a draft of this report for comment on April 20, 2009. OMB staff responded the next day, noting that in its initial review, OMB concurred with the overall objectives of our recommendations. OMB staff also provided some clarifying information, adding that OMB will complete a more thorough review in a few days. We have incorporated OMB’s clarifying information as appropriate. In addition, OMB said it plans to work with us to define the best path forward on our recommendations and to further the accountability and transparency of the Recovery Act. The Governors of each of the 16 states and the Mayor of the District were provided drafts for comment on each of their respective appendixes in this report. Those comments are included in the appendixes. Over time, the programmatic focus of Recovery Act spending will change. As shown in figure 2, about two-thirds of Recovery Act funds expected to be spent by states in the current 2009 fiscal year will be health-related spending, primarily temporary increases in Medicaid FMAP funding. Health, education, and transportation is estimated to account for approximately 90 percent of fiscal year 2009 Recovery Act funding for states and localities. However, by fiscal year 2012, transportation will be the largest share of state and local Recovery Act funding. Taken together, transportation spending, along with investments in community development, energy, and environmental areas that are geared more toward creating long-run economic growth opportunities, will represent approximately two-thirds of state and local Recovery Act funding in 2012. Medicaid is a joint federal-state program that finances health care for certain categories of low-income individuals, including children, families, persons with disabilities, and persons who are elderly. The federal government matches state spending for Medicaid services according to a formula based on each state’s per capita income in relation to the national average per capita income. The amount of federal assistance states receive for Medicaid service expenditures is known as the FMAP. Under the Recovery Act, states are eligible for an increased FMAP for expenditures that states make in providing services to their Medicaid populations. The Recovery Act provides eligible states with an increased FMAP for 27 months between October 1, 2008 and December 31, 2010. On February 25, 2009, CMS made increased FMAP grant awards to states, and states may retroactively claim reimbursement for expenditures that occurred prior to the effective date of the Recovery Act. Generally, for fiscal year 2009 through the first quarter of fiscal year 2011, the increased FMAP, which is calculated on a quarterly basis, provides for: (1) the maintenance of states’ prior year FMAPs; (2) a general across-the-board increase of 6.2 percentage points in states’ FMAPs; and (3) a further increase to the FMAPs for those states that have a qualifying increase in unemployment rates. For the first two quarters of 2009, the increases in the FMAP for the 16 states and the District ranged from 7.09 percentage points in Iowa to 11.59 percentage points in California, as shown in table 2. In our sample of 16 states and the District, officials from 15 states and the District indicated that they had drawn down increased FMAP grant awards, totaling $7.96 billion for the period of October 1, 2008 through April 1, 2009—47 percent of their increased FMAP grant awards. In our sample, the extent to which individual states and the District accessed these funds varied widely, ranging from 0 percent in Colorado to about 66 percent in New Jersey. Nationally, the 50 states and several territories combined have drawn down approximately $11 billion as of April 1, 2009, which represents almost 46 percent of the increased FMAP grants awarded for the first three quarters of federal fiscal year 2009 (table 3). In order for states to qualify for the increased FMAP available under the Recovery Act, they must meet certain requirements. In particular Maintenance of Eligibility: In order to qualify for the increased FMAP, states generally may not apply eligibility standards, methodologies, or procedures that are more restrictive than those in effect under their state Medicaid programs on July 1, 2008. In guidance to states, CMS noted that examples of restrictions of eligibility could include (1) the elimination of any eligibility groups since July 1, 2008 or (2) changes in an eligibility determination or redetermination process that is more stringent than what was in effect on July 1, 2008. States that fail to initially satisfy the maintenance of eligibility requirements have an opportunity to reinstate their eligibility standards, methodologies, and procedures before July 1, 2009 and become retroactively eligible for the increased FMAP. Compliance with Prompt Payment: Under federal law states are required to pay claims from health practitioners promptly. Under the Recovery Act, states are prohibited from receiving the increased FMAP for days during any period in which that state has failed to meet this requirement. Although the increased FMAP is not available for any claims received from a practitioner on each day the state is not in compliance with these prompt payment requirements, the state may receive the regular FMAP for practitioner claims received on days of non-compliance. CMS officials told us that states must attest that they are in compliance with the prompt payment requirement, but that enforcement is complicated due to differences across states in methods used to track this information. CMS officials plan to issue guidance on reporting compliance with the prompt payment requirement and are currently gathering information from states on the methods they use to determine compliance. Rainy Day Funds: States are not eligible for an increased FMAP if any amounts attributable (either directly or indirectly) to the increased FMAP are deposited or credited into any reserve or rainy day fund of the state. Percentage Contributions from Political Subdivisions: In some states, political subdivisions—such as cities and counties—may be required to help finance the state’s share of Medicaid spending. States that have such financing arrangements are not eligible to receive the increased FMAP if the percentage contributions required to be made by a political subdivision are greater than what was in place on September 30, 2008. In addition to meeting the above requirements, states that receive the increased FMAP must submit a report to CMS no later than September 30, 2011 that describes how the increased FMAP funds were expended, in a form and manner determined by CMS. In guidance to states, CMS has stated that further guidance will be developed for this reporting requirement. CMS guidance to states also indicates that, for federal reimbursement, increased FMAP funds must be drawn down separately, tracked separately, and reported to CMS separately. Officials from several states told us they require additional guidance from CMS on tracking receipt of increased FMAP funds and on reporting on the use of these funds. The increased FMAP available under the Recovery Act is for state expenditures for Medicaid services. However, the receipt of this increased FMAP may reduce the state share for their Medicaid programs. States have reported using these available funds for a variety of purposes. In our sample, individual states and the District reported that they would use the funds to maintain their current level of Medicaid eligibility and benefits, cover their increased Medicaid caseloads—which are primarily populations that are sensitive to economic downturns, including children and families, and to offset their state general fund deficits thereby avoiding layoffs and other measures detrimental to economic recovery. Ten states and the District reported using these funds to maintain program eligibility. Nine states and the District reported using these funds to maintain benefits. Specifically, Massachusetts reported that during a previous financial downturn, the state limited the number of individuals eligible for some services and reduced certain program benefits that were optional for the state to cover. However, with the funds made available as a result of the increased FMAP, the state did not have to make such reductions. Similarly, New Jersey reported that the state used these funds to eliminate premiums for certain children in its State Children’s Health Insurance Program, allowing it to retain coverage for children whose enrollment in the program would otherwise have been terminated for non-payment of premiums. Nine states and the District reported using these funds to cover increases to their Medicaid caseloads, primarily to populations that are sensitive to economic downturns, such as children and families. For example, New Jersey indicated that these funds would help the state meet the increased demand for Medicaid services. According to a New Jersey official, due to significant job losses, the state’s proposed 2010 budget would not have accommodated all the applicants newly eligible for Medicaid and that the funds available as a result of the increased FMAP have allowed the state to maintain a “safety net” of coverage for uninsured and unemployed people. Six states in our sample also reported that they used funds made available as a result of the increased FMAP to comply with prompt payment requirements. Specifically, Illinois reported that these funds will permit the state to move from a 90-day payment cycle to a 30-day payment cycle for all Medicaid providers. Three states also reported using these funds to restore or to increase provider payment rates. In addition, 10 states and the District indicated that the funds made available as a result of the increased FMAP would help offset deficits in their general funds. Pennsylvania reported that because funding for its Medicaid program is derived, in part, from state revenues, program funding levels fluctuate as the economy rises and falls. However, the state was able to use the funds made available to offset the effects of lower state revenues. Arizona officials also reported that the state used funds made available as a result of the increased FMAP to pay down some of its debt and make payroll payments, thus allowing the state to avoid a serious cash flow problem. In our sample, many states and the District indicated that they need additional guidance from CMS regarding eligibility for the increased FMAP funds. Specifically, 5 states raised concerns about whether certain programmatic changes could jeopardize the state’s eligibility for these funds. For example, Texas officials indicated that guidance from CMS is needed regarding whether certain programmatic changes being considered by Texas, such as a possible extension of the program’s eligibility period, would affect the state’s eligibility for increased FMAP funds. Similarly, Massachusetts wanted clarification from CMS as to whether certain changes in the timeframe for the state to conduct eligibility re- determinations would be considered a more restrictive standard. Four states also reported that they wanted additional guidance from CMS regarding policies related to the prompt payment requirements or changes to the non-federal share of Medicaid expenditures. For example, California officials noted that the state reduced Medicaid payments for in-home support services, but that counties could voluntarily choose to increase these payments without altering the cost sharing arrangements between the counties and the state. The state wants clarification from CMS on whether such an arrangement would be allowable in light of the Recovery Act requirements regarding the percentage of contributions by political subdivisions within a state toward the non-federal share of expenditures. In response to states’ concerns regarding the need for guidance, CMS told us that it is in the process of developing draft guidance on the prompt payment provisions in the Recovery Act. One official noted that this guidance will include defining the term practitioner, describing the types of claims applicable under the provision, and addressing the principles that are integral to determining a state’s compliance with prompt payment requirements. Additionally, CMS plans to have a reporting mechanism in place through which states would report compliance under this provision. With regard to Recovery Act requirements regarding political subdivisions, CMS described their current activities for providing guidance to states. Due to the variability of state operations, funding processes, and political structures, CMS has been working with states on a case-by-case basis to discuss particular issues associated with this provision and to address the particular circumstances for each state. A CMS official told us that if there were an issue(s) or circumstance(s) that had applicability across the states, or if there were broader themes having national significance, CMS would consider issuing guidance. The Recovery Act provides approximately $48 billion to fund grants to states, localities and regional authorities for transportation projects of which the largest piece is $27.5 billion for highway and related infrastructure investments. The Recovery Act largely provides for increased transportation funding through existing programs-such as the Federal-Aid Highway Surface Transportation Program—a federally funded, state-administered program. Under this program, funds are apportioned annually to each state department of transportation (or equivalent) to construct and maintain roadways and bridges on the federal-aid highway system. The Federal-Aid Highway Program refers to the separately funded formula grant programs administered by the Federal Highway Administration (FHWA) in the U.S. Department of Transportation. Of the $27.5 billion provided in the Recovery Act for highway and related infrastructure investments, $26.7 billion is provided to the 50 states for restoration, repair, construction and other activities allowed under the Federal-Aid Highway Surface Transportation Program. Nearly one-third of these funds are required to be sub-allocated to metropolitan and other areas. States must follow the requirements for the existing program, and in addition, the Recovery Act requires that the Governor must certify that the state will maintain its current level of transportation spending, and the governor or other appropriate chief executive must certify that the state or local government to which funds have been made available has completed all necessary legal reviews and determined that the projects are an appropriate use of taxpayer funds. The certifications must include a statement of the amount of funds the state planned to expend from state sources as of the date of enactment, during the period beginning on the date of enactment through September 30, 2010, for the types of projects that are funded by the appropriation. The U.S. Department of Transportation is reviewing the Governors’ certifications regarding maintaining their level of effort for highways. According to the Department, of the 16 states in our review and the District, three states have submitted a certification free of explanatory or conditional language—Arizona, Michigan, and New York. Eight submitted “explanatory” certifications—certifications that used language that articulated assumptions used or stated the certification was based on the “best information available at the time,” but did not clearly qualify the expected maintenance of effort on the assumptions proving true or information not changing in the future. Six submitted a “conditional” certification, which means that the certification was subject to conditions or assumptions, future legislative action, future revenues, or other conditions. Recovery Act funding for highway infrastructure investment differs from the usual practice in the Federal-Aid Highway Program in a few important ways. Most significantly, for projects funded under the Recovery Act, the federal share is 100 percent; typically projects require a state match of 20 percent while the federal share is typically 80 percent. Under the Recovery Act, priority is also to be given to projects that are projected to be completed within three years. In addition, within 120 days after the apportionment by the Department of Transportation to the states (March 2, 2009), 50 percent of the apportioned funds must be obligated. Any amount of this 50 percent of apportioned funding that is not obligated may be withdrawn by the Secretary of Transportation and redistributed to other states that have obligated their funds in a timely manner. Furthermore, one year after enactment, the Secretary will withdraw any remaining unobligated funds and redistribute them based on states’ need and ability to obligate additional funds. These provisions are applicable only to those funds apportioned to the state and not those funds required by the Recovery Act to be suballocated to metropolitan, regional and local organizations. Finally, states are required to give priority to projects that are located in economically distressed areas as defined by the Public Works and Economic Development Act of 1965, as amended. In March 2009, FHWA directed its field offices to provide oversight and take appropriate action to ensure that states gave adequate consideration to economically distressed areas in selecting projects. Specifically, field offices were directed to discuss this issue with the states and to document its review and oversight of this process. States are undertaking planning activities to identify projects, obtain approval at the state and federal level, and move projects to contracting and implementation. However, because of the steps necessary before implementation, states generally had not yet expended significant amounts of Recovery Act Funds. States are required to reach agreement with DOT on a list of projects. States will then request reimbursement from DOT as the state makes payments to contactors working on approved projects. As of April 16, 2009, the U.S. Department of Transportation reported that nationally $6.4 billion of the $26.6 billion in Recovery Act highway infrastructure investment funding provided to the states had been obligated--meaning Transportation and the states had reached agreements on projects worth this amount. As shown in Table 4 below, for the locations that GAO reviewed, the extent to which the Department of Transportation had obligated funds apportioned to the states and the District ranged from 0 to 65 percent. For two of the states, the Department of Transportation had obligated over 50 percent of the states’ apportioned funds, for 4 it had obligated 30 to 50 percent of the states’ funds, for 9 states it had obligated under 30 percent of funds, and for three it had not obligated any funds. While most states we visited had not yet expended significant funds, some told us they were planning to solicit bids in April or May. Officials, also stated that they planned to meet statutory deadlines for obligating the highway funds. A few states had already executed contracts. As of April 1, 2009, the Mississippi Department of Transportation (MDOT), for example, had signed contracts for 10 projects totaling approximately $77 million. These projects include the expansion of State Route 19 in eastern Mississippi into a four-lane highway. This project fulfills part of MDOT’s 1987 Four-Lane Highway Program which seeks to link every Mississippian to a four-lane highway within 30 miles or 30 minutes. Similarly, as of April 15, 2009, the Iowa Department of Transportation had competitively awarded 25 contracts valued at $168 million. Most often however, we found that highway funds in the states and the District have not yet been spent because highway projects were at earlier stages of planning, approval, and competitive contracting. For example, in Florida, the Department of Transportation (FDOT) plans to use the Recovery Act funds to accelerate road construction programs in its preexisting 5-year plan which will result in some projects being reprioritized and selected for earlier completion. On April 15, 2009, the Florida Legislative Budget Commission approved the Recovery Act-funded projects that FDOT had submitted. For the most part, states were focusing their selection of Recovery Act- funded highway projects on construction and maintenance, rather than planning and design, because they were seeking projects that would have employment impacts and could be implemented quickly. These included road repairs and resurfacing, bridge repairs and maintenance, safety improvements, and road widening. For example, in Illinois, the Department of Transportation is planning to spend a large share of its estimated $655 million in Recovery Act funds for highway and bridge construction and maintenance projects in economically distressed areas, those that are shovel-ready, and those that can be completed by February 2012. In Iowa, the contracts awarded have been for projects such as bridge replacements and highway resurfacing—shovel-ready projects that could be initiated and completed quickly. Knowing that the Recovery Act would include opportunities for highway investment, states told us they worked in advance of the legislation to identify appropriate projects. For example, in New York, the state DOT began planning to manage anticipated federal stimulus money in November 2008. A key part of New York’s DOT’s strategy was to build on existing planning and program systems to distribute and manage the funds. The Recovery Act provided $53.6 billion in appropriations for the State Fiscal Stabilization Fund (SFSF) to be administered by the U.S. Department of Education. The Act requires that the Secretary set aside $5 billion for State Incentive Grants, referred to by the department as the Reach for the Top program, and the establishment of an Innovation Fund. The Recovery Act specifies that 81.8 percent (about $39.5 billion) is to be distributed to states for support of elementary, secondary, and postsecondary education, and early childhood education programs. The remaining 18.2 percent of SFSF (about $8.8 billion) is available for basic government services but may also be used for educational purposes. These funds are to be distributed to states by formula, with 61 percent of the state award based on the state’s relative share of the population aged 5 to 24 and 39 percent based on the state’s relative share of the total U.S. population. The Department of Education announced on April 1, 2009 that it will award the SFSF in two phases. The first phase—$32.6 billion— represents about two-thirds of the SFSF. The states and the District must apply to the Department of Education for SFSF funds and Education must approve those applications. As of April 20, 2009, applications from three states had been approved—South Dakota, and two of GAO’s sample states, California and Illinois. Since applications from other states are now being developed and submitted, they have not yet received their SFSF funds. The applications to Education must contain certain assurances. For example, states must assure that, in each of fiscal years 2009, 2010, and 2011, they will maintain state support at fiscal year 2006 levels for elementary and secondary education and also for public institutions of higher education (IHEs). However, the Secretary of Education may waive maintenance of effort requirements if the state demonstrates that it will commit an equal or greater percentage of state revenues to education than in the previous applicable year. The state application must also contain (1) assurances that the state is committed to advancing education reform in increasing teacher effectiveness, establishing state-wide education longitudinal data systems, and improving the quality of state academic standards and assessments; (2) baseline data that demonstrates the state’s current status in each of the education reform areas; and (3) a description of how the state intends to use its stabilization allocation. Within two weeks of receipt of an approvable SFSF application, Education will provide the state with 67 percent of its SFSF allocation. Under certain circumstances, Education will provide the state with up to 90 percent of its allocation. In the second phase, Education intends to conduct a full peer review of state applications before awarding the final allocations. After maintaining state support for education at fiscal year 2006 levels, states are required to use the education portion of the SFSF to restore state support to the greater of fiscal year 2008 or 2009 levels for elementary and secondary education, public IHEs, and, if applicable, early childhood education programs. States must distribute these funds to school districts using the primary state education formula but maintain discretion in how funds are allocated to public IHEs. If, after restoring state support for education, additional funds remain, the state must allocate those funds to school districts according to the Title I, Part A funding formula. However, if a state’s education stabilization fund allocation is insufficient to restore state support for education, then a state must allocate funds in proportion to the relative shortfall in state support to public schools and IHEs. Education stabilization funds must be allocated to school districts and public IHEs and cannot be retained at the state level. Once stabilization funds are awarded to school districts and public IHEs, they have considerable flexibility over how they use those funds. School districts are allowed to use stabilization funds for any allowable purpose under the Elementary and Secondary Education Act (ESEA), (commonly known as the No Child Left Behind Act), the Individuals with Disabilities Education Act (IDEA), the Adult Education and Family Literacy Act, or the Perkins Act, subject to some prohibitions on using funds for, among other things, sports facilities and vehicles. In particular, because allowable uses under the Impact Aid provisions of ESEA are broad, school districts have discretion to use Recovery Act funding for things ranging from salaries of teachers, administrators, and support staff to purchases of textbooks, computers, and other equipment. The Recovery Act allows public IHEs to use SFSF funds in such a way as to mitigate the need to raise tuition and fees, as well as for the modernization, renovation, and repair of facilities, subject to certain limitations. However, the Recovery Act prohibits public IHEs from using stabilization funds for such things as increasing endowments, modernizing, renovating, or repairing sports facilities, or maintaining equipment. According to Education officials, there are no maintenance of effort requirements placed on local school districts. Consequently, as long as local districts use stabilization funds for allowable purposes, they are free to reduce spending on education from local-source funds, such as property tax revenues. States have broad discretion over how the $8.8 billion in SFSF funds designated for basic government services are used. The Recovery Act provides that these funds can be used for public safety and other government services and that these services may include assistance for education, as well as for modernization, renovation, and repairs of public schools or IHEs, subject to certain requirements. Education’s guidance provides that the funds can also be used to cover state administrative expenses related to the Recovery Act. However, the Act also places several restrictions on the use of these funds. For example, these funds cannot be used to pay for casinos (a general prohibition that applies to all Recovery Act funds), financial assistance for students to attend private schools, or construction, modernization, renovation, or repair of stadiums or other sports facilities. States expected that SFSF uses by school districts and public IHEs would include retaining current staff and spending on programmatic initiatives, among other uses. Some states’ fiscal condition could affect their ability to meet maintenance of effort (MOE) requirements in order to receive SFSF monies, but they are awaiting final guidance from Education on procedures to obtain relief from these requirements. For example, due to substantial revenue shortages, Florida has cut its state budget in recent years and the state will not be able to meet the maintenance-of-effort requirement to readily qualify for these funds. The state will apply to Education for a waiver from this requirement; however, it is awaiting final instructions from Education on submission of the waiver. Florida plans to use SFSF funds to reduce the impact of any further cuts that may be needed in the state education budget. In Arizona, state officials expect that SFSF recipients, such as local school districts, will generally use their allocations to improve the tools they use to assess student performance and determine to what extent performance meets federal academic standards, rehire teachers that were let go because of prior budget cuts, retain teachers, and meet the federal requirement that all schools have equal access to highly qualified teachers, among other things. Funds for the state universities will help them maintain services and staff as well as avoid tuition increases. Illinois officials stated that the state plans to use all of the $2 billion in State Fiscal Stabilization funds, including the 18.2 percent allowed for government services, for K-12 and higher education activities and hopes to avert layoffs and other cutbacks many districts and public colleges and universities are facing in their fiscal year 2009 and 2010 budgets. State Board of Education officials also noted that U.S. Department of Education guidance allows school districts to use stabilization funds for education reforms, such as prolonging school days and school years, where possible. However, officials said that Illinois districts will focus these funds on filling budget gaps rather than implementing projects that will require long-term resource commitments. While planning is underway, most of the selected states reported that they have not yet fully decided how to use the 18.2 percent of the SFSF, which is discretionary. States’ and localities’ tracking and accounting systems are critical to the proper execution and accurate and timely recording of transactions associated with the Recovery Act. OMB has issued guidance to the states and localities that provides for separate “tagging” of Recovery Act funds so that specific reports can be created and transactions traced. Officials from all 16 of the selected states and the District told us they have established or were establishing methods and processes to separately identify, monitor, track, and report on the use of Recovery Act funds they receive. Officials in some states expressed concern that the use of different accounting software among state agencies may make it difficult to provide consistent and timely reporting. Others reported that their ability to track Recovery Act funds may be affected by state hiring freezes, resulting from budget shortfalls. State officials reported a range of concerns regarding the federal requirements to identify and track Recovery Act funds going to sub- recipients, localities, and other non-state entities. These concerns include their ability to track these funds within existing systems, uncertainty regarding state officials’ accountability for the use of funds which do not pass through state government entities, and their desire for additional federal guidance to establish specific expectations on sub-recipient reporting requirements. Officials in many states expressed concern about being held accountable for funds flowing directly from federal agencies to localities or other recipients. Officials in some states said they would like to at least be informed about funds provided to non-state entities, in order to facilitate planning for their use and so they can coordinate Recovery Act activities. All of the 16 selected states and the District reported taking action to plan for and monitor the use of Recovery Act funding. Some states reported that Recovery Act planning activities for funds received by the state are directed primarily by the governor’s office. In New York, for example, the governor provides program direction to the state’s departments and offices, and he established a Recovery Act Cabinet comprised of representatives from all state agencies and many state authorities to coordinate and manage Recovery Act funding throughout the state. In North Carolina, Recovery Act planning efforts are led by the newly created Office of Economic Recovery and Investment, which was established by the governor to oversee the state’s economic recovery initiatives. Other states reported that their Recovery Act planning efforts were less centralized. In Mississippi, the governor has little influence over the state Departments of Education and Transportation, as they are led by independent entities. In Texas, oversight of federal Recovery Act funds involves various stakeholders, including the Office of the Governor, the Office of the Comptroller of Public Accounts, and the State Auditor’s Office as well as two entities established within the Texas legislature specifically for this purpose—the House Select Committee on Federal Economic Stabilization Funding and the House Appropriations’ Subcommittee on Stimulus. Several states reported that they have appointed “Recovery Czars” or identified a similar key official and established special offices, task forces or other entities to oversee the planning and monitor the use of Recovery Act funds within their states. In Michigan, the governor appointed a Recovery Czar to lead a new Michigan Economic Recovery Office, which is responsible for coordinating Recovery Act programs across all state departments and with external stakeholders such as GAO, the federal OMB, and others. Some states began planning efforts before Congress enacted the Recovery Act. For example, the state of Georgia recognized the importance of accounting for and monitoring Recovery Act funds and directed state agencies to take a number of steps to safeguard Recovery Act funds and mitigate identified risks. Georgia established a small core team in December 2008 to begin planning for the state’s implementation of the Recovery Act. Within 1 day of enactment, the governor appointed a Recovery Act Accountability Officer, and she formed a Recovery Act implementation team shortly thereafter. The implementation team includes a senior management team, officials from 31 state agencies, an accountability and transparency support group comprised of officials from the state’s budget, accounting, and procurement offices, and five cross- agency implementation teams. At one of the first implementation team meetings, the Recovery Act Accountability Officer disseminated an implementation manual to agencies, which included multiple types of guidance on how to use and account for Recovery Act funds, and new and updated guidance is disseminated at the weekly implementation team meetings. Officials in other states are using existing mechanisms rather than creating new offices or positions to lead Recovery Act efforts. For example, a District official stated that the District would not appoint a Recovery Czar, and instead would use its existing administrative structures to distribute and monitor Recovery Act funds to ensure quick disbursement of funds. In Mississippi, officials from the Governor’s office said that the state did not establish a new office to provide statewide oversight of Recovery Act funding, in part because they did not believe that the Recovery Act provided states with funds for administrative expenses—including additional staff. The Governor did designate a member of his staff to act as a Stimulus Coordinator for Recovery Act activities. All 16 states we visited and the District have established Recovery Act web sites to provide information on state plans for using Recovery funding, uses of funds to date, and, in some instances, to allow citizens to submit project proposals. For example, Ohio has created www.recovery.Ohio.gov, which represents the state’s efforts to create an open, transparent, and equitable process for allocating Recovery Act funds. The state has encouraged citizens to submit proposals for use of Recovery Act funds, and as of April 8, 2009, individuals and organizations from across Ohio submitted more than 23,000 proposals. Iowa officials indicated they want to use the state’s recovery web site (www.recovery.Iowa.gov) to host a “dashboard” function to report updated information on Recovery Act spending that is easily searchable by the public. Also in Colorado, the state plans to create a web-based map of projects receiving recovery funds to help inform the public about the results of Recovery Act spending in Colorado. The selected states and the District are taking various approaches to ensure that internal controls are in place to manage risk up-front, rather than after problems develop and deficiencies are identified after the fact, and have different capacities to manage and oversee the use of Recovery Act funds. Many of these differences result from the underlying differences in approaches to governance, organizational structures, and related systems and processes that are unique to each jurisdiction. A robust system of internal control specifically designed to deal with the unique and complex aspects of the Recovery Act funds will be key to helping management of the states and localities achieve the desired results. Effective internal control can be achieved through numerous different approaches, and, in fact, we found significant variation in planned approaches by state. For example, New York’s Recovery Act cabinet plans to establish a working group on internal controls; the Governor’s office plans to hire a consultant to review the state’s management infrastructure and capabilities to achieve accountability, effective internal controls, compliance and reliable reporting under the act; and, the state plans to coordinate fraud prevention training sessions. Michigan’s Recovery Office is developing strategies for effective oversight and tracking of the use of Recovery Act funds to ensure compliance with accountability and transparency requirements. Ohio’s Office of Internal Audit plans to assess the adequacy and effectiveness of the current internal control framework and test whether state agencies adhere to the framework. Florida’s Chief Inspector General established an enterprise-wide working group of agency program Inspectors General who are updating their annual work plans by including the Recovery Act funds in their risk assessments and will leave flexibility in their plans to address issues related to funds. Massachusetts’s Joint Committee on Federal Recovery Act Oversight will hold hearings regarding the oversight of Recovery Act spending. Georgia’s State Auditor plans to provide internal control training to state agency personnel in late April. The training will discuss basic internal controls, designing and implementing internal controls for Recovery Act programs, best practices in contract monitoring, and reporting on Recovery Act funds. Internal controls include management and program policies, procedures, and guidance that help ensure effective and efficient use of resources; compliance with laws and regulations; prevention and detection of fraud, waste, and abuse; and the reliability of financial reporting. Because Recovery Act funds are to be distributed as quickly as possible, controls are evolving as various aspects of the program become operational. Effective internal control is a major part of managing any organization to achieve desired outcomes and manage risk. GAO’s Standards for Internal Control include five key elements: control environment, risk assessment, control activities, information and communication, and monitoring. Our report contains a discussion of these elements and the related effort underway in the jurisdictions we visited. OMB’s Circular No. A-133 sets out implementing guidelines for the single audit and defines roles and responsibilities related to the implementation of the Single Audit Act, including detailed instructions to auditors on how to determine which federal programs are to be audited for compliance with program requirements in a particular year at a given grantee. The Circular No. A-133 Compliance Supplement is issued annually to guide auditors on what program requirements should be tested for programs audited as part of the single audit. OMB has stated that it will use its Circular No. A-133 Compliance Supplement to notify auditors of program requirements that should be tested for Recovery Act programs, and will issue interim updates as necessary. Both the Single Audit Act and OMB Circular No. A-133 call for a “risk- based” approach to determine which programs will be audited for compliance with program requirements as part of a single audit. In general, the prescribed approach relies heavily on the amount of federal expenditures during a fiscal year and whether findings were reported in the previous period to determine whether detailed compliance testing is required for a given program that year. Under the current approach for risk determination in accordance with Circular No. A-133, certain risks unique to the Recovery Act programs may not receive full consideration. Recovery Act funding carries with it some unique challenges. The most significant of these challenges are associated with (1) new government programs, (2) the sudden increase in funds or programs that are new for the recipient entity, and (3) the expectation that some programs and projects will be delivered faster so as to inject funds into the economy. This makes timely and efficient evaluations in response to the Recovery Act’s accountability requirements critical. Specifically, new programs and recipients participating in a program for the first time may not have the management controls and accounting systems in place to help ensure that funds are distributed and used in accordance with program regulations and objectives; Recovery Act funding that applies to programs already in operation may cause total funding to exceed the capacity of management controls and accounting systems that have been effective in past years; the more extensive accountability and transparency requirements for Recovery Act funds will require the implementation of new controls and procedures; and risk may be increased due to the pressures of spending funds quickly. In response to the risks associated with Recovery Act funding, the single audit process needs adjustment to put appropriate focus on Recovery Act programs and to provide the necessary level of accountability over these funds in a timely manner. The single audit process could be adjusted to require the auditor to perform procedures such as the following as part of the routine single audit: provide for review of the design and implementation of internal control over compliance and financial reporting for programs under the Recovery Act; consider risks related to Recovery Act-related programs in determining which federal programs are major programs; and specifically, test Recovery Act programs to determine whether the auditee complied with laws and regulations. The first two items above should preferably be accomplished during 2009 before significant expenditures of funds in 2010 so that the design of internal control can be strengthened prior to the majority of those expenditures. We further believe that OMB Circular No. A-133 and/or the Circular No. A-133 Compliance Supplement could be adjusted to provide some relief on current audit requirements for low-risk programs to offset additional workload demands associated with Recovery Act funds. OMB told us that it is developing audit guidance that would address the above audit objectives. OMB also said that it is considering reevaluating potential options for providing relief from certain existing audit requirements in order to provide some balance to the increased requirements for Recovery Act program auditing. Officials in several states also expressed concerns regarding the lack of funding provided to state oversight entities, given the additional federal requirements placed on states to provide proper accounting and ensure transparency. Due to fiscal constraints, many states reported significant declines in the number of oversight staff, limiting their ability to ensure proper implementation and management of Recovery Act funds. Although the majority of states reported that they lack the necessary resources to ensure adequate oversight of Recovery Act funds, some states reported that they are either hiring new staff or reallocating existing staff for this purpose. Officials we interviewed in several states said the lack of funding for state oversight entities in the Recovery Act presents them with a challenge, given the increased need for oversight and accountability. According to state officials, state budget and staffing cuts have limited the ability of state and local oversight entities to ensure adequate management and implementation of the Recovery Act. For example, Colorado’s state auditor reported that state oversight capacity is limited, noting that the Department of Health Care Policy and Financing has had 3 controllers in the past 4 years and the state legislature’s Joint Budget Committee recently cut field audit staff for the Department of Human Services in half. In addition, the Colorado Department of Transportation’s deputy controller position is vacant, as is the Department of Personnel & Administration’s internal auditor position. Colorado officials noted that these actions are, in part, due to the natural tendency in an economic downturn to cut administrative expenses in an attempt to maintain program delivery levels. Our report contains more examples of capacity issues from our selected states and the District. Although most states indicated that they lack the resources needed to provide effective monitoring and oversight, some states indicated they will hire additional staff to help ensure the prudent use of Recovery Act funds. For example, according to officials with North Carolina’s Governor’s Crime Commission, the current management capacity in place is not sufficient to implement the Recovery Act. Officials explained that the Recovery Act funds for the Edward Byrne Memorial Justice Assistance Grant program have created such an increase in workload that the department will have to hire additional staff to handle over the next 3 years. Officials explained that these staff will be hired for the short term since the money will run out in 3 years. Additionally, officials explained that they are able to use 10 percent of the Justice Assistance Grants funding to pay for the administrative positions that are needed. A number of states expressed concerns regarding the ability to track Recovery Act funds due to state hiring freezes, resulting from budget shortfalls. For instance, New Jersey has not increased its number of state auditors or investigators, nor has there been an increase in funding specifically for Recovery Act oversight. In addition, the state hiring freeze has not allowed many state agencies to increase their Recovery Act oversight efforts. For example, despite an increase of $469 million in Recovery Act funds for state highway projects, no additional staff will be hired to help with those tasks or those directly associated with the Recovery Act, such as reporting on the number of jobs created. While the state’s Department of Transportation has committed to shift resources to meet any expanded need for internal Recovery Act oversight, one person is currently responsible for reviewing contractor-reported payroll information for disadvantaged business enterprises, ensuring compliance with Davis-Bacon wage requirements, and development of the job creation figures. State education officials in North Carolina also said that greater oversight capacity is needed to manage the increase in federal funding. However, due to the state’s hiring freeze, the agency will be unable to use state funds to hire the additional staff needed to oversee Recovery funds. The North Carolina Recovery Czar said that his office will work with state agencies to authorize hiring additional staff when directly related to Recovery Act oversight. With respect to oversight of Recovery Act funding at the local level, varying degrees of preparedness were reported by state and local officials. While the California Department of Transportation (Caltrans) officials stated that extensive internal controls exist at the state level, there may be control weaknesses at the local level. Caltrans is collaborating with local entities to identify and address these weaknesses. Likewise, Colorado officials expressed concerns that effective oversight of funds provided to Jefferson County may be limited due to the recent termination of its internal auditor and the elimination of its internal control audit function. Arizona state officials expressed some concerns about the ability of rural, tribal, and some private entities such as boards, commissions, and nonprofit organizations to manage, especially if the Recovery Act does not provide administrative funding. As recipients of Recovery Act funds and as partners with the federal government in achieving Recovery Act goals, states and local units of government are expected to invest Recovery Act funds with a high level of transparency and to be held accountable for results under the Recovery Act. As a means of implementing that goal, guidance has been issued and will continue to be issued to federal agencies, as well as to direct recipients of funding. To date, OMB has issued two broad sets of guidance to the heads of federal departments and agencies for implementing and managing activities enacted under the Recovery Act. OMB has also issued for public comment detailed proposed standard data elements that federal agencies will require from all recipients (except individuals) of Recovery Act funding. When reporting on the use of funds, recipients must show the total amount of recovery funds received from a federal agency, the amount expended or obligated to the project, and project specific information including the name and description of the project, an evaluation of its completion status, the estimated number of jobs created and retained by the project, and information on any subcontracts awarded by the recipient, as specified in the Recovery Act. State reactions vary widely and often include a mixture of responses to the reporting requirements. Some states will use existing federal program guidance or performance measures to evaluate impact, particularly for on- going programs. Other states are waiting for additional guidance from federal departments or from OMB on how and what to measure to assess impact. While Georgia is waiting on further federal guidance, the state is adapting an existing system (used by the State Auditor to fulfill its Single Audit Act responsibilities) to help the state report on Recovery Act funds. The statewide web-based system will be used to track expenditures, project status, and job creation and retention. The Georgia governor is requiring all state agencies and programs receiving Recovery Act funds to use this system. Some states indicated that they have not yet determined how they will assess impact. Officials in 9 of the 16 states and the District expressed concern about the definitions of jobs retained and jobs created under the Recovery Act, as well as methodologies that can be used for estimation of each. Officials from several of the states we met with expressed a need for clearer definitions of “jobs retained” and “jobs created.” Officials from a few states expressed the need for clarification on how to track indirect jobs, while others expressed concern about how to measure the impact of funding that is not designed to create jobs. Mississippi state officials suggested the need for a clearly defined distinction for time-limited, part-time, full-time, and permanent jobs; since each state may have differing definitions of these two categories. Officials from Massachusetts expressed concern that contractors may overestimate the number of jobs retained and created. Some existing programs, such as highway construction, have methodologies for estimating job creation. But other programs, existing and new, do not have job estimation methodologies. Some of the questions that states and localities have about Recovery Act implementation may have been answered in part via the guidance provided by OMB for the data elements as well as by guidance issued by federal departments. For example, OMB provided draft definitions for employment, as well as for jobs retained and jobs created via Recovery Act funding. However, OMB did not specify methodologies for estimating jobs retained and jobs created, which has been a concern for some states. Data elements were presented in the form of templates with section by section data requirements and instructions. OMB provided a comment period during which it is likely to receive many questions and requests for clarifications from states, localities, and other entities that can be direct recipients of Recovery Act funding. OMB plans to update this guidance again in the next 30 to 60 days. Some federal agencies have also provided guidance to the states. The Departments of Education, Housing and Urban Development, Justice, Labor, Transportation, the Corporation for National Community Service, the National Institutes of Health, and the Centers for Medicare & Medicaid Services have provided guidance for program implementation, particularly for established programs. Although guidance is expected, some new programs, such as Broadband Deployment Grants, are awaiting issuance of implementation instructions. It has been a little over two months since enactment of the Recovery Act and OMB has moved out quickly. In this period, OMB has issued two sets of guidance, first on February 18 and next on April 3, with another round to be issued within 60 days. OMB has sought formal public comment on its April 3 guidance update and before this, according to OMB, reached out informally to Congress, federal, state, and local government officials, and grant and contract recipients to get a broad perspective on what is needed to meet the high expectations set by Congress and the Administration. In addition, OMB is standing up two new reporting vehicles, Recovery.gov, which will be turned over to the Recovery Accountability and Transparency Board and is expected to provide unprecedented public disclosure on the use of Recovery Act funds, and a second system to capture centrally information on the number of jobs created or retained. As OMB’s initiatives move forward and it continues to guide the implementation of the Recovery Act, OMB has opportunities to build upon its efforts to date by addressing several important issues. These issues can be characterized broadly in three categories: (1) Accountability and Transparency Requirements, (2) Administrative Support and Oversight, and (3) Communications. Recipients of Recovery Act funding face a number of implementation challenges in this area. The Act includes many programs that are new or new to the recipient and, even for existing programs; the sudden increase in funds is out of normal cycles and processes. Add to this the expectation that many programs and projects will be delivered faster so as to inject funds into the economy and it becomes apparent that timely and efficient evaluations are needed. The following are our recommendations to help strengthen ongoing efforts to ensure accountability and transparency. The single audit process is a major accountability vehicle but should be adjusted to provide appropriate focus and the necessary level of accountability over Recovery Act funds in a timelier manner than the current schedule. OMB has been reaching out to stakeholders to obtain input and is considering a number of options related to the single audit process and related issues. We Recommend: To provide additional leverage as an oversight tool for Recovery Act programs, the Director of OMB should adjust the current audit process to: focus the risk assessment auditors use to select programs to test for compliance with 2009 federal program requirements on Recovery Act funding; provide for review of the design of internal controls during 2009 over programs to receive Recovery Act funding, before significant expenditures in 2010; and evaluate options for providing relief related to audit requirements for low-risk programs to balance new audit responsibilities associated with the Recovery Act. Responsibility for reporting on jobs created and retained falls to non- federal recipients of Recovery Act funds. As such, states and localities have a critical role in determining the degree to which Recovery Act goals are achieved. Senior Administration officials and OMB have been soliciting views and developing options for recipient reporting. In its April 3 guidance, OMB took an important step by issuing definitions, standard award terms and conditions, and clarified tracking and documenting Recovery Act expenditures. Furthermore, OMB and the Recovery Accountability and Transparency Board are developing the data architecture for the new federal reporting system that will be used to collect recipient reporting information. According to OMB, state chief information officers commented on an early draft and OMB expects to provide an update for further state review. We Recommend: Given questions raised by many state and local officials about how best to determine both direct and indirect jobs created and retained under the Recovery Act, the Director of OMB should continue OMB’s efforts to identify appropriate methodologies that can be used to: assess jobs created and retained from projects funded by the Recovery Act; determine the impact of Recovery Act spending when job creation is indirect; identify those types of programs, projects, or activities that in the past have demonstrated substantial job creation or are considered likely to do so in the future. Consider whether the approaches taken to estimate jobs created and jobs retained in these cases can be replicated or adapted to other programs. There are a number of ways that the needed methodologies could be developed. One option would be to establish a working group of federal, state and local officials and subject matter experts. Given that governors have certified to the use of funds in their states, state officials are uncertain about their reporting responsibilities when Recovery Act funding goes directly to localities. Additionally, they have concerns about the capacity of reporting systems within their states, specifically, whether these systems will be capable of aggregating data from multiple sources for posting on Recovery.gov. Some state officials are concerned that too many federal requirements will slow distribution and use of funds and others have expressed reservations about the capacity of smaller jurisdictions and non-profits to report data. Even those who are confident about their own systems are uncertain about the cost and speed of making any required modifications for Recovery.gov reporting or further data collection. Problems also have been identified with federal systems that support the Recovery Act as well. For example, questions have been raised about the reliability of www.USASpending.gov (USAspending.gov) and the ability of Grants.gov to handle the increased volume of grant applications. OMB is taking concerted actions to address these concerns. It plans to reissue USASpending guidance shortly to include changes in operations that are expected to improve data quality. In a memorandum dated March 9, OMB said that it is working closely with federal agencies to identify system risks that could disrupt effective Recovery Act implementation and acknowledged that Grants.gov is one such system. A subsequent memorandum on April 8, offered a short-term solution to the significant increase in Grants.gov usage while longer-term alternative approaches are being explored. GAO has work underway to review differences in agency policies and methods for submitting grant applications using Grants.gov and will issue a report shortly. OMB addressed earlier questions about reporting coverage in its April 3 guidance. According to OMB there are limited circumstances in which prime and sub recipient reporting will not be sufficient to capture information at the project level. OMB stated that it will expand its current model in future guidance. OMB guidance described recipient reporting requirements under the Recovery Act’s section 1512 as the minimum which must be collected, leaving it to federal agencies to determine whether additional information would be required for program oversight. We Recommend: In consultation with the Recovery Accountability and Transparency Board and States, the Director of OMB should evaluate current information and data collection requirements to determine whether sufficient, reliable and timely information is being collected before adding further data collection requirements. As part of this evaluation, OMB should consider the cost and burden of additional reporting on states and localities against expected benefits. At a time when states are experiencing cutbacks, state officials expect the Recovery Act to incur new regulations, increase accounting and management workloads, change agency operating procedures, require modifications to information systems, and strain staff capacity, particularly for contract management. Although federal program guidelines can include a percentage of grants funding available for administrative or overhead costs, the percentage varies by program. In considering other sources, states have asked whether the portion of the State Fiscal Stabilization Fund that is available for government services could be used for this purpose. Others have suggested a global approach to increase the percentage for all Recovery Act grants funding that can be applied to administrative costs. As noted earlier, state auditors also are concerned with meeting increased audit requirements for Recovery Act funding with a reduced number of staff and without a commensurate reduction in other audit responsibilities or increase in funding. OMB and senior administration officials are aware of the states’ concerns and have a number of options under consideration. We Recommend: The Director of OMB should timely clarify what Recovery Act funds can be used to support state efforts to ensure accountability and oversight, especially in light of enhanced oversight and coordination requirements. State officials expressed concerns regarding communication on the release of Recovery Act funds and their inability to determine when to expect federal agency program guidance. Once funds are released, there is no consistent procedure for ensuring that the appropriate officials in states and localities are notified. According to OMB, agencies must immediately post guidance to the Recovery Act web site and inform to the “maximum extent practical, a broad array of external stakeholders.” In addition, since nearly half of the estimated spending programs in the Recovery Act will be administered by non-federal entities, state officials have suggested opportunities to improve communication in several areas. For example, they wish to be notified when funds are made available to prime recipients that are not state agencies. Some of the uncertainty can be attributed to evolving reports and timing of these reports at the federal level as well as the recognition that different terms used by federal assistance programs add to the confusion. A reconsideration of how best to publicly report on federal agency plans and actions led to OMB’s decision to continue the existing requirement to report on the federal status of funds in the Weekly Financial and Activity Reports and eliminate a planned Monthly Financial Report. The Formula and Block Grant Allocation Report has been replaced and renamed the Funding Notification Report. This expanded report includes all types of awards, not just formula and block grants, and is expected to better capture the point in the federal process when funds are made available. We Recommend: To foster timely and efficient communications, the Director of OMB should develop an approach that provides dependable notification to (1) prime recipients in states and localities when funds are made available for their use, (2) states, where the state is not the primary recipient of funds, but has a state-wide interest in this information, and (3) all non-federal recipients, on planned releases of federal agency guidance and, if known, whether additional guidance or modifications are expected. Mr. Chairman, Senator Collins, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. For further information on this testimony, please contact J. Christopher Mihm on (202) 512-6806 or [email protected]. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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. | This testimony discusses GAO's work examining the uses and planning by selected states and localities for funds made available by the American Recovery and Reinvestment Act of 2009 (Recovery Act). The Recovery Act is estimated to cost about $787 billion over the next several years, of which about $280 billion will be administered through states and localities. Funds made available under the Recovery Act are being distributed to states, localities, and other entities and individuals through a combination of grants and direct assistance. As Congress may know, the stated purposes of the Recovery Act are to: (1) preserve and create jobs and promote economic recovery; (2) assist those most impacted by the recession; (3) provide investments needed to increase economic efficiency by spurring technological advances in science and health; (4) invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits; and (5) stabilize state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases. As described in GAO's March testimony, the Recovery Act specifies several roles for GAO including conducting bimonthly reviews of selected states' and localities' use of funds made available under the act. This statement today is based on our report being released today, Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential, which is the first in a series of bimonthly reviews we will do on states' and localities' uses of Recovery Act funding and covers the actions taken under the Act through April 20, 2009. Our report and our other work related to the Recovery Act can be found on our new website called Following the Money: GAO's Oversight of the Recovery Act, which is accessible through GAO's home page at www.gao.gov . Like the report, this statement discusses (1) selected states' and localities' uses of and planning for Recovery Act funds, (2) the approaches taken by the selected states and localities to ensure accountability for Recovery Act funds, and (3) states' plans to evaluate the impact of the Recovery Act funds they received. About 90 percent of the estimated $49 billion in Recovery Act funding to be provided to states and localities in FY2009 will be through health, transportation and education programs. Within these categories, the three largest programs are increased Medicaid Federal Medical Assistance Percentage (FMAP) grant awards, funds for highway infrastructure investment, and the State Fiscal Stabilization Fund (SFSF). The funding notifications for Recovery Act funds for the 16 selected states and the District of Columbia (the District) have been approximately $24.2 billion for Medicaid FMAP on April 3, $26.7 billion for highways on March 2, and $32.6 billion for SFSF on April 2. Fifteen of the 16 states and the District have drawn down approximately $7.96 billion in increased FMAP grant awards for the period October 1, 2008 through April 1, 2009. The increased FMAP is for state expenditures for Medicaid services. The receipt of this increased FMAP may reduce the state share for their Medicaid programs. States have reported using funds made available as a result of the increased FMAP for a variety of purposes. For example, states and the District reported using these funds to maintain their current level of Medicaid eligibility and benefits, cover their increased Medicaid caseloads-which are primarily populations that are sensitive to economic downturns, including children and families, and to offset their state general fund deficits thereby avoiding layoffs and other measures detrimental to economic recovery. States are undertaking planning activities to identify projects, obtain approval at the state and federal level and move them to contracting and implementation. For the most part, states were focusing on construction and maintenance projects, such as road and bridge repairs. Before they can expend Recovery Act funds, states must reach agreement with the Department of Transportation on the specific projects; as of April 16, two of the 16 states had agreements covering more than 50 percent of their states' apportioned funds, and three states did not have agreement on any projects. While a few, including Mississippi and Iowa had already executed contracts, most of the 16 states were planning to solicit bids in April or May. Thus, states generally had not yet expended significant amounts of Recovery Act funds. The states and D.C. must apply to the Department of Education for SFSF funds. Education will award funds once it determines that an application contains key assurances and information on how the state will use the funds. As of April 20, applications from three states had met that determination- South Dakota, and two of GAO's sample states, California and Illinois. The applications from other states are being developed and submitted and have not yet been awarded. The states and the District report that SFSF funds will be used to hire and retain teachers, reduce the potential for layoffs, cover budget shortfalls, and restore funding cuts to programs. Planning continues for the use of Recovery Act funds. State activities indlude appointing Recovery Czars; establishing task forces and other entities, and developing public websites to solicit input and publicize selected projects. GAO found that the selected states and the District are taking various approaches to ensuring that internal controls manage risk up-front; they are assessing known risks and developing plans to address those risks. State auditors are also planning their work including conducting required single audits and testing compliance with federal requirements. Nearly half of the estimated spending programs in the Recovery Act will be administered by non-federal entities. State officials suggested opportunities to improve communication in several areas. Officials in nine of the 16 states and the District expressed concern about determining the jobs created and retained under the Recovery Act, as well as methodologies that can be used for estimation of each. |
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SBInet includes the acquisition, development, integration, deployment, and operations and maintenance of a mix of surveillance technologies, such as cameras, radars, sensors, and C3I technologies. The initial focus of SBInet has been on addressing the requirements of CBP’s Office of Border Patrol, which is responsible for securing the borders between the land ports of entry. Longer term, SBInet is to address requirements of CBP’s Office of Field Operations, which controls vehicle and pedestrian traffic at the ports of entry, and its Office of Air and Marine Operations, which operates helicopters, fixed-wing aircraft, and marine vessels used in securing the borders. (See fig. 1 for the potential long-term SBInet concept of operations.) Surveillance technologies are to include a variety of sensor systems. Specifically, unattended ground sensors are to be used to detect heat and vibrations associated with foot traffic and metal associated with vehicles. Radar mounted on fixed and mobile towers is to detect movement, and cameras on fixed and mobile towers are to be used by operators to identify and classify items of interest detected and tracked by ground sensors and radar. Aerial assets are also to be used to provide video and infrared imaging to enhance tracking targets. These technologies are generally to be acquired through the purchase of commercial off-the-shelf (COTS) products. C3I technologies (software and hardware) are to produce a common operating picture (COP)—a uniform presentation of activities within specific areas along the border. Together, the sensors, radar, and cameras are to gather information along the border and transmit this informatio COP terminals located in command centers and agents’ vehicles, which in turn are to assemble it to provide CBP agents with border situational awareness. Among other things, COP hardware and software are to allow agents to (1) view data from radar and sensors that detect and track movement in the border areas, (2) control cameras to help identify and classify illegal entries, (3) correlate entries wit h the positions of nearby agents, and (4) enhance tactical decision making regarding the appropriate r esponse to apprehend an entry, if necessary. To increase border security and decrease illegal immigration, DHS launched SBI more than 4 years ago after canceling its America’s Shield Initiative program. Since fiscal year 2006, DHS has received about $4.4 billion in appropriations for SBI, including about $2.5 billion for physical fencing and related infrastructure, about $1.5 billion for virtual fencing (surveillance systems) and related technical infrastructure (towers), and about $300 million for program management. The SBI Program Ex Office, which is organizationally within CBP, is responsible for managing key acquisition functions associated with SBInet, including prime contractor tracking and oversight. It is organized into four components: SBInet System Program Office (referred to as the SPO in this report), Systems Engineering, Business Management, and Operational Integration As of Dece mber 31, 2009, the SBI Program Executive Office was staffed with 188 people—87 government employees, 78 contractor staff, and 13 detailees. . In September 2006, CBP awarded a 3-year prime contract to the Boeing Company, with three additional 1-year options for designing, producing, testing, deploying, and sustaining SBI. In 2009, CBP exercised the first option year. Under this contract, CBP has issued 10 task orders tha to SBInet, covering for example, COP design and development, system deployment, and system maintenance and logistics support. As of December 2009, 4 of the 10 task orders had been completed and 6 were ongoing. (See table 1 for a summary of the SBInet task orders.) One of the completed task orders is for an effort known as Project 28, which is a prototype system that covers 28 miles of the border in CBP’s Tucson Sector in Arizona, and has been operating since February 2008. However, its completion took 8 months longer than planned because of problems in integrating system components (e.g., cameras and radars) with the COP software. As we have reported, these problems were attributable to, among other things, limitations in requirements development and contractor oversight. Through the task orders, CBP’s strategy is to deliver SBInet capabilities incrementally. To accomplish this, the SPO has adopted an evolutionary system life cycle management approach in which system capabilities are to be delivered to designated locations in a series of discrete subsets of system functional and performance capabilities that are referred to as blocks. The first block, which has been designated as Block 1, includes the purchase of commercially available surveillance systems, development of customized COP systems and software, and use of existing CBP communications and network capabilities. Such an incremental approach is a recognized best practice for acquiring large-scale, complex systems because it allows users access to new capabilities and tools sooner, and thus permits both their early operational use and evaluation. Subsequent increments of SBInet capabilities are to be delivered based on feedback and unmet requirements, as well as the availability of new technologies. In general, the SBInet life cycle management approach consists of four primary work flow activities: (1) Planning Activity, (2) System Block Activity, (3) Project Laydown Activity, and (4) Sustainment Activity. During the Planning Activity, the most critical user needs are to be identified and balanced against what is affordable and technologically available. The outcome of this process is to be a set of capability requirements that are to be acquired, developed, and deployed as a specific block. This set of capabilities, once agreed to by all stakeholders, is then passed to the System Block Activity, during which the baseline system solution to be fielded is designed and built. Also as part of this activity, the verification steps are to be conducted on the individual system components and the integrated system solution to ensure that they meet defined requirements. The Project Laydown Activity is performed to configure the block solution to a specific geographic area’s unique operational characteristics. This activity involves assessing the unique threats, terrain, and environmental concerns associated with a particular area, incorporating these needs into the system configuration to be deployed to that area, obtaining any needed environmental permits, and constructing the infrastructure and installing the configured system. It also involves test and evaluation activities, including system acceptance testing, to verify that the installed block system was built as designed. The final activity, Sustainment, is focused on the operations and maintenance of the deployed block solution and supporting the user community. Associated with each of these activities are various milestone or gate reviews. For example, a key review for the System Block Activity is the Critical Design Review (CDR). At this review, the block design and requirements are baselined and formally controlled to approve and track any changes. Among other things, this review is to verify that the block solution will meet the stated requirements within the program’s cost and schedule commitments. An important review conducted during the Project Laydown Activity is the Deployment Design Review. At this review, information such as the status of environmental reviews and land acquisitions for a specific geographic area is assessed, and the location- specific system configuration is determined. The Deployment Readiness Review is another key event during this activity. During this review, readiness to begin site preparation and construction is assessed. In addition to the four above described workflow activities are various key life cycle management processes, such as requirements development and management, risk management, and test management. Requirements development and management, among other things, involves defining and aligning a hierarchy of five types of SBInet requirements. These five types begin with high-level operational requirements and are followed by increasingly more detailed lower-level requirements, to include system, component, C3I/COP software, and design requirements. To help it manage the requirements, the SPO relies on Boeing’s use of a database known as the Dynamic Object-Oriented Requirements System (DOORS). The various types of SBInet requirements are described in table 2. Risk management entails taking proactive steps to identify and mitigate potential problems before they become actual problems. The SPO has defined a “risk” to be an uncertain event or condition that, if it occurs, will have a negative effect on at least one program objective, such as schedule, cost, scope, or technical performance. The SPO has defined an “issue” as a risk that has been realized (i.e., a negative event or condition that currently exists or has a 100 percent future certainty of occurring). According to SBInet’s risk management process, anyone involved in the program can identify a risk. Identified risks are submitted to the Risk Management Team, which includes both the SPO Risk Manager and Boeing Risk Manager, for preliminary review. If approved for further consideration, the risk is entered into the Boeing-owned risk database, which is accessible by SPO and Boeing officials. These risks are subsequently reviewed by the Joint Risk Review Board, which is composed of approximately 20 SPO and Boeing officials. If a risk is approved, it is to be assigned an owner who will be responsible for managing its mitigation. Test management involves planning, conducting, documenting, and reporting on a series of test events that first focus on the performance of individual system components, then on the performance of integrated system components, followed by system-level tests that focus on whether the system (or major system increments) are acceptable and operationally suitable. For SBInet, the program’s formal test events fall into two major phases: developmental test and evaluation (DT&E) and operational test and evaluation (OT&E). DT&E is to verify and validate the systems engineering process and provide confidence that the system design solution satisfies the desired capabilities. It consists of four test events— integration testing, component qualification testing, system qualification testing, and system acceptance testing. OT&E is to ensure that the system is effective and suitable in its operational environment with respect to key considerations, including reliability, availability, compatibility, and maintainability. SBInet defines three operational testing events—User Assessment, Operational Test, and Follow-on Operational Test and Evaluation. (See table 3 for each test event’s purpose, responsible parties, and location.) As of December 2009, the program was in the Project Laydown Activity. Specifically, the SBInet CDR was completed in October 2008, and the Block 1 design has been configured and is being tested and readied for deployment to the Tucson Border Patrol Station (TUS-1), and then to the Ajo Border Patrol Station (AJO-1), both of which are located in the CBP’s Tucson Sector of the southwest border. More specifically, the Deployment Design Review covering both TUS-1 and AJO-1 was completed in June 2007, the TUS-1 Deployment Readiness Review was completed in April 2009, and the AJO-1 Deployment Readiness Review was completed in December 2009. Together, these two deployments are to cover 53 miles of the 1,989-mile-long southern border (see fig. 2). Once a deployed configuration has been accepted and is operational, the program will be in the Sustainment Activity. As of November 2009, program documentation showed that TUS-1 and AJO-1 were to be accepted in January and July 2010, respectively. However, the SBI Executive Director told us in December 2009 that these and other SBInet scheduled milestones are currently being re-evaluated. As of February 2010, TUS-1 and AJO-1 were proposed to be accepted in September 2010 and November 2010, respectively. However, this proposed schedule has yet to be approved by CBP. Since 2007, we have identified a range of management weaknesses and risks facing SBInet and we have made a number of recommendations to address them that DHS has largely agreed with and, to varying degrees, taken actions to address. For example, in February 2007, we reported that DHS had not fully defined activities, milestones, and costs for implementing the program; demonstrated how program activities would further the strategic goals and objectives of SBI; and reported on the costs incurred, activities, and progress made by the program in obtaining operational control of the border. Further, we reported that the program’s schedule contained a high level of concurrency among related tasks and activities, which introduced considerable risk. Accordingly, we recommended that DHS define explicit and measurable commitments relative to, among other things, program capabilities, schedules, and costs, and re-examine the level of concurrency in the schedule and adjust the acquisition strategy appropriately. We are currently reviewing DHS’s Fiscal Year 2010 SBI Expenditure Plan to, among other things, determine the status of DHS’s actions to address these recommendations. In October 2007, we testified that DHS had fallen behind in implementing Project 28 due to software integration problems, although program officials stated at that time that Boeing was making progress in correcting the problems. Shortly thereafter, we testified that while DHS had accepted Project 28, it did not fully meet expectations. To benefit from this experience, program officials stated that they identified a number of lessons learned, including the need to increase input from Border Patrol agents and other users in SBInet design and development. In September 2008, we reported that important aspects of SBInet were ambiguous and in a continued state of flux, making it unclear and uncertain what technological capabilities were to be delivered when. We concluded that the absence of clarity and stability in key aspects of SBInet impaired the ability of Congress to oversee the program and hold DHS accountable for results, and hampered DHS’s ability to measure program performance. As a result, we recommended that the SPO establish and baseline the specific program commitments, including the specific system functional and performance capabilities that are to be deployed, and when they were to be deployed. Also, we reported that the SPO had not effectively performed key requirements definition and management practices. For example, it had not ensured that different levels of requirements were properly aligned, as evidenced by our analysis of a random probability sample of component requirements showing that a large percentage of them could not be traced to higher-level system and operational requirements. Also, some of SBInet’s operational requirements, which are the basis for all lower-level requirements, were found by an independent DHS review to be unaffordable and unverifiable, thus casting doubt on the quality of lower- level requirements that were derived from them. As a result of these limitations, we concluded that the risk of SBInet not meeting mission needs and performing as intended was increased, as were the chances of the program needing expensive and time-consuming system rework. We recommended that the SPO implement key requirements development and management practices to include (1) baselining requirements before system design and development efforts begin; (2) analyzing requirements prior to being baselined to ensure that that they are complete, achievable, and verifiable; and (3) tracing requirements to higher-level requirements, lower-level requirements, and test cases. We also reported that SBInet testing was not being effectively managed. For example, the SPO had not tested the individual system components to be deployed to the initial deployment locations, even though the contractor had initiated integration testing of these components with other system components and subsystems. Further, while a test management strategy was drafted, it had not been finalized and approved, and it did not contain, among other things, a clear definition of testing roles and responsibilities; a high-level master schedule of SBInet test activities; or sufficient detail to effectively guide project-specific test planning, such as milestones and metrics for specific project testing. We concluded that without a structured and disciplined approach to testing, the risk that SBInet would not satisfy user needs and operational requirements, thus requiring system rework, was increased. We recommended that the SPO (1) develop and document test practices prior to the start of testing; (2) conduct appropriate component-level testing prior to integrating system components; and (3) approve a test management strategy that, at a minimum, includes a relevant testing schedule, establishes accountability for testing activities by clearly defining testing roles and responsibilities, and includes sufficient detail to allow for testing and oversight activities to be clearly understood and communicated to test stakeholders. In light of these weaknesses and risks, we further recommended that (1) the risks associated with planned SBInet acquisition, development, testing, and deployment activities be immediately assessed and (2) the results, including proposed alternative courses of action for mitigating the risks, be provided to the CBP Commissioner and DHS’s senior leadership, as well as to the department’s congressional authorization and appropriations committees. DHS agreed with all but one of the recommendations in our September 2008 report. The status of DHS’s efforts to implement these recommendations is summarized later in this report and discussed in detail in appendix III. In September 2009, we reported that SBInet had continued to experience delays. For example, deployment to the entire southwest border had slipped from early 2009 to 2016, and final acceptance of TUS-1 and AJO-1 had slipped from November 2009 and March 2010 to December 2009 and June 2010, respectively. We did not make additional SBInet recommendations at that time. Most recently, we reported in January 2010 that SBInet testing was not being effectively managed. Specifically, while DHS’s approach to testing appropriately consisted of a series of progressively expansive developmental and operational test events, the test plans, cases, and procedures for the most recent test events were not defined in accordance with important elements of relevant guidance. For example, none of the plans adequately described testing risks and only two of the plans included quality assurance procedures for making changes to test plans during their execution. Further, a relatively small percentage of test cases for these events described the test inputs and the test environment (e.g., facilities and personnel to be used), both of which are essential to effective testing. In addition, a large percentage of the test cases for these events were changed extemporaneously during execution. While some of the changes were minor, others were more significant, such as re-writing entire procedures and changing the mapping of requirements to test cases. Moreover, these changes to procedures were not made in accordance with documented quality assurance processes, but rather were based on an undocumented understanding that program officials said they established with the contractor. Compounding the number and significance of changes were questions raised by the SPO and a support contractor about the appropriateness of some changes. For example, the SPO wrote to the prime contractor that changes made to system qualification test cases and procedures appeared to be designed to pass the test instead of being designed to qualify the system. Further, we reported that from March 2008 through July 2009, that about 1,300 SBInet defects had been found, with the number of new defects identified during this time generally increasing faster than the number being fixed—a trend that is not indicative of a system that is maturing and ready for deployment. While the full magnitude of these unresolved defects was unclear because the majority were not assigned a priority for resolution, some of the defects that had been found were significant. Although DHS reported that these defects had been resolved, they had nevertheless caused program delays, and related problems had surfaced that continued to impact the program’s schedule. Further, an early user assessment of SBInet had raised significant concerns about the performance of key system components and the system’s operational suitability. In light of these weaknesses, we recommended that DHS (1) revise the program’s overall test plan to include (a) explicit criteria for assessing the quality of test documentation, including test plans and test cases, and (b) a process for analyzing, prioritizing, and resolving program defects; (2) ensure that test schedules, plans, cases, and procedures are adequately reviewed and approved consistent with the revised test plan; (3) ensure that sufficient time is provided for reviewing and approving test documents prior to beginning a given test event; and (4) triage the full inventory of unresolved system problems, including identified user concerns, and periodically report on their status to CBP and DHS leadership. DHS fully agreed with the last three recommendations and partially agreed with the first. For Block 1, functional and performance capabilities and the number of geographic locations to which they are to be deployed have continued to decrease. We reported in September 2008 that the capabilities and deployment locations of SBInet were decreasing. Since that time, the number of component-level requirements to be deployed to TUS-1 and AJO-1 has decreased by about 32 percent. In addition, the number of sectors that the system is to be deployed to has been reduced from three to two, and the stringency of the system performance measures that the deployed system is to meet has been reduced. According to program officials, the decreases are due to poorly defined requirements and limitations in the capabilities of commercially available system components. The result will be a deployed and operational system that, like Project 28, does not live up to user expectations and provides less mission support than was envisioned. Since our September 2008 report, the number of requirements that Block 1 is to meet has dropped considerably. Specifically, in September 2008, DHS directed the SPO to identify the operational requirements to be allocated to Block 1. In response, 106 operational requirements were established, such as providing border surveillance, facilitating decision support and situational awareness, enabling communications, providing operational status and readiness metrics, and enabling system audits. Of the 106 requirements, 69 were to be included in the initial technology deployments planned for TUS-1 and AJO-1. The remaining 37 were to be addressed in future blocks. To implement the 69 operational requirements, the SPO developed a system-level requirement specification and 12 component-level requirements specifications. More specifically, as part of CDR, which concluded in October 2008, the 69 operational requirements for TUS-1 and AJO-1 were associated with 97 system-level requirements. Also during CDR, the 97 system-level requirements were associated with 1,286 component-level requirements. However, between October 2008 and September 2009, the number of component-level requirements was reduced from 1,286 to 880, or by about 32 percent. First, 281 requirements related to the specifications for three components—communications, network operations, and network security—were eliminated, leaving 1,005 baselined requirements. Examples of the 281 requirements that were eliminated include the following: the failure in a single piece of hardware or software would not affect mission critical functions which include detection and resolution of border incursions; the failure of a Network Operations Center/Security Operations Center (NOC/SOC) workstation would not prevent the system from operating; and the failure of one network power supply would be compensated for by additional backup power supplies. In addition, another 125 component-level requirements were granted “waivers” or “deviations,” further reducing the number of Block 1 requirements to be deployed to TUS-1 and AJO-1 to 880 (as of September 2009). For example, the unattended ground sensors were required to differentiate between human, vehicle, and animal targets. However, because the sensors that are to be deployed to TUS-1 and AJO-1 are only able to identify potential vehicles and are not able to differentiate between humans and animals, this requirement was deviated. Similarly, the radar was required to classify targets as humans or vehicles. However, the radar also cannot differentiate between classes of targets (e.g., humans and vehicles). As a result, the requirement in the radar specification was also deviated. Figure 3 summarizes the roughly 32 percent drop in requirements that has occurred over the last 15 months. According to program officials, component requirements were eliminated because they were either poorly written or duplicative of other requirements, or because the capabilities of commercially available products were limited. In addition, they attributed a significant number of eliminated requirements to a decision to not use a Boeing designed and developed network and instead to use an existing DHS network. To the SPO’s credit, this decision was made to align SBInet with DHS technical standards and to increase the use of COTS products. Compounding this reduction in Block 1 requirements is the likelihood that further requirements deviations and waivers will be granted based on the results of an early user assessment of the system. According to the July 2009 assessment report, certain SBInet components did not meet requirements. For example: The daytime cameras were judged to be operationally ineffective over 5 kilometers for identifying humans, while the requirement is that the cameras be usable to 10 kilometers. The laser range finder was determined to have an effective range of less than 2 kilometers, while the requirement is for the effective range to be 10 kilometers. Program officials told us that many of the limitations found during the user assessment were previously known, and corrective actions were already under way or planned for future technology upgrades to address them. However, the officials also stated they plan to issue a waiver or deviation for the camera and the laser range finder to address the two problems discussed above. In addition, they stated that a previously known limitation of the range of the radar will also need to be addressed through a deviation. In this case, the radar is required to have a range of 20 kilometers, but testing shows a maximum range of 10 kilometers. Beyond the requirement reductions, the geographic locations to receive the initial SBInet capabilities have also been reduced. As of September 2008, the initial Block 1 deployment was to span three border patrol sectors: Tucson, Yuma, and El Paso—a total of 655 miles. According to program officials, deployment to these three areas was the expressed priority of the Border Patrol due to the high threat levels in these areas. However, the Acquisition Program Baseline, which was drafted in December 2008, states that initial deployment will be to just the Tucson and Yuma Sectors, which will cover only 387 miles. According to program officials, deployment to the 268 miles of the El Paso Sector was dropped from the initial deployment in anticipation that the sector will instead receive the capabilities slated for the next SBInet increment (i.e., build). However, plans for the next increment have not been developed. According to the SBI Executive Director in December 2009, the SPO is re-evaluating where and when future deployments of SBInet will occur, and a date for when the revised deployment plans will be available has not been set. System performance measures define how well a system is to perform certain functions, and thus are important in ensuring that the system meets mission and user needs. According to program documentation, failure to meet a key performance parameter can limit the value of the system and render it unsuccessful. In November 2008, the SPO re- evaluated its existing SBInet key performance parameters and determined that SBInet must meet three such parameters: (1) the probability of detecting items of interest between the border and the control boundary; (2) the probability of correctly identifying items of interest as human, conveyance, or others; and (3) the operational availability of the system. According to program officials, subject matter experts and CBP staff concluded that these three were critical to determining whether the system successfully meets mission and user needs. Associated with each parameter is a threshold for acceptable performance. In November 2008, the SPO re-evaluated the thresholds for its three key performance parameters, and it significantly relaxed each of the thresholds: The threshold for detecting items of interest dropped from 95 percent to 70 percent. The threshold for identifying items of interest declined from 95 percent to 70 percent. The threshold for operational availability decreased from 95 to 85 percent. These threshold reductions significantly lower what constitutes acceptable system performance. For example, the system will meet its detection and identification performance requirements if it identifies 70 percent of the 70 percent of items that it detects, thus producing a 49 percent probability of identifying items of interest that cross the border. Furthermore, the reduction in operational availability means that the time that the system can be unavailable for use has gone from 18.25 days per year to 54.75 days per year—or from approximately 2.5 weeks to about 7 weeks per year, excluding downtime for planned maintenance. The SBI Executive Director attributed the performance reductions to program officials’ limited understanding of needed operational capabilities at the time the parameters and thresholds were set. The director further stated that once Block 1 has been deployed and Border Patrol personnel gain experience operating it, decisions will be made as to what additional changes to make to the key performance parameters and associated thresholds. Until then, system performance relative to identifying items of interest and operational availability will remain as described above, which program officials agreed fall short of expectations. The success of a large-scale system acquisition program like SBInet depends in part on having a reliable schedule of when the program’s set of work activities and milestone events will occur, how long they will take, and how they are related to one another. Among other things, a reliable schedule provides a road map for systematic execution of a program and the means by which to gauge progress, identify and address potential problems, and promote accountability. Our research has identified nine best practices associated with developing and maintaining a reliable schedule. These are (1) capturing all activities, (2) sequencing all activities, (3) assigning resources to all activities, (4) establishing the duration of all activities, (5) integrating activities horizontally and vertically, (6) establishing the critical path for all activities, (7) identifying reasonable float between activities, (8) conducting a schedule risk analysis, and (9) updating the schedule using logic and durations. To be considered reliable, a schedule should meet all nine practices. The August 2009 SBInet integrated master schedule, which was the most current version available for our review, is not reliable because it substantially complies with only two of the nine key schedule estimating practices and it does not comply with, or only partially or minimally complies with, the remaining seven practices (see table 4 for a summary and app. IV for the detailed results of our analysis of the extent to which the schedule meets each of the nine practices). Examples of practices that were either substantially, partially, minimally, or not met are provided below. Without having a reliable schedule, it is unlikely that actual program execution will track to plans, thus increasing the risk of cost, schedule, and performance shortfalls. Capturing all activities: The schedule does not capture all activities as defined in the program’s work breakdown structure or integrated master plan. First, 57 percent of the activities listed in the work breakdown structure (71 of 125) and 67 percent of the activities listed in the integrated master plan (46 of 69) were not in the integrated master schedule. For example, the schedule is missing efforts associated with systems engineering, sensor towers, logistics, system test and evaluation, operations support, and program management. Second, the schedule does not include key activities to be performed by the government. For example, while the schedule shows the final activity in the government process for obtaining an environmental permit in order to construct towers, it does not include the related government activities needed to obtain the permit. Sequencing all activities: The schedule identifies virtually all of the predecessor and successor activities. Specifically, only 9 of 1,512 activities (less than 1 percent) were missing predecessor links. Further, only 21 of 1,512 activities (about 1 percent) had improper predecessor and successor links. While the number of unlinked activities is very small, not linking a given activity can cause problems because changes to the durations of these activities will not accurately change the dates for related activities. More importantly, 403 of 1,512 activities (about 27 percent) are constrained by “start no earlier than” dates, which is significant because it means that these activities are not allowed to start earlier, even if their respective predecessor activities have been completed. Establishing the critical path for all activities: The schedule does not reflect a valid critical path for several reasons. First, and as noted above, it is missing government and contractor activities, and is thus not complete. Second, as mentioned above, the schedule is missing some predecessor links, and improperly establishes other predecessor and successor links. Problems with the critical path were recognized by the Defense Contract Management Agency as early as November 2008, when it reported that the contractor could not develop a true critical path that incorporates all program elements. Conducting a schedule risk analysis: An analysis of the schedule’s vulnerability to slippages in the completion of tasks has not been performed. Further, program officials described the schedule as not sufficiently stable to benefit from a risk analysis. Reasons that these practices were not fully met vary and include the program’s use of Boeing to develop and maintain the integrated master schedule, even though Boeing’s processes and tools do not allow it to include in the schedule work that it does not have under contract to perform, as well as the constantly changing nature of the work to be performed. Without a reliable schedule that includes all activities necessary to complete Block 1, the SPO cannot accurately determine the amount of time required to complete Block 1, and it does not have an adequate basis for guiding the program’s execution and measuring progress, thus reducing the likelihood of meeting the program’s completion dates. Collectively, the weaknesses in meeting the nine key practices for the program’s integrated master schedule increase the risk of schedule slippages and related cost overruns and make meaningful measurement and oversight of program status and progress, as well as accountability for results, difficult to achieve. In the case of Block 1, this risk has continued to be realized. For example, the dates presented at the December 2008 to November 2009 monthly program review meetings for government acceptance of Block 1 at TUS-1 and AJO-1 showed a pattern of delays, with TUS-1 and AJO-1 acceptance slipping by 4 months and 7 months, respectively. (See fig. 4.) Moreover, these slipped dates have not been met, and the SBI Executive Director told us in December 2009 that when Block 1 will be accepted and operational continues to change and remains uncertain. As of February 2010, TUS-1 and AJO-1 were proposed to be accepted in September 2010 and November 2010, respectively; however, this proposed schedule has yet to be approved by CBP. As we have previously reported, the decision to invest in any system or major system increment should be based on reliable estimates of costs and meaningful forecasts of quantifiable and qualitative benefits over the system’s useful life. For Block 1, DHS does not have a complete and current life cycle cost estimate. Moreover, it has not projected the mission benefits expected to accrue from Block 1 over the same life cycle. According to program officials, it is premature to project such benefits given the uncertainties surrounding the role that Block 1 will ultimately play in overall border control operations. Without a meaningful understanding of SBInet costs and benefits, DHS lacks an adequate basis for knowing whether the initial system solution on which it plans to spend at least $1.3 billion is cost-effective. Moreover, DHS and congressional decision makers continue to lack a basis for deciding what investment in SBInet beyond this initial capability is economically prudent. A reliable cost estimate is critical to successfully delivering large-scale information technology (IT) systems, like SBInet, as well as major system increments, like Block 1. Such an estimate provides the basis for informed investment decision making, realistic budget formulation, meaningful progress measurement, and accountability for results. According to the Office of Management and Budget (OMB), federal agencies must maintain current and well-documented estimates of program costs, and these estimates must encompass the program’s full life cycle. Among o things, OMB states that a reliable life cycle cost estimate is critical to the capital planning and investment control process. Without such an estimate, agencies are at increased risk of making poorly informed investment decisions and securing insufficient resources to effectively execute defined program plans and schedules, and thus experiencing program cost, schedule, and performance shortfalls. Our research has identified a number of practices that form the basis of effective program cost estimating. These practices are aligned with four characteristics of a reliable cost estimate. To be reliable, a cost estimate should possess all four characteristics, each of which is summarized below. (See app. V for the key practices associated with each characteristic, including a description of each practice and our analysis of the extent to which the SBInet cost estimate meets each practice.) Comprehensive: The cost estimate should include all government and contractor costs over the program’s full life cycle, from program inception through design, development, deployment, and operation and maintenance to retirement. It should also provide sufficient detail to ensure that cost elements are neither omitted nor double counted, and it should document all cost-influencing ground rules and assumptions. Well-documented: The cost estimate should capture in writing things such as the source and significance of the data used, the calculations performed and their results, and the rationale for choosing a particular estimating method or reference. Moreover, this information should be captured in such a way that the data used to derive the estimate can be traced back to, and verified against, their sources. Finally, the cost estimate should be reviewed and accepted by management to demonstrate confidence in the estimating process and the estimate. Accurate: The cost estimate should not be overly conservative or optimistic, and should be, among other things, based on an assessment of most likely costs, adjusted properly for inflation, and validated against an independent cost estimate. In addition, the estimate should be updated regularly to reflect material changes in the program and actual cost experience on the program. Further, steps should be taken to minimize mathematical mistakes and their significance and to ground the estimate in documented assumptions and a historical record of actual cost and schedule experiences on comparable programs. Credible: The cost estimate should discuss any limitations in the analysis due to uncertainty or biases surrounding the data and assumptions. Major assumptions should be varied and other outcomes computed to determine how sensitive the estimate is to changes in the assumptions. Risk and uncertainty inherent in the estimate should be assessed and disclosed. Further, the estimate should be properly verified by, for example, comparing the results with one or more independent cost estimates. The SPO’s Block 1 life cycle cost estimate includes the costs to complete those portions of Block 1 that are to be deployed to the Tucson and Yuma Sectors, which together cover about 387 miles of the southwest border (53 miles associated with both TUS-1 and AJO-1, which are in the Tucson Sector, as well as an additional 209 miles in the Tucson Sector and 125 miles in the Yuma Sector). More specifically, this estimate, which is dated December 2008, shows the minimum cost to acquire and deploy Block 1 to the Tucson and Yuma Sectors to be $758 million, with another $544 million to operate and maintain this initial capability, for a total of about $1.3 billion. However, this Block 1 cost estimate is not reliable because it does not sufficiently possess any of the above four characteristics. Specifically: The estimate is not comprehensive because it does not include all relevant costs, such as support contractor costs and costs associated with system and software design, development, and testing activities that were incurred prior to December 2008. Moreover, it includes only 1 year of operations and maintenance costs rather than these costs over the expected life of the system. Further, the estimate does not document and assess the risks associated with all ground rules and assumptions, such as known budget constraints, staff and schedule variations, and technology maturity. The estimate is not well-documented because, among other things, the sources and significance of key data have not been captured and the quality of key data, such as historical costs and actual cost reports, is limited. For example, instead of identifying and relying on historical costs from similar programs, the estimate was based, in part, on engineering judgment. Further, the calculations performed and their results, while largely documented, did not document contingency reserves and the associated confidence level for the risk-adjusted cost estimate. Also, as noted above, assumptions integral to the estimate, such as those for budget constraints, and staff and schedule variances, were not documented. The estimate is not accurate because it was not, for example, validated against an independent cost estimate. Further, it has not been updated to reflect material program changes since the estimate was developed. For example, the estimate does not reflect development and testing activities that were added since the estimate was approved to correct problems discovered during testing. Further, the estimate has not been updated with actual cost data available from the contractor. The estimate is not credible because its inherent risk and uncertainty were not adequately assessed, and thus the estimate does not address limitations associated with the assumptions used to create it. For example, the risks associated with software development were not examined, even though such risks were known to exist. In fact, the only risks considered were those associated with uncertainty in labor rates and hardware costs, and instead of being based on historical quantitative analyses, these risks were expressed by assigning them arbitrary positive or negative percentages. In addition, and for the reasons mentioned above, the estimate did not specify contingency reserve amounts to mitigate known risks, and an independent cost estimate was not used to verify the estimate. Program officials attributed these limitations in the cost estimate’s comprehensiveness, documentation, accuracy, and credibility to a range of factors, including competing program office priorities and the department’s limited cost estimating capabilities. For example, program officials stated that the DHS Cost Analysis Division did not prepare an independent estimate because it did not have, among other things, the people and tools needed to do so. In this regard, this division reports that as of July 2009, DHS only had eight cost estimators (six in headquarters and two in program offices) for departmentwide needs. Because the estimate does not adequately display these four characteristics, it does not provide a reliable picture of Block 1’s life cycle costs. As a result, DHS does not have complete information on which to base informed investment decision making, understand system affordability, and develop justifiable budget requests. Moreover, the Block 1 cost estimate does not provide a meaningful standard against which to measure cost performance, is likely to show large cost overruns, and does not provide a good basis for informing future cost estimates. The Clinger-Cohen Act of 1996 and OMB guidance emphasize the need to ensure that IT investments actually produce tangible, observable improvements in mission performance. As we have previously reported,to accomplish this, benefits that are expected to accrue from investments need to be forecast and their actual accrual needs to be measured. In the case of Block 1, however, expected mission benefits have not been defined and measured. For example, while program officials told us that system benefits are documented in the SBInet Mission Need Statement dated October 2006, this document does not include either quantifiable or qualitative benefits. Rather, it provides general statements such as “the lack of a program such as SBInet increases the risks of terrorist threats and other illegal activities.” Congress recognized the importance of having a meaningful understanding of SBInet’s value proposition when it required DHS in 2008 to provide in its Border Security, Fencing, Infrastructure, and Technology Fiscal Year 2009 Expenditure Plan a description of how the department’s planned expenditure of funds would be linked to expected SBI mission benefits and outcomes. However, we reported that the plan DHS submitted only described links among planned activities, expenditures, and outputs. It did not link these to outcomes associated with improving operational control of the border. More recently, we reported that while SBI technology and physical infrastructure, along with increases in Border Patrol personnel, are intended to allow DHS to gain effective control of U.S. borders, CBP’s measures of effective control are limited. Thus, we recommended that CBP conduct a cost-effectiveness evaluation of the SBI tactical infrastructure’s impact on effective control of the border, and DHS agreed with this recommendation. Further, program officials noted that uncertainty about SBInet’s role in and contribution to effective control of the border makes it difficult to forecast SBInet benefits. Rather, they said that operational experience with Block 1 is first needed in order to estimate such benefits. While we recognize the value of operationally evaluating an early, prototypical version of a system in order to better understand, among other things, its mission impact, and thus to better inform investment decisions, we question the basis for spending in excess of a billion dollars to gain this operational experience. Without a meaningful understanding and disclosure of SBInet benefits, to include the extent to which expected mission benefits are known and unknown, DHS did not have the necessary basis for justifying and making informed decisions about its sizeable investment in Block 1, as well as for measuring the extent to which the deployed Block 1 will actually deliver mission value commensurate with costs. Successful management of large IT programs, like SBInet, depends in large part on having clearly defined and consistently applied life cycle management processes. Our evaluations and research show that applying system life cycle management rigor and discipline increases the likelihood of delivering expected capabilities on time and within budget. In other words, the quality of a system is greatly influenced by the quality of the processes used to manage it. To the SPO’s credit, it has defined key life cycle management processes that are largely consistent with relevant guidance and associated best practices. However, it has not effectively implemented these processes. Specifically, it has not consistently followed its systems engineering plan, requirements development and management plan, and risk management approach. Reasons cited by program officials for not implementing these processes include the decision by program officials to rely on contract task order requirements that were developed prior to the systems engineering plan, and competing SPO priorities, including meeting an aggressive deployment schedule. Until the SPO consistently implements these processes, it will remain challenged in its ability to successfully deliver SBInet. Each of the steps in a life cycle management approach serves an important purpose and has inherent dependencies with one or more other steps. In addition, the steps used in the approach should be clearly defined and repeatable. Thus, if a life cycle management step is omitted or not performed effectively, later steps can be affected, potentially resulting in costly and time-consuming rework. For example, a system can be effectively tested to determine whether it meets requirements only if these requirements have been completely and correctly defined. To the extent that interdependent life cycle management steps or activities are not effectively performed, or are performed concurrently, a program will be at increased risk of cost, schedule, and performance shortfalls. The SPO’s Systems Engineering Plan documents its life cycle management approach for SBInet definition, development, testing, deployment, and sustainment. As noted earlier, we reported in September 2008 on a number of weaknesses in the SBInet life cycle management approach and made recommendations to improve it.In response, the SPO revised its Systems Engineering Plan in November 2008, and to its credit, the revised plan is largely consistent with DHS and other relevant guidance. For example, it defines a number of key life cycle milestone or “gate” reviews that are important in managing the program, such as initial planning reviews, requirements reviews, system design reviews, and test reviews. In addition, the revised plan requires most of the key artifacts and program documents that DHS guidance identified as important to each gate review, such as a concept of operations, an operational requirements document, a deployment plan, a risk management plan, a life cycle cost estimate, requirements documentation, and test plans. To illustrate, the plan identifies CDR as the important milestone event where a design baseline is to be established, requirements traceability is to be demonstrated, and verification and testing plans are to be in place. However, the Systems Engineering Plan does not address the content of the key artifacts that it requires. For example, it does not provide a sample document or content template for the concept of operations, the operational requirements document, or the deployment plan. As a result, the likelihood of the developers and reviewers of these artifacts sharing and applying a consistent and repeatable understanding of their content is minimized, thus increasing the risk that they will require costly and time- consuming rework. As we recently reported, the absence of content guidance or criteria for assessing the quality of the prime contractor’s test- related deliverables was a primary reason that limitations were found in test plans. Beyond the content of the Systems Engineering Plan, the SPO has not consistently implemented key system life cycle management activities for Block 1 that are identified by the plan. For example, the following artifacts were not reviewed or considered during the CDR that concluded in October 2008: Security Test Plan, which describes the process for assessing the robustness of the system’s security capabilities (e.g., physical facilities, hardware, software, and communications) in light of their vulnerabilities. Quality Plan, which documents the process for verifying that the contractor deliverables satisfy contractual requirements and meet or exceed quality standards. Test Plan, which describes the overall process for the test and evaluation, including the development of detailed test event plans, test procedure instructions, data collection methods, and evaluation reports. Block Training Plan, which outlines the objectives, strategy, and curriculum for training that are specific to each block, including the activities needed to support the development of training materials, coordination of training schedules, and reservation of personnel and facilities. Block Maintenance Plan, which lays out the policies and concepts to be used to maintain the operational availability of hardware and software. To the SPO’s credit, it reviewed and considered all but one of the key artifacts for the TUS-1 Deployment Readiness Review that concluded in April 2009. The omitted artifact was the Site Specific Training Plan, which outlines the objectives, strategy, and curriculum for training that are specific to each geographic site, including the activities needed to support the development of training materials, coordination of training schedules, and reservation of personnel and facilities. According to program officials, even though the Systems Engineering Plan cites the training plan as integral to the Deployment Readiness Review, this training plan is to be reviewed as part of a later milestone review. Program officials stated that a reason that the artifacts were omitted is that they have yet to begin implementing the Systems Engineering Plan. Instead, they have, for example, enforced the CDR requirements in the System Task Order that Boeing was contractually required to follow. To address this, they added that the SPO intends to bring the task orders into alignment with the Systems Engineering Plan, but they did not specify when this would occur. As a result, key milestone reviews and decisions have not always benefited from life cycle management documentation that the SPO has determined to be relevant and important to these milestone events. More specifically, the Systems Engineering Plan states that the gate reviews are intended to identify and address problems early and thus minimize future costs and avoid subsequent operational issues. By not fully informing these gate reviews and associated decisions with key life cycle management documentation, the risk of Block 1 design and deployment problems is increased, as is the likelihood of expensive and time-consuming system rework. Well-defined and managed requirements are essential to successfully acquiring large-scale systems, like SBInet. According to relevant guidance,effective requirements development and management include establishing a baseline set of requirements that are complete, unambiguous, and testable. It also includes ensuring that system-level requirements are traceable backwards to higher-level operational requirements and forward to design requirements and the methods used to verify that they are met. Among other things, this guidance states that such traceability should be used to verify that higher-level requirements have been met by first verifying that the corresponding lower-level requirements have been satisfied. However, not all Block 1 component requirements were sufficiently defined at the time that they were baselined, and operational requirements continue to be unclear and unverifiable. In addition, while requirements are now largely traceable backwards to operational requirements and forward to design requirements and verification methods, this traceability has not been used until recently to verify that higher-level requirements have been satisfied. Program officials attributed these limitations to competing SPO priorities, including aggressive schedule demands. Without ensuring that requirements are adequately defined and managed, the risks of Block 1 not performing as intended, not meeting user needs, and costing more and taking longer than necessary to complete are increased. The SBInet Requirements Development and Management Plan states that a baseline set of requirements should be established by the time of the CDR and that these requirements should be complete, unambiguous, and testable. Further, the program’s Systems Engineering Plan states that the CDR is intended to establish the final allocated requirements baseline and ensure that system development, integration, and testing can begin. To the SPO’s credit, it established a baseline set of requirements for the TUS-1 and AJO-1 system deployments at CDR. However, the baseline requirements associated with the NOC/SOC were not adequately defined at this time, as evidenced by the fact that they were significantly changed 2 months later. Specifically, about 33 percent of the component-level requirements and 43 percent of the design specifications for NOC/SOC were eliminated from the Block 1 design after CDR. Program officials attributed these changes to the NOC/SOC requirements to (1) requirements that were duplicative of another specification, and thus were redundant; (2) requirements that were poorly written, and thus did not accurately describe needs; and (3) requirements that related to the security of a system that SBInet would not interface with, and thus were unnecessary. According to program officials, the NOC/SOC was a late addition to the program, and at the time of CDR, the component’s requirements were known to need additional work. Further, they stated that while the requirements were not adequately baselined at the time of CDR, the interface requirements were understood well enough to begin system development. Without properly baselined requirements, system testing challenges are likely to occur, and the risk of system performance shortfalls, and thus cost and schedule problems, are increased. In this regard, we recently reported that NOC/SOC testing was hampered by incorrect mapping of requirements to test cases, failure to test all of the requirements, and significant changes to test cases made during the testing events. This occurred in part because ambiguities in requirements caused testers to rewrite test steps during execution based on interpretations of what they thought the requirements meant, and they required the SPO to conduct multiple events to test NOC/SOC requirements. According to the SBInet Requirements Development and Management Plan, requirements should be achievable, verifiable, unambiguous, and complete. To ensure this, the plan contains a checklist that is to be used in verifying that each requirement possesses these characteristics. However, not all of the SBInet operational requirements that pertain to Block 1 possess these characteristics. Specifically, a November 2007 DHS assessmentdetermined that 19 operational requirements, which form the basis for the lower-level requirements used to design and build the system, were not complete, achievable, verifiable, or affordable. Further, our analysis of the 12 Block 1 requirements that are included in these 19 operational requirements shows that they have not been changed to respond to the DHS findings. According to the assessment, 6 of the 12 were unaffordable and unverifiable, and the other 6 were incomplete. Examples of these requirements and DHS’s assessment follow: A requirement that the system should provide for complete coverage of the border was determined to be unverifiable and unaffordable because defining what complete coverage meant was too difficult and ensuring complete coverage, given the varied and difficult terrain along the border, was cost prohibitive. A requirement that the system should be able to detect and identify multiple simultaneous events with different individuals or groups was determined to be incomplete because the requirement did not specify the number of events to be included, the scope of the area to be covered, and the system components to be involved. As we have previously reported,these limitations in the operational requirements affect the quality of system, component, and software requirements. This is significant because, as of September 2009, these 12 operational requirements were associated with 16 system-level requirements, which were associated with 152 component-level requirements, or approximately 15 percent of the total number of component-level requirements. According to program officials, these requirements were not updated because the SPO planned to resolve the problems through the testing process. However, we recently reported that requirements limitations actually contributed to testing challenges. Specifically, we reported that about 71 percent of combined system qualification and component qualification test cases had to be rewritten extemporaneously during test execution. According to program officials, this was partly due to ambiguities in requirements, which led to differing opinions among the program and contractor staff about what was required to effectively demonstrate that the requirements were met. Further, program officials stated that a number of requirements have been granted deviations or waivers because they were poorly written. For example: A requirement for camera equipment to “conform to the capabilities and limitations of the users to operate and maintain it in its operational environment and not exceed user capabilities” was determined to be subjective and unquantifiable and thus was waived. A requirement for the tower design to accommodate the future integration of components “without causing impact on cost, schedule, and/or technical performance” was determined to have no specific criteria to objectively demonstrate closure decision and thus was also waived. As a result of these deviations and waivers, the system capabilities that are to be delivered as part of Block 1 will be less than originally envisioned. Consistent with relevant guidance,the SBInet Requirements Development and Management Plan provides for maintaining bidirectional traceability from high-level operational requirements through detailed low- level requirements to test plans. More specifically, it states that operational requirements should trace to system requirements, which in turn should trace to component requirements that trace to design requirements, which further trace to v erification methods. Since September 2008, the SPO has worked with Boeing to manually review each requirement and develop a bidirectional traceability matrix. Further, it has used this matrix to update the DOORS requirements database. Our analysis of the traceability of a random sample of Block 1 component-level requirements in the DOORS database shows that they are largely traceable backwards to operational requirements and forward to design requirements and verification methods. For example, we estimate that only 5 percent (with a 95 percent confidence interval between 1 and 14 percent) of a random sample of component requirements cannot be traced to the system requirements and then to the operational requirements. In addition, we estimate that 0 percent (with a 95 percent confidence interval between 0 and 5 percent) of the component requirements in the same sample do not trace to a verification method. (See table 5 for the results of our analysis along with the associated confidence intervals.) By establishing this traceability, the SPO is better positioned to know the extent to which the acquired and deployed system can meet operational requirements. However, the SPO has not used its requirements traceability in closing higher-level component requirements. According to relevant guidance,all lower-level requirements (i.e., children) should be closed in order to sufficiently demonstrate that the higher-level requirements (i.e., parents) have been met. Consistent with this guidance, the SBInet Requirements Development and Management Plan states that ensuring the traceability of requirements from children to their parents is an integral part of ensuring that testing is properly planned and conducted. However, 4 of 8 higher- level component requirements (parents) in the above cited random sample of system-level requirements were closed regardless of whether their corresponding lower-level design requirements (children) had been closed. According to program officials, this is because their standard practice in closing parent requirements, until recently, was to sometimes close them before their children were closed. Further, they said that this was consistent with their verification criteria for closing higher-level requirements, which did not require closure of the corresponding lower- level requirements. They also said that the reason parent verification criteria did not always reflect children verification criteria was that traceability was still being established when the verification criteria were developed and thus parent-child relationships were not always available to inform the closure criteria. Furthermore, they stated that schedule demands did not permit them to ensure that the verification criteria for requirements were aligned with the traceability information. After we shared our findings on parent requirement closure with the SPO, officials stated that they had changed their approach and will no longer close parent requirements without ensuring that all of the children requirements have first been closed. However, they did not commit to reviewing previously closed parents to determine that all of the children were closed. Without fully ensuring traceability among requirements verification methods, the risks of delivering a system solution that does not fully meet user needs or perform as intended, and thus requires additional time and resources to deliver, are increased. Risk management is a continuous, forward-looking process that effectively anticipates and mitigates risks that may have a critical impact on a program’s success. In 2008, the SPO documented a risk management approach that largely complies with relevant guidance. However, it has not effectively implemented this approach for all risks. Moreover, available documentation does not demonstrate that significant risks were disclosed to DHS and congressional decision makers in a timely fashion, as we previously recommended and, while risk disclosure to DHS leadership has recently improved, not all risks have been formally captured and thus shared. As a result, the program will likely continue to experience actual cost, schedule, and performance shortfalls, and key decision makers will continue to be less than fully informed. According to relevant guidance, effective risk management includes defining a process that, among other things, proactively identifies and analyzes risks on the basis of likelihood of occurrence and impact, assigns ownership, provides for mitigation, and monitors status. To the SPO’s credit, it has developed an approach for risk management that is largely consistent with this guidance. For example, the approach provides for continuously identifying risks throughout the program’s life cycle before they develop into actual problems, including suggested methods for doing so, such as conducting brainstorming sessions and interviewing subject matter experts; analyzing identified risks to determine their likelihood of occurring and assigning responsibility for risks; developing a risk mitigation plan, to include a set of discrete, measurable actions or events which, if successfully accomplished, can avoid or reduce the likelihood of occurrence or severity of impact of the risk; and executing and regularly monitoring risk mitigation plans to ensure that they are implemented and to allow for corrective actions if the desired results are not being achieved. In February 2007, we reported that the program’s risk management approach was in the process of being established. Specifically, we noted that at that time the SPO had drafted a risk management plan, established a governance structure, developed a risk management database, and identified 30 risks. In April 2009, we reported that the DHS Chief Information Officer had certified that this approach provided for the regular identification, evaluation, mitigation, and monitoring of risks throughout the system life cycle, and that it provided for communicating high-risk conditions to DHS investment decision makers. The SPO has not adhered to key aspects of its defined process for managing program risks. In particular, the program’s risk management repository, which is the tool used for capturing and tracking risks and their mitigation, has not included key risks that have been identified by stakeholders. For example, our analysis of reports from the repository showing all open and closed risks from April 2006 to September 2009 shows that the following program risks that have been identified by us and others were not captured in the repository: program cost and schedule risks briefed by the SPO to senior SBInet officials in January 2009, such as unplanned and unauthorized work impacting the credibility of the program cost data, and program costs and schedule plans lacking traceability; program schedule and cost estimate risks identified by the Defense Contract Management Agency prior to March 2009, such as contractor- provided documentation not permitting adequate assessment of critical path accuracy, and cost projections not including all applicable elements and thus lacking credibility; and the risk of the SPO’s heavy reliance on contractors, reported by the DHS Office of Inspector General in June 2009. In addition, the SBI Executive Director told us that the program faces a number of other risks, all but one of which were also not in the repository. These include the lack of well-defined acquisition management processes, staff with the appropriate acquisition expertise, and agreement on key system performance parameters. According to program officials, some of these risks are not in the repository because Boeing is responsible for operating and maintaining the repository, and the specifics surrounding the risks and their mitigation are considered acquisition sensitive, meaning that they should not be shared with Boeing. In this regard, the officials acknowledged that the SPO needs a risk database independent of the contractor to manage these acquisition-sensitive risks. Further, the Risk Manager identified other limitations that have hindered the SPO’s risk management efforts, along with recent actions intended to address them. For example: Risk review meetings were only being held once a month, which was resulting in lost opportunities to mitigate risks that were to be realized as actual problems within 30 days. As a result, the frequency of these meetings has been increased to twice a month. Risk information provided to senior SBI managers at monthly Joint Program Management Review Meetingswas not sufficiently detailed, and thus has been expanded. Changes were being made to the risk management repository by contractor staff without sufficient justification and without the approval of the Joint Risk Review Board. For example, program officials cited an instance in which a risk’s severity was changed from medium to high and no board member knew the reason for the change. As a result, the number of contractor staff authorized to modify data in the repository was reduced. The repository did not include all requisite information for all identified risks. For example, some risks were missing the rationale for the likelihood of occurrence and the potential impact. As a result, the Joint Risk Review Board has adopted a policy of not accepting risks that are missing requisite information. According to the Risk Manager, competing program priorities have resulted in insufficient resources devoted to risk management activities, which has contributed to the state of the SPO’s risk management efforts. However, he added that the SPO is taking steps to improve risk management by revising risk management guidance, implementing a CBP- approved database tool for managing government-only risks, and increasing risk management training and oversight. Until the program’s risk management is strengthened and effectively implemented, the program will continue to be challenged in its ability to forestall cost, schedule, and performance problems. As noted earlier, we recommended in September 2008 that the SPO assess SBInet risks and that the results of these assessments, along with alternative courses of action to address them, be provided to DHS leadership and congressional committees. According to program officials, shortly after receiving our draft report they briefed the DHS Acquisition Review Board on, among other things, SBInet risks. However, the briefing slides used for this meeting do not identify individual risks. Instead, the briefing contains one slide that only identifies “contributing factors” to changes in the program’s schedule, including a reallocation SBInet funding to SBI physical infrastructure, concurrencies and delays that have occurred in testing, and the need for environmental studies. The slides do not identify risks and alternative courses of action to address or mitigate them. In addition, program officials told us that they briefed congressional committees during the fall of 2008 on the program’s status, which they said included disclosure of program risks. However, they did not have any documentation of these briefings to show which committees were briefed, when the briefings occurred, who was present, and what was discussed and disclosed. Further, House Committee on Homeland Security staff stated that while program officials briefed them following our September 2008 report, specific program risks were not disclosed. As a result, it does not appear that either DHS or congressional stakeholders received timely information on risks facing the program at a crucial juncture in its life cycle. To the SPO’s credit, it has recently improved its disclosure of risks facing the program. In particular, the SBI Executive Director briefed the DHS Chief Information Officer in November 2009 on specific program risks. However, this briefing states that the risks presented were the Block 1 risks as captured in the contractor’s risk repository and that additional risks have not yet been formalized (see above discussion about repository limitations). Until all key risks are formally managed and regularly disclosed to department and congressional stakeholders, informed SBInet investment decision making will be constrained. As noted earlier, we reported on a number of SBInet program management weaknesses in September 2008, and we concluded that these weaknesses introduced considerable risk that the program would not meet expectations and would require time-consuming and expensive rework. In summary, these problems included a lack of clarity and certainty surrounding what technological capabilities would be delivered when, and a lack of rigor and discipline around requirements definition and management and test management. To address these problems and thereby reduce the program’s exposure to cost, schedule, and performance risks, we made eight recommendations. DHS concurred with seven of the recommendations and disagreed with one aspect of the remaining one. In summary, the department has not implemented two of the recommendations and has partially implemented the remaining six. See table 6 for a summary and appendix III for a detailed discussion of the status of each recommendation. DHS has yet to demonstrate that its proposed SBInet solution is a cost- effective course of action, and thus whether the considerable time and money being invested to acquire and deploy it is a wise and prudent use of limited resources. Given that the magnitude of the initial investment in SBInet spans more than 3 years of effort and totals hundreds of millions of dollars, coupled with the fact that the scope of the initial system’s capabilities and areas of deployment have continued to shrink, the program is fraught with risk and uncertainty. As a result, the time is now for DHS to thoughtfully reconsider its proposed SBInet solution, and in doing so, to explore ways to both limit its near-term investment in an initial set of operational capabilities and develop and share with congressional decision makers reliable projections of the relative costs and benefits of longer-term alternatives for meeting the mission goals and outcomes that SBInet is intended to advance, or reasons why such information is not available and the uncertainty and risks associated with not having it. Compounding the risks and uncertainty surrounding whether the department is pursuing the right course of action are a number of system life cycle management concerns, including limitations in the integrated master schedule; shortcomings in the documentation available to inform key milestone decisions; and weaknesses in how requirements have been developed and managed, risks have been managed, and tests have been conducted. Collectively, these concerns mean that the program is not employing the kind of acquisition management rigor and discipline needed to reasonably ensure that proposed system capabilities and benefits will be delivered on time and on budget. Because of SBInet’s decreased scope, uncertain timing, unclear costs relative to benefits, and limited life cycle management discipline and rigor, in combination with its size and mission importance, the program represents a risky undertaking. To minimize the program’s exposure to risk, it is imperative for DHS to move swiftly to first ensure that SBInet, as proposed, is the right course of action for meeting its stated border security and immigration management goals and outcomes, and once this is established, for it to move with equal diligence to ensure that it is being managed the right way. To this end, our prior recommendations to DHS relative to SBInet provide for strengthening a number of life cycle management processes, including requirements development and management and test management. Accordingly, we are not making additional recommendations that focus on these processes at this time. To address the considerable risks and uncertainties facing DHS on its SBInet program, we are making 12 recommendations. Specifically, we recommend that the Secretary of Homeland Security direct the Commissioner of U.S. Customs and Border Protection to limit future investment in the program to only work that meets one or both of the following two conditions: (1) is already under contract and supports deployment, acceptance, and operational evaluation of only those Block 1 capabilities (functions and performance levels) that are currently targeted for TUS-1 and AJO-1; or (2) provides the analytical basis for informing a departmental decision as to what, if any, expanded investment in SBInet, both in terms of capabilities (functions and performance) and deployment locations, represents a prudent, responsible, and affordable use of resources for achieving the department’s border security and immigration management mission. With respect to the first condition, we further recommend that the Secretary of Homeland Security direct the Commissioner of U.S. Customs and Border Protection to have the SBI Executive Director make it a program priority to ensure that the integrated master schedule for delivering Block 1 capabilities to TUS-1 and AJO-1 is revised to address the key schedule estimating practices discussed in this report; the currently defined Block 1 requirements, including key performance parameters, are independently validated as complete, verifiable, and affordable and any limitations found in the requirements are addressed; the Systems Engineering Plan is revised to include or reference documentation templates for key artifacts required at milestone gate reviews; all parent requirements that have been closed are supported by evidence of the closure of all corresponding and associated child requirements; and all significant risks facing the program are captured, mitigated, tracked, and periodically reported to DHS and congressional decision makers. Also with respect to the first condition, we reiterate our prior recommendations, as stated in our September 2008 report,relative to establishing program commitments, implementing the Systems Engineering Plan, defining and managing requirements, and testing. With respect to the second condition, we further recommend that the Secretary of Homeland Security direct the Commissioner of U.S. Customs and Border Protection to have the SBI Executive Director make it a program priority to ensure that a life cycle cost estimate for any incremental block of SBInet capabilities that is to include capabilities and cover locations beyond those associated with the TUS-1 and AJO-1 deployments is developed in a manner that reflects the four characteristics of a reliable estimate discussed in this report; a forecast of the qualitative and quantitative benefits to be derived from any such incremental block of SBInet over its useful life, or reasons why such forecasts are not currently possible, are developed and documented; the estimated life cycle costs and benefits and associated net present value of any such incremental block of SBInet capabilities, or reasons why such an economic analysis cannot be performed, are prepared and documented; and the results of these analyses, or the documented reasons why such analyses cannot be provided, are provided to the Commissioner of U.S. Customs and Border Protection and the DHS Acquisition Review Board. Also with respect to this second condition, we recommend that the Secretary of Homeland Security direct the Deputy Secretary of Homeland Security, as the Chair of the DHS Acquisition Review Board, to (1) decide, in consultation with the board and Commissioner of U.S. Customs and Border Protection, what, if any, expanded investment in SBInet, both in terms of capabilities (functions and performance) and deployment locations, represents a prudent, responsible, and affordable use of resources for achieving the department’s border security and immigration management mission; and (2) report the decision, and the basis for it, to the department’s authorization and appropriations committees. In written comments on a draft of this report, signed by the Director, Departmental GAO/Office of Inspector General Liaison, and reprinted in appendix II, DHS stated that it agreed with ten of our recommendations and partially agreed with the remaining two. In this regard, it described ongoing and planned actions to address each, and it provided milestones for completing these actions. In addition, DHS provided technical comments, which we have incorporated in the report as appropriate. In agreeing with our first recommendation, however, DHS commented that the words “one of” were omitted before the two conditions contained in the recommendation. However, this interpretation is not correct. Rather, the intent of our recommendation is to limit future investment on the program to either of the conditions, meaning “one or both of.” Notwithstanding DHS’s interpretation, we believe that actions that it described to address this recommendation, which include freezing funding beyond the initial deployments to TUS-1 and AJO-1 until it completes a comprehensive reassessment of the program that includes an analysis of the cost and mission effectiveness of alternative technologies, is consistent with the intent of the recommendation. Nevertheless, we have slightly modified the recommendation to avoid any further confusion. Regarding its partial agreement with our recommendation for revising the integrated master schedule in accordance with a range of best practices embodied in our cost and schedule estimating guide, DHS acknowledged the merits of employing these practices and stated that it is committed to adopting and deploying them. However, it added that the current contract structure limits its ability to fully implement all the practices prior to completing the TUS-1 and AJO-1 deployments. We understand that program facts and circumstances create practical limitations associated with some of the practices, and believe that DHS’s planned actions are consistent with the intent of our recommendation. Regarding its partial agreement with our recommendation that reiterated a number of the recommendations that we made in a prior report, DHS stated that, while these prior recommendations reflect program management best practices and it continues to make incremental improvements to address each, the scope of the program had narrowed since these recommendations were made. As a result, DHS stated that these prior recommendations were not fully applicable until and unless a decision was made to move the program forward and conduct future deployments beyond TUS-1 and AJO-1. We acknowledge that the facts and circumstances surrounding the program have recently changed and that these changes impact the nature and timing of actions appropriate for implementing them. Moreover, we believe that DHS’s planned actions are consistent with the intent of our recommendation. DHS also commented that it believed that it had implemented two of our recommendations and that these recommendations should be closed. Because closure of our recommendations requires evidentiary validation of described actions, and because many of the actions that DHS described were planned rather than completed, we are not closing any of our recommendations at this time. As part of our recurring review of the status of all of our open recommendations, we will determine if and when the recommendations have been satisfied and thus can be closed. 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 interested congressional committees and other parties. We will also send copies to the Secretary of Homeland Security, the Commissioner of the U.S. Customs and Border Protection, and the Director of the Office of Management and Budget. In addition, this report will be available at no cost on the GAO Web site at http://www.gao.gov. Should you or your offices have any questions on matters discussed in this report, please contact me at (202) 512-3439 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. Our objectives were to determine the extent to which the Department of Homeland Security (DHS) has (1) defined the scope of its proposed Secure Border Initiative Network (SBInet) solution, (2) developed a reliable schedule for delivering this solution, (3) demonstrated the cost- effectiveness of this solution, (4) acquired this solution in accordance with key life cycle management processes, and (5) addressed our recent SBInet recommendations. To accomplish our objectives, we largely focused on the first increment of SBInet, known as Block 1. To determine the extent to which DHS has defined the scope of its proposed system solution, we reviewed key program documentation related to the Block 1 functional and performance requirements and deployment locations, such as the SBInet Acquisition Program Baseline and related acquisition decision memorandums, the Operational Requirements Document, the Operational Requirements Document Elements Applicable to Block 1 System, the Requirements Traceability Matrix, the Requirements Verification Matrix, and the SBInet Block 1 User Assessment. In addition, we compared Block 1 requirements that were baselined in October 2008 as part of the Critical Design Review (CDR) to the Block 1 requirements as defined as of September 2009 to identify what, if any, changes had occurred, and we interviewed program officials as to the reasons for any changes. We also compared the locations, including the miles of border associated with these locations, that were to receive Block 1 as of September 2008 to the locations specified in the program’s March 2009 Acquisition Program Baseline to identify any changes, and we interviewed program officials as to the reasons for any changes. Further, we compared the key performance parameters listed in the Operational Requirements Document, dated March 2007, to the key performance parameters in the program’s Acquisition Program Baseline dated March 2009. To determine the extent to which DHS has developed a reliable schedule for its proposed system solution, we analyzed the SBInet integrated master schedule as of June 2009 against the nine key schedule estimating practices in our Cost Estimating and Assessment Guide. In doing so, we used commercially available software tools to determine whether it, for example, included all critical activities, a logical sequence of activities, and reasonable activity durations. Further, we observed a demonstration of the schedule in June 2009 provided by contractor officials responsible for maintaining the schedule and program officials responsible for overseeing the contractor. In July 2009, we observed a demonstration of the program office’s efforts to reconcile the version of the integrated master schedule that is exported for the government’s use with the version of the schedule that the prime contractor uses to manage the program. During this demonstration, we discussed some of our concerns regarding the integrated master schedule with program officials and we inquired about deviations from some of the key practices. Subsequently, the program office provided us with a revised version of the integrated master schedule as of August 2009, which we analyzed. In doing so, we repeated the above described steps. Further, we characterized the extent to which the revised schedule met each of the practices as either Not Met, Minimally Met, Partially Met, Substantially Met, or Met. In addition, we analyzed changes in the scheduled Block 1 deployment dates presented at each of the monthly program reviews for the 1-year period beginning in December 2008 and ending in November 2009. To determine the extent to which DHS has demonstrated the cost- effectiveness of the proposed solution, we evaluated the reliability of the Block 1 life cycle cost estimate and the definition of expected system benefits, both of which are addressed below. Cost estimate: We first observed a demonstration of the cost model used to develop the estimate, which was provided by the contractor officials who are responsible for maintaining it and the program officials who are responsible for overseeing the contractor. We then analyzed the derivation of the cost estimate relative to 12 key practices associated with four characteristics of a reliable estimate. As defined in our Cost Estimating and Assessment Guide, these four characteristics are comprehensive, well-documented, accurate, and credible, and the practices address, for example, the methodologies, assumptions, and source data used. We also interviewed program officials responsible for the cost estimate about the estimate’s derivation. We then characterized the extent to which each of the four characteristics was met as either Not Met, Minimally Met, Partially Met, Substantially Met, or Met. To do so, we scored each of the 12 individual key practices associated with the four characteristics on a scale of 1-5 (Not Met = 1, Minimally Met = 2, Partially Met = 3, Substantially Met = 4, and Met = 5), and then averaged the individual practice scores associated with a given characteristic to determine the score for that characteristic. Benefits: We interviewed program officials to identify any forecasts of qualitative and quantitative benefits that the system was to produce. In this regard, we were directed to the SBInet Mission Need Statement dated October 2006, which we analyzed. In addition, we reviewed our prior reports on the Secure Border Initiative (SBI), including a report on the SBI expenditure plan, which is a plan that DHS has been required by statute to submit to the House and Senate Appropriations Committees to, among other things, identify expected system benefits. We also interviewed program officials to determine the extent to which the system’s life cycle costs and expected benefits had been analyzed together to economically justify DHS’s proposed investment in SBInet. To determine the extent to which DHS has acquired its proposed system solution in accordance with key life cycle management processes, we focused on three key processes: the system engineering approach, requirements development and management, and risk management, each of which is addressed below. Systems engineering approach: We compared the program’s defined system engineering approach, as defined in the SBInet Systems Program Office’s (SPO) Systems Engineering Plan, to DHS and other relevant guidance. To determine the extent to which the defined systems engineering approach had been implemented, we focused on two major “gates” (i.e., life cycle milestone reviews)—the CDR and the Deployment Readiness Review. For each of these reviews, we compared the package of documentation prepared for and used during these reviews to the program’s defined system engineering approach as specified in the Systems Engineering Plan to determine what, if any, deviations existed. We also interviewed program officials as to the reason for any deviations. Requirements development and management: We compared relevant requirements management documentation, such as the Requirements Development and Management Plan, the Requirements Management Plan, the Configuration and Data Management Plan, the Operational Requirements Document, the system-level requirements specification, and the component-level requirements specifications, to relevant requirements development and management guidance to identify an variances, focusing on the extent to which requirements were properly baselined, adequately defined, and fully traced. With respect to requirements baselining, we compared the component and system requirements as of September 2008, which were approved during the CDR that concluded in October 2008, to the component and system requirements as of November 2008, and identified the number and percentage of requirements changes. We also interviewed program officials as to the reasons for any changes. For requirements definition, weassessed the extent to which operational requirements that were identified as poorly defined in November 2007 had been clarified in the Operatio Requirements Document, Elements Applicable to Block 1 System, dat November 2008. In doing so, we focused on those operational requirements that are associated with Block 1. We also traced these Blo 1 operational requirements to the lower-level system requirements (i.e., system and component requirements) to determine how many of the lower-level requirements were associated with any unchanged operationa requirements. For requirements traceability, we randomly selected a sample of 60 requirements from 1,008 component requirements in the program’s requirements management tool, known as the Dynamic Object- Oriented Requirements System (DOORS), as of July 2009. Before doing so we reviewed the quality of the access controls for the database, and we interviewed program and contractor officials and received a DOOR tutorial to understand their respective roles in requirements management and development and the use of DOORS. Once satisfied as to the reliability of the data in DOORS, we then traced each of the 60 requirements S backwards to the system requirements and then to the operational requirements and forward to design requirements and verification methods. Because we followed a probability procedure based on ra selection, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. We used statistical methods appropriate for audit compliance testing to estimate 95 percent confiden r equirements in our sample. ce intervals for the traceability of Risk management: We reviewed relevant documentation, such as t SBInet Risk/Issue/Opportunity Management Plan, the SBInet SPO Risk/Issue/Opportunity Management Process, and the SBInet Risk Management Policy, as well as extracts from the SBInet risk management database and minutes of meetings and agendas from the Risk Management Team and the Joint Risk Review Board. In doing so, we compared the risk management process defined in these documents to relevant guidance todetermine the extent to which the program has defined an effective risk management approach. Further, we observed a demonstration of the r database, and we compared SBInet risks identified by us and others, including the SBI Executive Director, to the risks in the database to determine the extent to which all key risks were being actively managed. Further, we discussed actions recently taken and planned to improve risk management with the person responsible for SBInet risk management. W also reviewed briefings and related material provided to DHS leadership during oversight reviews of SBInet and interviewed program officials to ascertain the extent to which program risks were disclosed at these reviews and at meetings with congressional committees. In this regard, we also asked cognizant staff with the House Homeland Security Commi about the extent to which pr o ogram risks were disclosed by program fficials in status briefings. To determine the extent to which DHS has addressed our prior SBInet recommendations, we focused on the eight recommendations that we made in our September 2008 report. For each recommendation, we leveraged the work described above, augmenting it as necessary to determine any plans or actions peculiar to a given recommendat example, to determine the status of efforts to address our prior recommendation related to SBInet testing, we reviewed key testing ion. For documentation, such as the Test and Evaluation Master Plan; SBInet component and system qualification test plans, test procedures, and test reports; program management reviews; program office briefings; and D Acquisition Review p Board decision memoranda. We also interviewed rogram officials. To support our work across the above objectives, we also interviewed officials from the Department of Defense’s Defense Contract Managemen Agency, which provides contractor oversight services, to understand i reviews of the contractor’s integrated master schedule, requirements development and management activities, risk management practices, and testing activities. We also reviewed Defense Contract Management Agenc reports pertaining to documentation, such as monthly status reports and the integrated master schedule and cost reporting. To assess the reliability of the data that we relied on to support the findings in the report, we reviewed relevant program documentation to substantiate evidence obtained through interviews with knowledgeable agency officials, where available. We determined that the data used in this also made appropriate attribution report are sufficiently reliable. We have indicating the sources of the data used. We performed our work at the Customs and Border Protection headquarters and contractor facilities in the Washington, D.C., metropolitan area and at a contractor facility and a Defense Contract Management Agency office in Huntsville, Alabama. We conducted this performance audit from December 2008 to May 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropria 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. (CBP) In September 2008, we reported on a number of SBInet program management weaknesses and associated risks related to establishing program commitments, developing an integrated master schedule, defining and implementing a life cycle management approach, developing and managing requirements, and testing. To address these weaknesses and risks, we made a number of recommendations. Table 7 provides details on DHS efforts to address each recommendation. Our research has identified a range of best practices associated with effective schedule estimating. These are (1) capturing all activities, (2) sequencing all activities, (3) assigning resources to all activities, (4) establishing the duration of all activities, (5) integrating activities horizontally and vertically, (6) establishing the critical path for all activities, (7) identifying reasonable float time between activities, (8) conducting a schedule risk analysis, and (9) updating the schedule using logic and durations. We assessed the extent to which the SBInet integrated master schedule, dated August 2009, met each of the nine practices as either Not Met (the program provided no evidence that satisfies any portion of the criterion), Minimally Met (the program provided evidence that satisfies less than one-half of the criterion), Partially Met (the program provided evidence that satisfies about one-half of the criterion), Substantially Met (the program provided evidence that satisfies more than one-half of the criterion), and Met (the program provided evidence that satisfies the entire criterion). Table 8 shows the detailed results of our analysis. Our research has identified 12 practices that are integral to effective program life cycle cost estimating. These 12 practices in turn relate to four characteristics of a high-quality and reliable cost estimate: Comprehensive: The cost estimate should include all government and contractor costs over the program’s full life cycle, from program inception through design, development, deployment, and operation and maintenance to retirement. It should also provide sufficient detail to ensure that cost elements are neither omitted nor double-counted, and it should document all cost-influencing ground rules and assumptions. Well-documented: The cost estimate should capture in writing things such as the source and significance of the data used, the calculations performed and their results, and the rationale for choosing a particular estimating method or reference. Moreover, this information should be captured in such a way that the data used to derive the estimate can be traced back to, and verified against, their sources. Finally, the cost estimate should be reviewed and accepted by management to demonstrate confidence in the estimating process and the estimate. Accurate: The cost estimate should not be overly conservative or optimistic, and should be, among other things, based on an assessment of most likely costs, adjusted properly for inflation, and validated against an independent cost estimate. In addition, the estimate should be updated regularly to reflect material changes in the program and actual cost experience with the program. Further, steps should be taken to minimize mathematical mistakes and their significance and to ground the estimate in documented assumptions and a historical record of actual cost and schedule experiences with other comparable programs. Credible: The cost estimate should discuss any limitations in the analysis due to uncertainty or biases surrounding data or assumptions. Major assumptions should be varied and other outcomes computed to determine how sensitive the estimate is to changes in the assumptions. Risk and uncertainty inherent in the estimate should be assessed and disclosed. Further, the estimate should be properly verified by, for example, comparing the results with an independent cost estimate. Our analysis of the $1.3 billion SBInet life cycle cost estimate relative to each of the 12 best practices, as well as to each of the four characteristics, is summarized in table 9. A detailed analysis relative to the 12 practices is in table 10. In addition to the contact named above, Deborah Davis (Assistant Director), David Alexander, Rebecca Alvarez, Carl Barden, Tisha Derricotte, Neil Doherty, Nancy Glover, Dan Gordon, Cheryl Dottermusch, Thomas J. Johnson, Kaelin P. Kuhn, Jason T. Lee, Lee McCracken, Jamelyn Payan, Karen Richey, Karl W.D. Seifert, Matt Snyder, Sushmita Srikanth, Jennifer Stavros-Turner, Stacey L. Steele, and Karen Talley made key contributions to this report. | The technology component of the Department of Homeland Security's (DHS) Secure Border Initiative (SBI), referred to as SBInet, is to put observing systems along our nation's borders and provide Border Patrol command centers with the imagery and related tools and information needed in deciding whether to deploy agents. SBInet is being acquired and deployed in incremental blocks of capability, with the first block to cost about $1.3 billion. Because of the program's importance, size, and challenges, GAO was asked to, among other things, determine the extent to which DHS has (1) defined the scope of its proposed SBInet solution, (2) developed a reliable schedule for this solution, (3) demonstrated the cost-effectiveness of this solution, and (4) acquired the solution using key management processes. To do this, GAO compared key program documentation to relevant guidance and industry practices. DHS has defined the scope of the first incremental block of SBInet capabilities; however, these capabilities have continued to shrink from what the department previously committed to deliver. For example, the geographical "footprint" of the initially deployed capability has been reduced from three border sectors spanning about 655 miles to two sectors spanning about 387 miles. Further, the stringency of the performance capabilities has been relaxed, to the point that, for example, system performance will be deemed acceptable if it identifies less than 50 percent of items of interest that cross the border. The result is a system that is unlikely to live up to expectations. DHS has not developed a reliable integrated master schedule for delivering the first block of SBInet. Specifically, the schedule does not sufficiently comply with seven of nine key practices that relevant guidance states are important to having a reliable schedule. For example, the schedule does not adequately capture all necessary activities, assign resources to them, and reflect schedule risks. As a result, it is unclear when the first block will be completed, and continued delays are likely. DHS has also not demonstrated the cost-effectiveness of this first system block. In particular, it has not reliably estimated the costs of this block over its entire life cycle. To do so requires DHS to ensure that the estimate meets key practices that relevant guidance states are important to having an estimate that is comprehensive, well-documented, accurate, and credible. However, DHS's cost estimate for the initial block does not sufficiently possess any of these characteristics. Further, DHS has yet to identify expected benefits from the initial block, whether quantitative or qualitative, and analyze them relative to costs. As a result, it does not know whether its planned investment will produce mission value commensurate with costs. DHS has also not acquired the initial SBInet block in accordance with key life cycle management processes. While processes associated with, among other things, requirements development and management and risk management, have been adequately defined, they have not been adequately implemented. For example, key risks have not been captured in the risk management repository and thus have not been proactively mitigated. As a result, DHS is at increased risk of delivering a system that does not perform as intended. SBInet's decreasing scope, uncertain timing, unclear value proposition, and limited life cycle management discipline and rigor are due to a range of factors, including limitations in both defined requirements and the capabilities of commercially available system components, as well as the need to address competing program priorities, such as meeting aggressive system deployment milestones. As a result, it remains unclear whether the department's pursuit of SBInet is a cost effective course of action, and if it is, that it will produce expected results on time and within budget. |
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In 1980, the Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, to clean up highly contaminated hazardous waste sites. The act gave EPA the authority to clean up contaminated sites or to compel the parties responsible for the contamination to perform or pay for the cleanups. As of November 6, 1996, there were 1,205 sites on the NPL: 1,054 nonfederal and 151 federal. Cleanup actions fall into two broad categories: removal actions and remedial actions. Removal actions are usually short-term actions designed to stabilize or clean up a hazardous waste site that poses an immediate threat to human health or the environment. Remedial actions are generally longer-term and usually costlier actions aimed at achieving a permanent remedy. To promote timely cleanups, the Superfund Amendments and Reauthorization Act (SARA) of 1986 set numerical cleanup goals for all NPL sites. SARA provided that, for facilities discovered after the act was passed, a facility shall be evaluated for placement on the NPL within 4 years of the site’s discovery if EPA determines on the basis of a site inspection or preliminary assessment that such an evaluation is warranted. For certain contaminated federal sites identified as of October 17, 1986 (the date of SARA’s enactment), the act required EPA to ensure the performance of a preliminary assessment of each such facility within 18 months (1.5 years) after October 17, 1986. In addition, the act required EPA to ensure the evaluation and placement of such sites on the NPL, if appropriate, within 30 months (2.5 years) after October 17, 1986. In 1992, EPA implemented the Superfund Accelerated Cleanup Model. This model introduced several initiatives designed to accomplish Superfund cleanups in less time and at less cost. The initiatives included (1) integrated site assessments—efforts to reduce redundancies in data collection, (2) non-time-critical removals—efforts to reduce risks sooner by accelerating some cleanup actions, and (3) presumptive remedies—efforts to reduce the costs and time to study various cleanup alternatives by identifying in advance the most effective cleanup remedy for a given situation. We reported last year that EPA’s regions were not effectively using one of the initiatives—the authority to use non-time-critical removals to save time and money. We found that although these removals show promise for expediting Superfund cleanups, budgetary and legal issues have constrained their wider use. EPA site managers estimate that using non-time-critical removals instead of the full remedial process can, on average, cut the time for similar cleanup actions by about 2 years and reduce the costs by about half a million dollars. Compared to the full remedial process, the removal process considerably shortens the evaluation (study and design) steps but may conduct similar cleanup actions. EPA, other federal agencies, and state governments all play roles in the Superfund process. EPA administers the program, evaluates nonfederal sites for placement on the NPL, oversees cleanups performed by the parties responsible for contaminating sites, and performs cleanups itself when these parties cannot be found. Federal agencies are responsible, under EPA’s supervision, for evaluating and cleaning up their own properties. States may enter into contracts or cooperative agreements with EPA to carry out certain Superfund actions, including site evaluation and cleanup oversight. For this report, we asked EPA to provide us with data on the length of time taken by EPA, authorized states, and federal agencies to evaluate sites for possible placement on the NPL, to complete cleanups of listed sites, and to accomplish the steps leading to listing and cleanup. The source of this information was EPA’s Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS), which is the official repository of Superfund data. For more detailed information on the time taken to complete steps in the evaluation and cleanup phases of the Superfund process, see appendixes I and II, respectively. Appendix III presents the numbers of observations, by year, included in the average time for each processing step (e.g., date of placement on the NPL) depicted in the report’s figures. We used a “date of event” analysis (e.g., date of a site’s placement on the NPL, date of completing a cleanup) in presenting data on completion times because of its usefulness in showing the productivity and management of Superfund resources over time. (See app. IV.) This analysis considers the actual number of listings, cleanups completed, or intermediate steps completed in a given year regardless of when the sites were discovered or placed on the NPL. Our approach is consistent with a method used by EPA in its management reports to measure the program’s accomplishments. This “date of event” analysis contrasts with a “date of submission” analysis, which would track processing times by the year sites were discovered or listed. Both methods are accepted forms of analysis. The date of submission method can be useful for measuring the effects of policy changes. We did not use this method in our analysis because the changes EPA made to accelerate the Superfund process are too recent for their effects to be reflected in the available data. We also attempted to measure trends in the time taken to complete listings and cleanups, using SARA’s goals and EPA’s own standards as benchmarks. Because these standards set 4- and 5-year completion goals, our analysis was limited to sites discovered or listed not later than 1991. Because EPA’s initiatives to expedite cleanups were introduced after this time, their effect on achieving the standards cannot yet be determined using this approach. We are, however, currently reviewing the implementation and possible effects of these initiatives. The length of time between discovering a site and placing it on the NPL has increased significantly over the life of the Superfund program. (See fig. 1.) According to EPA, this increase is due largely to the backlog of sites referred to the agency for evaluation, additional processing requirements, and a reduction in the number of sites added annually to Superfund. No nonfederal sites were listed on the NPL in fiscal years 1988 and 1992. Data for fiscal year 1996 exclude three nonfederal sites that were added to the NPL without undergoing the usual evaluation because they posed imminent public health risks. No federal sites were listed on the NPL in fiscal years 1986, 1988, 1991-92, and 1996. Figure 1 shows a generally increasing trend in the time taken to place sites on the NPL following their discovery. In 1996, EPA took an average of 9.4 years to list nonfederal sites and, in 1995, 8.3 years to list federal sites. SARA’s goal was for EPA to evaluate nonfederal sites for listing, when warranted, within 4 years of their discovery. For federal sites, SARA’s goal was for EPA to evaluate certain sites identified as of October 17, 1986, within 2.5 years of that date. EPA established a policy goal to complete preliminary assessments and site inspections of federal sites discovered after October 17, 1986, within 1.5 years of their discovery. EPA made decisions about listing nonfederal sites within 4 years of their discovery for 43 percent of the 8,931 sites discovered from fiscal year 1987 through fiscal year 1991. However, as shown in figure 2, the percentage of sites for which decisions were made within 4 years of discovery decreased in each succeeding year, from 51 percent in fiscal year 1987 to 36 percent in fiscal year 1991. According to EPA officials, decisions not to list sites are now being made faster than during the period from 1987 through 1991, when many listing decisions were delayed pending a revision of the standards for evaluating hazardous waste sites. According to EPA, most sites are now excluded from further consideration for Superfund after an early assessment of their conditions. EPA has made some progress in reducing the time between discovering a site and completing certain steps required to place it on the NPL. Specifically, the average time from discovery to the completion of initial studies at nonfederal sites has declined from its peak in the late 1980s. (See app. I.) In addition, in 1996, the average time taken to list nonfederal sites fell to 9.4 years from 11.4 years in 1995. However, the time between discovery and listing for the seven sites placed on the NPL in the first quarter of fiscal year 1997 moved up again to an average of 11.2 years. These sites were discovered as recently as 1993 and as long ago as 1979. Although average processing times have lengthened, EPA can move quickly to list some sites if circumstances warrant. For example, in 1996, it listed three sites within about 9 to 12 months of their discovery, when the Public Health Service’s Agency for Toxic Substances and Disease Registry issued a public health advisory concerning the sites. EPA used an expedited process that bypassed its normal evaluation process to list these sites. In addition, EPA may undertake removal actions at sites to deal with imminent threats regardless of whether the sites are listed. However, listing is necessary before the full range of problems presented by many sites can be addressed under Superfund. EPA officials gave a number of reasons why assessment times have grown. They said that the Superfund program started with a backlog of sites awaiting evaluation. They also cited changes in the program, such as revised evaluation standards requiring the reevaluation of sites and the need to seek a state’s concurrence for listing a site. In addition, the number of sites placed on the NPL in recent years has declined. The officials also said that the agency’s current priority is to finish cleaning up the sites that have already been listed. Accordingly, EPA reallocated its budget between 1994 and 1996, cutting the funds for assessing sites by some 50 percent. The challenge for the future is indicated by the large number of sites that could enter the Superfund program in the future and the small number that have been placed on the NPL in the recent past. In a 1996 report, we estimated that between 1,400 and 2,300 sites could be added to the program in the future. In contrast, 16 sites per year were admitted, on average, from 1992 through 1996. EPA officials said that the listing of new sites is likely to remain constrained and that EPA is emphasizing the use of alternative strategies to clean up sites more quickly or to transfer the responsibility for cleanups to other parties. These alternative strategies include (1) assigning more cleanups to the removal rather than the remedial program, (2) expanding state cleanup programs, and (3) encouraging voluntary cleanups by responsible parties. For sites with completed cleanups, the average time between the site’s placement on the NPL and the cleanup’s completion increased significantly from 1986 to 1996. For nonfederal sites, the time required to complete cleanups increased from 2.4 years in 1986 to 10.6 years in 1996. For federal sites, the time required to complete cleanups increased from about 3.3 years in 1990 to 6.6 years in 1996. The increase in overall cleanup times was accompanied by a marked increase in the time taken to select cleanup remedies—a period that includes the waiting time between placement on the NPL and the start of remedy selection studies, the performance of the studies themselves, and in some cases, negotiations to reach settlements with the parties responsible for the contamination. For nonfederal sites, this phase was completed in about 2.5 years in 1986 but about 8 years in 1996. In contrast, the average time taken to construct the actual cleanup remedy for the nonfederal sites completing this cleanup phase in 1996 was 2.1 years. For our analysis, we considered a cleanup to be complete as of the date of EPA’s remedial action report indicating that construction has been completed. According to its procedures, EPA approves this report when a cleanup remedy has been put in place at an operable unit and, except where long-term operation is needed, has achieved the required cleanup levels. EPA would consider remedial action complete when a system for pumping and treating contaminated groundwater has been installed, even though the system may have to operate for years before the contamination is reduced to acceptable levels. Our analysis of cleanup times considers whole sites as well as the cleanup projects (operable units) into which sites are often divided. Since EPA and federal agencies have cleaned up more operable units than whole sites, measuring the progress in cleaning up the operable units gives a more complete picture of the program’s activity. Figure 3 shows the average time between placing nonfederal and federal sites on the NPL and completing cleanups at operable units. Because few federal sites were cleaned up before fiscal year 1990, we began our analysis of cleanups at federal sites starting in that year. As figure 3 shows, the time taken to complete cleanups of operable units has grown longer at both nonfederal and federal Superfund sites. In addition, the time taken to complete the principal steps in the process leading to the completion of cleanups has also grown longer (see app. II.) In 1996, cleanup completions averaged 10.6 years for nonfederal operable units and 6.6 years for federal operable units. As noted, SARA set goals for starting certain cleanup actions, but not for completing the cleanups. For fiscal year 1993, however, EPA set an expectation for its regions to complete a cleanup within 5 years of a site’s listing. At nonfederal sites listed from 1986 through 1990, 10 percent of the operable units were cleaned up within 5 years of their site’s listing. As shown in figure 4, the percentages of operable units cleaned up within 5 years increased from 7 percent for sites listed in fiscal year 1986 to 15 percent for sites listed in fiscal year 1990. EPA officials said that they now believe that sites will be cleaned up within 8 to 10 years of their listing. We also analyzed data on the time taken to clean up entire Superfund sites (as opposed to operable units). From 1986 to 1996, EPA recorded cleanups for 592 operable units at nonfederal facilities and for 118 operable units at federal facilities. During this same period, EPA recorded cleanups for 226 nonfederal sites and for only 7 federal sites. Figure 5 shows the average duration of cleanups for the 226 nonfederal sites recorded as cleaned up from 1986 to 1996. We examined the time taken to accomplish the principal steps in the process of placing a site on the National Priorities List (NPL)—the preliminary assessment, the site inspection, and the proposal to list the site as a national priority. The Environmental Protection Agency’s (EPA) regulation implementing the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) outlines a formal process for placing hazardous waste sites on the NPL. (See fig. I.1) The listing process starts when EPA receives a report of a potentially hazardous waste site. A state government or private citizen most often reports a nonfederal site. A responsible federal agency reports a potentially contaminated federal facility to EPA for placement on a list called the federal facility docket. EPA enters a potentially contaminated private site into a database known as the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). EPA or the state in which the potentially contaminated nonfederal site is located then conducts a preliminary assessment to decide whether the site poses a potential threat to human health and the environment. A federal agency performs the preliminary assessment of its site under EPA’s oversight. If the site presents a serious, imminent threat, EPA or the responsible federal agency may take immediate action. If the preliminary assessment shows that contamination exists but does not pose an imminent threat, or if the site continues to pose a problem following an immediate action, EPA or the responsible federal agency, with EPA’s supervision, may proceed to the next step of the evaluation process, the site inspection, which takes a more detailed look at possible contamination. If at any point the site is found not to pose a potential threat, the site can be eliminated from further consideration under CERCLA. Using information from the site inspection, EPA applies the hazard ranking system to evaluate the federal or nonfederal site’s potential risk to public health and the environment. The hazard ranking system is a numerically based scoring system that uses information from the preliminary assessment and the site inspection to assign each site a score ranging from 0 to 100. This score is used as a screening tool to determine whether a site should be considered for further action under CERCLA. A site with a score of 28.5 or higher is considered for placement on the NPL. EPA first proposes a site for placement on the NPL and then, after receiving public comments, either places it on the NPL or removes it from further consideration. The hazardous waste sites on the NPL represent the highest priorities for cleanup nationwide. Figure I.2 shows, for nonfederal and federal sites, the average time taken to complete a preliminary assessment of conditions at a site following its discovery. Figure I.2 shows that from 1987 to 1989, EPA sharply reduced the average time between discovery and completion of the preliminary assessment at nonfederal sites. EPA officials attributed this decrease to EPA’s effort to reduce the time for completing preliminary assessments following the passage of the Superfund Amendments and Reauthorization Act of 1986 (SARA). After SARA’s passage, EPA adopted a policy of completing a preliminary assessment within 1 year of a site’s discovery. The preliminary assessment was completed within a year of discovery at about two-thirds of the sites that were discovered after fiscal year 1987 and were preliminarily assessed by the end of fiscal year 1995. The officials said that EPA’s efforts to complete assessments within 1 year had reduced the backlog of sites needing assessments and shortened the time required for the assessments. However, since 1989, the time from discovery to completion of the preliminary assessment has gradually increased. For federal sites, the average time between discovery and completion of the preliminary assessment has fluctuated over the years but has consistently exceeded SARA’s goals. In fiscal year 1996, the preliminary assessment was completed for federal sites, on average, 2.5 years after discovery. SARA specified that EPA take steps to ensure that the assessment for all sites entered on EPA’s first federal facility docket be completed within 1.5 years. An EPA policy extended SARA’s deadline to all subsequent dockets. EPA officials told us that federal sites are typically larger and more complex than nonfederal sites and therefore their assessment requires more work and more time to complete. The officials also said that studies prepared by federal agencies often lack needed data, requiring EPA to ask the agencies to do more work to satisfy CERCLA’s requirements. The officials also noted that EPA does not have much leverage over how federal agencies conduct their preliminary assessments. Figure I.3 shows, for nonfederal and federal sites, the average time between discovery and completion of the site inspection. As figure I.3 shows, the average time from discovery to completion of the site inspection has declined in recent years for both nonfederal and federal sites. EPA has made progress over the past 5 years in reducing the time from discovery to completion of the site inspection for nonfederal sites. In 1991, EPA took an average of 6.6 years to complete the site inspection, whereas in 1996, it brought this average down to 4.1 years. EPA officials told us that the time for completing site inspections increased until 1991 because EPA concentrated its resources on completing preliminary assessments within 12 months and this effort created a backlog of site inspections. They said that after reducing the backlog of preliminary assessments, EPA focused on reducing the backlog of site inspections, bringing about the recent improvement in the time for completing site inspections. For federal sites, EPA’s policy was that inspections were to be completed within 1.5 years. In 1996, inspections took 6.5 years to complete, on average, from the time of site discovery. Figure I.4 shows, for nonfederal and federal sites, the average time between completing the site inspection and proposing to place the site on the NPL. The broken line indicates that no federal sites were proposed for the NPL in fiscal year 1987. Only two federal sites were proposed for the NPL in fiscal year 1995, and only one was proposed in fiscal year 1996. As figure I.4 shows, the average time required to propose a site for placement on the NPL generally increased for both nonfederal and federal sites from 1986 to 1996. For nonfederal sites proposed for listing in 1986, the proposal took 20 months from the completion of the site inspection, compared with 6 years in 1996. For federal sites proposed for listing in 1986, the proposal took only 10 months from the completion of the site inspection, compared with 5.5 years in 1994, the last year in which a substantial number of federal sites were proposed for listing. According to EPA officials, the increases in the time required to propose sites for listing are partly attributable to revisions in the hazard ranking system mandated by SARA. SARA directed EPA to obtain additional data so that the system could more accurately assess the relative risk to human health and the environment posed by sites and facilities nominated to the NPL. EPA officials said that the agency decided to limit listings while it was revising the hazard ranking system. EPA announced in April 1987 that it was considering revisions to the system, and in December 1988 it requested comments on proposed revisions. In December 1990, EPA promulgated final revisions to the hazard ranking system. EPA officials said that the revisions to the hazard ranking system led EPA to seek additional data on 5,275 nonfederal sites and 27 federal sites from 1992 through 1996. For these sites, EPA developed a temporary intermediate step—referred to as a site inspection prioritization—to gather the additional information needed on the sites’ risks to human health. EPA officials also said that the time taken to assess sites has grown because of the large backlog of sites at the start of the Superfund program, enforcement activities, and the need to seek a state’s concurrence for listing a site. In addition, the number of sites placed on the NPL has declined in recent years. We attempted to obtain data from CERCLIS showing the duration of some of the major steps in the process of evaluating sites for placement on the NPL: the preliminary assessment, the site inspection, and the site inspection prioritization. However, the starting date for many of these steps is not recorded in the database. For example, the beginning and ending dates are available for only 27 percent (4,693 of 17,469) of the site inspections completed at nonfederal sites through fiscal year 1995. However, the data that are available indicate that these steps account for only a portion of the total time taken to evaluate a site for listing. The available data show that in fiscal year 1995, preliminary assessments at nonfederal sites were completed on average in 8 months; site inspections in 12 months; and sites inspection prioritizations in 12 months. These numbers suggest that a substantial portion of the time between discovery and listing elapses while a site is awaiting the next step in the process. In addition to measuring the total time taken from the placement of a site on the NPL to the completion of its cleanup, we examined the time taken to complete two of the principal intermediate steps—the preparation of the record of decision, which documents the final remedy selected after completing the remedial investigation and feasibility study (RI/FS), and the remedial design, which includes the technical drawings and specifications for the selected remedy. We also obtained data on the duration of the RI/FS, the remedial design, and the remedial action. EPA’s regulation implementing CERCLA outlines the remedial process for cleaning up sites on the NPL. (see fig. II.1) The remedial responses to an NPL site consists of several phases. If a site is divided into discrete cleanup projects, known as operable units, each of the operable units may pass through these phases. First, through the RI/FS, the conditions at a site are studied, problems are identified, and alternative methods to clean up the site are evaluated. Then, a final remedy is selected, and the decision is documented in a record of decision. Next, during an engineering phase called the remedial design, technical drawings and specifications are developed for the selected remedy. Finally, in the remedial action phase, a cleanup contractor begins constructing the remedy according to the remedial design. Once EPA, in consultation with the state in which the site is located, determines that the work at a site has achieved all of the desired cleanup goals, the site can be removed (deleted) from the NPL. Figure II.2 shows, for nonfederal and federal operable units, the average time taken from the placement of a site on the NPL to the selection of a remedy for its cleanup. Because few federal sites had remedies selected prior to fiscal year 1990, we began our analysis of remedy selection at federal sites starting in that year. Figure II.2 shows that the average time taken to select a remedy at nonfederal sites has steadily increased over the years. In 1986, selecting a remedy after a site’s listing took an average of 2.6 years, compared with an average of 8.1 years in 1996. The average time taken to select a remedy at federal sites has also increased over the years, from an average of 2 years in 1990 to an average of 6.3 years in 1996. The cleanup phase that ends with the selection of a remedy comprises two periods: the time between listing and the start of the RI/FS and the time for the RI/FS. Both of these periods add significantly to the total time taken to complete cleanups. For nonfederal sites at which RI/FSs were begun from 1991 through 1996, an average of 4.5 years had elapsed since the sites were proposed for listing. For federal sites at which RI/FSs were begun during the same years, an average of 3.5 years had elapsed. For the nonfederal sites at which RI/FSs were completed in 1995 (the last year for which complete data were available), the RI/FS took an average of 4.4 years to complete, or about 2 years more than in 1986. For federal sites, the RI/FSs took an average of 4.4 years to complete in 1996, up about 2.5 years from 1991. Figure II.3 shows, for nonfederal and federal operable units, the average time taken to develop the remedial design, or the technical drawings and specifications for the selected remedy. The elapsed time is measured from the date of a site’s placement on the NPL. Because few federal sites had remedial designs completed before fiscal year 1990, we began our analysis of remedial designs at federal sites starting in that year. As figure II.3 indicates, remedial designs are generally completed more quickly at federal sites than at nonfederal sites. EPA officials attributed this difference to the fact that federal cleanups do not usually involve negotiations or litigation with private responsible parties. EPA’s records indicate that the actual time taken recently to complete the latter phases of the cleanup process—the remedial design and the remedial action—is less than one-half of the total time taken, from listing, to complete recent remedial actions. Nonfederal remedial designs took 2.3 years to complete in 1996, up from 1.6 years in 1991. Nonfederal remedial actions took about 2 years in 1996, essentially as long as they took in 1991. Federal remedial designs were done in 1 year in 1996, up slightly from about 10 months in 1991. Federal remedial actions were completed in 1.6 years in 1996, again up slightly from 1.4 years in 1991. Data are not presented for this year because the year is not included in the corresponding figure. The Chairman of the House Committee on Government Reform and Oversight asked us to provide information on the pace of Superfund cleanups. He specifically asked that we examine trends in the time taken to (1) evaluate hazardous waste sites for possible placement on the NPL and (2) clean up the sites following their listing. To accomplish these objectives, we asked EPA to provide us with data from the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). This information system is the official repository of Superfund data and provides integrated information on the evaluation (preremedial) and remedial programs as well as the removal program. To determine the time taken to evaluate sites for placement on the NPL, we asked EPA to provide us with data on the sites that had moved through the various stages of the assessment process from fiscal year 1986 through fiscal year 1996. For this report, we concentrated our analysis on the following four phases of each site’s evaluation: (1) from discovery to placement on the NPL, (2) from discovery to completion of the preliminary assessment, (3) from discovery to completion of the site inspection, and (4) from completion of the inspection to the proposal for listing. To determine the time taken to clean up sites placed on the NPL, we asked EPA to provide data on sites that had progressed through the stages of the remedial cleanup process. These data also covered fiscal years 1986 through 1996. For this part of the analysis, we examined data for three principal stages of the cleanup process: (1) from the site’s placement on the NPL to the selection of a remedy, (2) from the site’s listing to the completion of the remedial design, and (3) from the site’s listing to the completion of the cleanup. We also measured the duration of the RI/FS, the remedial design, and the remedial action and the time from the proposal for listing to the start of the RI/FS. We used a “date of event” (such as NPL listing or completion of cleanup) analysis in our review to measure the duration of listing and cleanup phases. This method classifies sites by the year in which they completed an activity. Our approach is an accepted form of analysis useful for showing the productivity and management of resources over time. Another analytical approach would have grouped sites by their “date of submission” (discovery or listing) and compared the duration of processing steps among these groups. This method can be useful in assessing the effect of policy or operational changes. We did not use it in our report because EPA’s initiatives to speed up the Superfund process are so recent. We also used goals for the completion of listing or cleanup set out in SARA or EPA directives as benchmarks for comparison with actual listing and cleanup times. We used EPA’s definitions of site discovery and cleanup completion. Site discovery for this report is defined as the date of a site’s listing in CERCLIS. Cleanup completion is defined as the end of the remedial action phase, that is, the date when, under EPA’s procedures, the designated regional or state official signs a document indicating that the physical construction is complete for all remedial and removal work required at a site and, except where the long-term operation of a remedy is needed, the required cleanup levels have been attained. EPA’s management data track a site’s projects, or operable units. Nonfederal sites average 1.8 operable units, while federal sites average 5.9 operable units. Each operable unit generally proceeds through the individual cleanup stages. For example, the Department of Energy’s Rocky Flats Environmental Technology Site was placed on the NPL in 1989 as one site. DOE subsequently categorized the known or suspected hazardous waste sources into 16 operable units on the basis of its cleanup priorities, the type of waste, the unit’s geographic location, and public input. EPA’s records show that cleanups at 3 of Rocky Flats’ 16 operable units have been completed, 2 in 1992 and 1 in 1993. Tracking the time required to clean up operable units allows EPA to measure progress without waiting for entire sites to be cleaned up. At some complex sites—like Rocky Flats—work may extend well into the future. We also examined data for sites where all of the operable units had been cleaned up. While we did not independently verify EPA’s data for completeness or accuracy, EPA took a number of steps to ensure the accuracy and reliability of its data. For example, sites without valid identification numbers or with inappropriate status codes were excluded. Also, any times for individual study phases that could not possibly be valid were excluded from the analysis. For example, negative times were excluded. Also, sites with times exceeding the mean by more than three standard deviations were eliminated to prevent a few sites on the high or low end of the spectrum from skewing the overall results. These adjustments resulted in the exclusion of fewer than 1 percent of the sites. EPA provided written comments on a draft of this report. These comments are discussed and evaluated in the pertinent sections of this report and are reprinted in appendix V. We conducted our work from November 1995 through February 1997 in accordance with generally accepted government auditing standards. The following are GAO’s comments on EPA’s letter dated December 23, 1996. 1. The graphs presented in this report represent the actual recorded time frames for all Superfund sites and projects that moved through the Superfund processing pipeline from 1986 through 1996. This method of analysis is analogous to measuring a company’s bottom-line financial performance over time. We did not attempt to forecast the potential effects of EPA’s recent initiatives to accelerate the pace of the Superfund program. 2. We have revised the title of the report to more precisely indicate the report’s contents. 3. The graphic depiction of trend data in this report is a historical presentation of the average time spent in the Superfund process by those sites that were listed and cleaned up in a given year. The information responds to the Committee’s questions on (1) how long it took to evaluate and process sites for possible placement on the NPL from the time of their discovery and (2) how long it took to clean up sites after they were placed on the NPL. We agree with EPA that our presentation of historical data may not fully reflect the effects of recent policy changes. Nevertheless, in reviewing EPA’s initiatives to accelerate the pace of Superfund cleanups under the Superfund Accelerated Cleanup Model (SACM) and in discussing this report with agency personnel, we found that EPA lacks data for measuring the extent to which these initiatives have been implemented or the effects of these initiatives. Our recent report on the non-time-critical removal component of SACM showed that although non-time-critical removals have an excellent potential to reduce costs and expedite the protection of human health and the environment, the program’s full implementation has been constrained by budgetary and legal issues. Without adequate data, we were unable to assess the effects of the new initiatives on reducing the overall duration of stages in the Superfund process. EPA told us that it is currently embarking on an analysis of its recent initiatives to better communicate to stakeholders and communities the successes of Superfund. 4. We disagree that using the year of listing, rather than the year of completion, would array the data in a more equitable way. The method using the year of listing attributes longer processing times to sites listed in earlier years and shorter times to more recently listed sites. In other words, this method will always show that recent processing times are an improvement over earlier processing times. As sites are completed in the future, average completion times will grow for each listing year containing these sites. 5. EPA’s efforts to explore alternatives to listing sites are noteworthy. However, the Congress in the 1986 SARA legislation established a goal for completing evaluations of nonfederal sites within 4 years of their discovery and for certain federal sites within 2.5 years. The agency still maintains these time goals as its stated policy. We disagree with EPA’s assertion that shortening the average time taken to evaluate sites for placement on the NPL may not be desirable. Placing a site on the NPL associates it with the nation’s most hazardous waste sites. To be considered for listing, a site must demonstrate that it has potential adverse effects on human health or the environment. For communities near a toxic waste site, the time taken to investigate and decide on a site’s listing may indeed be relevant and an early decision may be desirable. 6. We revised our statement of the act’s purpose and included enforcement activities among the reasons EPA officials cited for long listing and cleanup time frames. 7. According to EPA, the results of its recent changes will not be complete for 8 to 10 years. We previously testified that EPA’s current policy initiatives are a step in the right direction to improving the pace of Superfund cleanups. However, to effectively manage the new initiatives, EPA managers cannot wait 8 to 10 years to determine whether the recent changes work. EPA managers need data to measure the effects of the new policy initiatives. 8. See comment 4. EPA’s reference to figures 1 and 2 applies to the two parts of figure 1. 9. EPA stated that backlogs of sites awaiting processing increase the time taken to list and clean up sites over time. We agree that backlogs have contributed to increased time frames. In July 1993, we reported in Superfund: Backlog of Unevaluated Federal Facilities Slows Cleanup Effort (GAO/RCED-93-119) that the existence of substantial backlogs of unevaluated federal sites was a principal reason why EPA had not met its statutory deadlines under SARA for making listing decisions. We reported that EPA had not placed a high enough priority on assessing federal facilities and that EPA and other federal agencies had never established a plan for jointly responding to SARA’s deadlines. For nonfederal sites awaiting Superfund listing decisions, SARA provided that EPA should evaluate such sites for listing, when warranted, within 4 years of SARA’s enactment. For many sites, this goal was not met. We believe—and EPA agrees elsewhere in its comments—that backlogs of sites dating from the creation of the program are not the only reason for the increase in completion times. 10. The data we used in preparing our charts showing the average time between site discovery and the completion of various steps leading to listing did not include extensive periods preceding CERCLA’s enactment in 1980. Specifically, 200 sites discovered before October 1, 1969, were excluded from the analysis, and all sites discovered between October 1, 1969, and September 30, 1979, were adjusted to set a discovery date of October 1, 1979. However, we have revised the charts to begin the trend lines in 1986 to exclude possibly unrepresentative sites completed early in the program. 11. See comment 4. 12. There are extremes at either end of the processing time curve. While some sites may take only a few months to list, as EPA maintains, others take significantly longer than average. We do not disagree with EPA’s statement that the agency can expedite the processing of certain sites. 13. EPA argues that because it does not have full control over the time between a site’s proposed and final listing, the length of this period is not a good measure of its performance. EPA’s data indicate that the time required for this processing step has remained fairly constant over the life of the program and was not a factor leading to the increase in processing times. For example, from 1992 through 1995, it took 1.2 years, on average, to finalize the listing of a nonfederal site proposed for listing. This is slightly less than the 1.4 years taken, on average, from 1983 though 1995. 14. We included federal facilities listed in 1983 and 1984 because they were included in CERCLIS. However, in view of EPA’s comment and the limited number of federal listings until 1990, we have deleted federal facilities listed before 1990. 15. We have revised our report as suggested and deleted the sentence in question. 16. A statement indicating EPA’s disagreement with our presentation of the duration data was added to the agency comments section of the report. See comment 4. 17. We have deleted the years before 1986 from our analysis to eliminate possibly atypical sites that were completed early in the history of the Superfund program. Also, we have added the data in appendix III to the report to supplement the trend lines shown in the report’s figures and indicate for the reader how many sites or operable units were tracked in these figures. 18. See comment 4. 19. Sentence deleted. 20. See comment 4. 21. See comment 17. Also, we note that our report does present data on “discrete milestones.” For example, it presents information on the times taken to complete preliminary assessments, site inspections, the selection of remedies, and other steps in the Superfund process. 22. The data mentioned by EPA from figure 3 represent the average time taken to clean up 17 distinct operable units in 1986. The data in figure II.2 represent the average time taken to select a remedy for 82 other distinct operable units for that same year. These data are not inconsistent or inappropriate, as EPA implies, because they represent two distinct universes. 23. See comment 3. 24. The Congressional Budget Office’s (CBO) 1994 study is based on “estimated” average durations from the proposal for listing through the completion of construction, while our data represent actual durations for operable units and sites from the final listing through the completion of the remedial action. The main finding of CBO’s report was that the average time between the proposal for listing and the completion of construction will be at least 12 years for the first 1,249 sites. CBO obtained its data through interviews with remedial project managers. The managers estimated that the completion time for the nonfederal sites proposed for listing from 1981 through 1983 would average 12.9 years, while the completion time for the nonfederal sites proposed from 1984 through 1992 would average 9.6 years. CBO’s report said that the difference between the two estimates (of 12.9 years and 9.6 years) “may merely be evidence of the overoptimism suspected by officials at EPA headquarters. The sites listed more recently have generally not progressed as far through the Superfund pipeline; for example, only 16 percent of those with actual or estimated completion dates had been finished by 1993, compared with 31 percent of the early sites.” 25. We continue to believe that EPA’s efforts to expedite cleanups are steps in the right direction. However, enough time has now elapsed for EPA to evaluate the progress and effects of the program to date. Over 4 years have elapsed since EPA formally initiated SACM, and over 2 years have elapsed since the agency proceeded to fully implement the program. As indicated in this report, our review of non-time-critical removals showed limited use of this SACM component in EPA’s regions. 26. We have revised our report to indicate in the agency comments section that EPA regards factors such as budget shortfalls, legislative and administrative weaknesses in the current program, and a continuing influx of large and complex sites as barriers that undermine its efforts to increase the pace of assessments and cleanups. 27. See comment 9. 28. The presumptive remedy for municipal landfills was issued by EPA in September 1993. An EPA directive with the same date stated that presumptive remedies were expected to be used at all appropriate sites. The time savings cited by EPA were achieved at three pilot sites that used the landfill presumptive remedy in the spring of 1992. EPA’s December 1996 annual report on Superfund administrative reforms stated that the agency is beginning to collect and analyze data on the use of presumptive remedies. At the time of our review, no adequate data were available to assess the effects of presumptive remedies on the time taken to complete the Superfund process. 29. We added EPA’s estimate of the time savings attributable to these reforms to the report. James F. Donaghy, Assistant Director Robert J. Tice, Evaluator-in-Charge Larry D. Turman, Evaluator Pauline Lichtenfeld, Evaluator Mitchell B. Karpman, Senior Operations Research Analyst Annette Wright, Graphics Analyst Bess Eisenstadt, Communications Analyst Lynne L. Goldfarb, Publishing Adviser The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Environmental Protection Agency's (EPA) Superfund cleanup efforts, focusing on trends in the time taken to: (1) evaluate and process hazardous waste sites for possible placement on the National Priorities List (NPL); and (2) clean up these sites following their listing. GAO noted that: (1) EPA took an average of 9.4 years, calculated from the date of each site's discovery, to evaluate and process the nonfederal sites it added to the NPL in 1996; (2) while this evaluation and processing time shows some improvement over 1995, when listing took an average of 11.4 years after discovery for nonfederal sites, it is generally longer than for prior years; (3) the Superfund Amendments and Reauthorization Act of 1986 (SARA) requires EPA to evaluate nonfederal sites for listing, when warranted, within 4 years of their discovery; (4) listing decisions were made within 4 years of discovery for 43 percent of the 8,931 nonfederal sites discovered from 1987 through 1991; (5) the average time between discovery and listing for federal sites has also increased over the years, rising from about 6.5 years for sites listed in 1990 to 8.3 years for sites listed in 1995; (6) much of the increase in the time taken to list both federal and nonfederal sites has occurred in the latter stages of the evaluation process, after sites have been inspected and before final decisions about the need to list them are made; (7) EPA officials attributed the increases to a number of factors, including the large numbers of sites initially referred to the agency for evaluation and EPA's emphasis on completing work on already listed sites; (8) long waits for listing may continue because a large number of sites are potentially eligible for Superfund and a limited number of sites are being added to the program each year; (9) nonfederal cleanup projects completed from 1986 through 1989 were finished, on average, 3.9 years after sites were placed on the NPL; (10) by 1996, however, nonfederal cleanup completions were averaging 10.6 years; (11) SARA did not set deadlines for completing cleanups within a certain number of years, but EPA set an expectation for 1993 for its regions to complete a cleanup within 5 years of a site's listing; (12) ten percent of the cleanup projects at nonfederal sites listed from 1986 through 1990 were finished within 5 years of a site's listing; (13) federal agencies took, on average, 6.6 years from the date of listing to finish the cleanup projects they completed in fiscal year 1996; (14) much of the time taken to complete cleanups is spent during the early planning phases of the cleanup process, when cleanup remedies are selected; (15) less time has been spent on actual construction work at sites than on the selection of remedies; and (16) EPA officials attributed the increases in the time taken to complete cleanups to the growing complexity of the cleanup problems at sites. |
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Two “secret shopper” surveys of bank and thrift sales of mutual funds have been issued since we released our report. One was done by a private research organization called Prophet Market Research & Consulting and was completed in April 1996. The other was done for FDIC by another research organization, Market Trends, Inc., and was completed May 5, 1996. Both surveys indicated that many banks and thrifts still were not fully disclosing to their customers the risks associated with mutual fund investing. The results of the FDIC-sponsored survey, which was the most comprehensive, indicated that, in about 28 percent of the 3,886 in-person visits, bank and thrift representatives did not disclose to the shoppers that nondeposit investment products, including mutual funds, are not insured by FDIC. The results were worse for the 3,915 telephone contacts—with no disclosure in about 55 percent of the contacts. Similarly, in about 30 percent of the in -person visits, bank and thrift representatives did not inform shoppers that nondeposit investment products were not deposits or other obligations of, or guaranteed by, the institution (about 60 percent nondisclosure for telephone contacts). Finally, in about 9 percent of the in-person visits, bank and thrift representatives did not tell shoppers that their investment was subject to loss, including loss of principal (about 39 percent nondisclosure for telephone contacts). The survey’s findings on the physical location of the mutual fund sales area were nearly the same as ours, with about 37 percent of the institutions not clearly having separated the mutual fund sales area from the deposit-taking area. The survey’s findings reaffirm our earlier findings and indicate that a significant number of banks and thrifts continue to inadequately disclose four basic risks associated with mutual fund investing. Neither the FDIC-sponsored survey nor ours followed the sales process through to the point at which a mutual fund was purchased and an account was opened. However, the interagency guidelines emphasize that bank customers should clearly and fully understand the risks of investing in mutual funds, and that these risks should be orally disclosed to the customer during any sales presentation. Written disclosures or other documentation are to be available to customers during the sales process that may eventually fully inform them of the risks involved. Nevertheless, making these disclosures orally during initial sales presentations is particularly important because written disclosures may not always be read or understood until after the investors’ funds are committed, if at all. In responding to our report, the Federal Reserve and OCC indicated that bank practices generally complied with the interagency guidelines by mid-1995. However, FDIC’s survey results indicated that many banks and thrifts still need to improve their compliance with the guidelines so that their customers are adequately informed of the risks associated with mutual fund investing. According to banking and securities regulators, additional actions are being planned or taken to improve disclosures to bank customers. Some of these actions affect only those banks or thrifts under one regulator’s jurisdiction—such as FDIC’s efforts to improve its data systems to provide its examiners up-to-date information for more targeted examinations, or each regulator’s efforts to improve its examination guidelines. Other efforts are also being undertaken by all four bank and thrift regulators. These interagency efforts include efforts to adopt requirements that bank personnel engaged in the sale of nondeposit investment products take the securities industry’s standard qualifying examinations, better training for bank personnel selling uninsured investment products, reexamination of the interagency policy statement on mutual fund sales. business, and pass relevant qualifications examinations administered for the industry by NASD. The Securities Exchange Act of 1934 excludes banks from its broker-dealer registration requirements. As a result, banks have been able to choose whether to have their own employees sell mutual funds without the need to be associated with a Securities and Exchange Commission (SEC)-registered broker-dealer or subject to NASD oversight. If bank employees are to take NASD’s qualifying examination as the banking regulators propose, they are not to be registered with NASD because they would not be associated with a broker-dealer. However, under the proposal, they will have met the same initial qualifications as NASD-registered representatives. In addition, to maintain their qualifications, they would be subject to the same continuing education requirements imposed on NASD-registered representatives. FDIC officials told us that, in addition to the NASD testing and education requirements, the banking regulators plan to do further training to improve bank and thrift employees’ awareness of the importance of complying with the interagency guidelines. They said that although they found better compliance by NASD-registered representatives, the difference between these representatives and other employees was small, indicating that additional training might help further improve compliance. Banking regulators told us that efforts to reexamine the interagency policy statement are focused on clarifying (1) what situations do or do not constitute a sales presentation and (2) what the institution’s obligation is in assuring that an investment recommendation meets the customer’s needs. An FDIC official told us that the banking regulators want to make the interagency statement less vague so that banks and thrifts can better understand what is expected of them and their employees. restrictions on brokers’ use of confidential financial information from bank or thrift customer files were stricter than the interagency guidance and NASD’s proposed prohibition on the payment of referral fees by broker-dealers to employees of the bank differed from the interagency guidance, which allows payment of these fees. After analyzing nearly 300 comment letters, NASD made changes to its proposed rules. The revised proposal defines confidential financial information and allows its use, but only with the prior written approval of the customer; the prohibition on referral fees remains. NASD forwarded its revised proposal to SEC for approval. SEC published the proposal for public comment and received 86 comment letters by the end of the comment period in May 1996. Most of the letters were from banking organizations or bank-affiliated broker-dealers. SEC is currently analyzing the comment letters before deciding whether to approve the proposed rules. Ensuring that salespersons provide bank customers with appropriate risk disclosures during all mutual fund sales presentations presents a difficult challenge to regulators and to banks and thrifts. Over time, this task may become easier as distinctions among financial service providers continue to fade and customers become more aware of the differences between insured and uninsured products. The bank and securities regulators’ proposed actions for additional training of investment representatives, requiring testing of employees, and reexamining the interagency guidelines should help improve bank and thrift compliance with disclosures required by these guidelines. However, additional steps, which may have the potential to help improve compliance with the risk disclosure guidelines, could also be taken. Such actions, for example, could include regulators (1) continuing to monitor bank and thrift disclosure practices through periodic secret shopper surveys, (2) encouraging banks and thrifts to adopt this kind of testing procedure as part of their own internal compliance audits, if legal concerns can be overcome and it is cost effective; and (3) segmenting and publicizing the results of regulatory reviews of compliance with the interagency guidelines, including the results of secret shopper surveys, when appropriate. sales presentations between customers and bank employees, and they would have difficulty doing so without affecting the customer’s privacy or the performance of the employee. FDIC reported that it plans to evaluate the need for another secret shoppers survey on the basis of the results of bank examinations over the next 2 years. Because of the difficulty in monitoring oral sales presentations through examinations, it seems to us that decisions concerning the need for secret shopper surveys should not be based solely on examination results. Instead, using such surveys to supplement examination results could give banks and thrifts an additional incentive to better ensure that their personnel are providing proper disclosures. Bank regulators told us that some banks are using secret shopper surveys to monitor their own employees. A Federal Reserve official said that banks could make them part of their internal compliance audits. The need for federal regulators to do such surveys may decrease if more banks and thrifts do their own and if disclosure of mutual fund risks improves. Federal regulators could encourage banks and thrifts to adopt these surveys as part of their internal compliance audits if legal concerns can be overcome and it is cost effective. For example, some self-assessment activities, like self-testing, pose a dilemma for lending institutions in that under current law the results of self-testing programs may not be privileged or protected from disclosure to federal regulatory agencies or private litigants. Hence, despite the obvious preventative benefits to be gained from having lenders adopt continuous self-testing programs, many institutions are reluctant to undertake such programs out of fear that the findings could be used as evidence against them, especially by third-party litigants. One way to help resolve this issue would be to remove or diminish the disincentives associated with self-testing by alleviating the legal risks of self-testing when conducted by banks who, in good faith, are seeking to improve their mutual fund risk disclosures. Banking regulators suggested to us that they might also encourage depository institutions to consider methods other than secret shopper surveys to test compliance with disclosure requirements, such as calling their customers to determine if the sales person made the proper disclosures. investors than they are the safety and soundness of a depository institution. Therefore, bank and thrift regulators may want to consider the feasibility of segmenting the results of their reviews of compliance with disclosures required by the interagency guidelines, including the results of any secret shopper surveys, from other examination results and of making those results available to the public. Such segmentation and disclosure is already required in connection with regulators’ assessments of bank and thrift compliance with the Community Reinvestment Act. In summary, the results of our survey and the more recent surveys, indicate that there may be a persistent problem with many banks and thrifts failing to make the basic risk disclosures required under the interagency guidelines. These disclosures are important because they can help investors fully understand the risks of investing in bank mutual funds. Banking regulators and some banks and thrifts are taking steps to better ensure that the required disclosures are made. While these actions are positive, other steps, which may have the potential to help increase compliance with these guidelines and better ensure that investors are adequately informed of the risks of their investment decisions, could also be taken. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the Federal Deposit Insurance Corporation's (FDIC) survey concerning the risks associated with mutual fund investing. GAO noted that: (1) sales of mutual funds through banks and thrifts have increased dramatically; (2) the value of assets managed by these institutions doubled from $219 billion in December 1993, to $420 billion in March 1996; (3) 2,800 banks sold over $40 billion in both proprietary and nonproprietary mutual fund shares during 1995; (4) in February 1994, FDIC, the Office of the Comptroller of the Currency, the Federal Reserve, and the Office of Thrift Supervision jointly issued guidelines on the policies and procedures for selling nondeposit investment products; (5) these interagency guidelines require that bank and thrift customers be fully informed of the risks of investing in mutual funds; (6) the guidelines also require that banks' mutual fund sales activities be physically separated from bank deposit activities; (7) the results of the FDIC survey indicate that many banks and thrifts are not disclosing the risks associated with mutual fund investing; and (8) all four bank and thrift regulators are making an effort to ensure that bank personnel pass qualifying examinations and receive better training in selling uninsured investment products, and reexamine the current interagency policy on mutual fund sales. |
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Human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS), tuberculosis (TB), and malaria, are devastating millions of individuals and families, thousands of communities, and dozens of nations around the world according to the UN’s WHO. HIV/AIDS, the retrovirus that causes AIDS, is usually transmitted (1) sexually; (2) from mothers to children before or at birth or through breastfeeding; or (3) through contact with contaminated blood, such as through the use of contaminated hypodermic needles. In 2004, it led to between 2.8 and 3.5 million deaths, most of them in sub-Saharan Africa, which is home to more than 60 percent of people living with the virus. The number of people infected with HIV has risen in every region of the world, with the steepest increases occurring in East Asia, Eastern Europe, and Central Asia. In China, HIV/AIDS is now found in all 31 provinces, autonomous regions, and municipalities; and in India, as of 2003, 2.5 to 8.5 million people had been infected. In Eastern Europe and Central Asia, the number of HIV-positive people has risen ninefold in less than 10 years. TB, a bacterial infection transmitted by inhalation of airborne organisms, ranks just behind HIV/AIDS as the leading infectious cause of adult mortality, each year killing up to 2 million people, mostly between the ages of 15 and 54 years. It is the most common killer of people whose immune systems are compromised by HIV. Malaria, caused by a parasite, is transmitted in human populations through the bite of infected mosquitoes. The disease kills more than one million people per year, mostly young African children. The Global Fund, established as a private foundation in Switzerland in 2002, was created as a partnership between governments, civil society, the private sector and affected communities to increase resources to fight the three diseases. As shown in table 1, 45 percent of the Global Fund’s 271 grants, as of April 15, 2005, were focused on HIV/AIDS; 45 percent went to recipients in sub-Saharan Africa; and 59 percent went to government recipients. In March 2005, the Global Fund reported that across all grants, it had provided antiretroviral treatment to 130,000 people with AIDS; tested more than one million people voluntarily for HIV; supported 385,000 TB patients with directly observed short-course given more than 300,000 people new, more effective treatments for malaria; and supplied more than 1.35 million families with insecticide-treated mosquito nets. The Global Fund’s key principles are to (1) operate as a financial instrument, not an implementing entity; (2) make available and leverage additional resources; (3) support programs that evolve from national plans and priorities; (4) operate in a balanced manner with respect to geographic regions, diseases, and health-care interventions; (5) pursue an integrated and balanced approach to prevention, treatment, care and support; (6) evaluate proposals through an independent review process; and (7) operate in a transparent and accountable manner and employ a simplified, rapid, and innovative grant-making process. Numerous entities participate in the Global Fund’s processes for managing grants. The Global Fund manages its grants in two phases, generally over a 5-year period. During phase 1, the Global Fund signs a 2-year grant agreement with the principal recipient and periodically reviews recipients’ performance to determine whether to disburse additional funds. Near the end of phase 1, the board reviews the grant’s progress to determine whether to renew the grant for an additional 3 years; if the board approves continued funding, the grant enters phase 2. The Global Fund board approved the first round of grants in April 2002 and approved 33 grants to enter phase 2 as of April 25, 2005. The following entities participate in the Global Fund’s grant management process (see fig. 1). A country coordinating mechanism (CCM) representing country-level stakeholders submits grant proposals to the Global Fund and nominates a principal recipient to be responsible for implementing the grant. According to the Global Fund, the CCM should be made up of high-level host government representatives, representatives of nongovernmental organizations (NGO), multilateral and bilateral donors, the private sector, and individuals living with HIV/AIDS, TB, or malaria. CCMs are to develop and forward grant proposals to the Global Fund, monitor grant implementation, and advise the Global Fund on the viability of grants for continued funding after 2 years. The principal recipient is a local entity nominated by the CCM that signs an agreement with the Global Fund to implement a grant in a recipient country. There may be multiple public and private principal recipients for a single grant. The principal recipient is responsible for overseeing the activities of any subrecipients implementing grant activities and for distributing grant money to them. The secretariat is responsible for the Global Fund’s day-to-day operations, including managing the grant proposal process; overseeing and managing grant implementation to ensure financial and programmatic accountability; and acting as a liaison between grant recipients and bilateral, multilateral, and nongovernmental partners to ensure that activities at the country level receive necessary technical assistance and are well coordinated. As of April 15, 2005, the secretariat had 165 staff. Within the secretariat, the fund portfolio manager, or grant manager, is responsible for reviewing grant progress and deciding whether to disburse additional funds to the principal recipient. The secretariat reports to the Global Fund’s board of directors. The 23-member board is responsible for overall governance of the Global Fund and approval of grants. The board includes 19 voting representatives of donor and recipient governments, NGOs, the private sector (including businesses and foundations), and affected communities. Key international development partners, including WHO, the Joint UN Programme on HIV/AIDS (UNAIDS), and the World Bank, participate as nonvoting members. The World Bank also serves as the Global Fund's trustee. The local fund agent is the Global Fund’s representative in each recipient country and is responsible for financial and program oversight of grant recipients. This oversight role includes an assessment of recipients prior to their receiving money from the Global Fund. To date, the Global Fund has contracted with the following entities to serve as local fund agents: four private firms, KPMG, PricewaterhouseCoopers (PWC), Chemonics International, Inc., and Deloitte Emerging Markets; one private foundation that was formerly a public corporation, Crown Agents; the Swiss Tropical Institute; and two multilateral entities, the World Bank and the UN Office for Project Services (UNOPS). PWC and KPMG serve as the local fund agents in 91 of the 110 countries for which the Global Fund has contracted local fund agents. After the board approves a proposal submitted by a CCM and vetted by an independent, multinational technical review panel, typically for a 5-year grant, the secretariat signs a 2-year grant agreement with the principal recipient. This initial 2-year period represents phase 1 of the grant; if the board approves continued funding, the grant enters phase 2. For grants approved in 2002 and 2003, the local fund agent conducted, or contracted with other entities to conduct, assessments of the recipient’s capacity to (1) manage, evaluate, and report on program activities; (2) manage and account for funds, including disbursing to subrecipients; and (3) procure goods and services and maintain a reliable supply of drugs and other commodities. The local fund agent initially conducted these assessments after the signing of the grant agreement but now conducts them before the Global Fund signs an agreement with a principal recipient. After the local fund agent determines that the results of its assessments are satisfactory, the Global Fund instructs the World Bank to disburse the first tranche of funds to the principal recipient. According to its policy, the Global Fund disburses subsequent tranches based on performance to ensure that investments are made where impact in alleviating the burden of HIV/AIDS, TB, and malaria can be achieved. During the grant period, the portfolio managers are to link disbursements to periodic demonstrations of program progress and financial accountability. The grant agreements initially specified that principal recipients would report their progress and request additional disbursements on a quarterly basis. In July 2004, the secretariat changed the default reporting/disbursement request cycle to every 6 months. As of April 15, 2005, about 20 percent of the Global Fund’s grants were on a 6-month schedule. According to the secretariat, some grant recipients may choose to remain on a quarterly schedule or the secretariat may decide, based on a grant’s risk profile, to disburse only one quarter at a time. According to secretariat officials, grant managers use four sources of information to determine whether to disburse additional funds to grant recipients. Recipient progress reports. Principal recipients submit progress reports on meeting designated targets along with requests for further funding at the end of each disbursement period. If program results or expenses differ significantly from plans attached to the grant agreement, the principal recipient is to explain the reasons for these deviations and may also provide an overview of other program results achieved, potential issues and lessons learned, as well as any planned changes in the program and budget. The recipient forwards its progress report and disbursement request to the Global Fund secretariat through the local fund agent. Recipient expenditure data. The progress reports contain cash-flow information. Principal recipients are to outline expenditures for the previous disbursement period, comparing amounts budgeted for grant activities with amounts spent. Recipients are then to reconcile expenditures and provide a current cash balance. Budgets may vary from initial projections, owing to cost savings, additional expenditures, or currency fluctuations. Local fund agent assessments. The local fund agent reviews and validates the information in the progress update, performs ad-hoc verifications of program performance and financial accountability, and advises the Global Fund on the next disbursement. Local fund agents are to highlight achievements and potential problems to support their advice and may identify performance gaps to be addressed. Representatives of one local fund agent, which covers grants in 29 countries, said that they base their disbursement recommendations on two considerations: (1) the Global Fund’s level of risk in making additional disbursements to a recipient that uses funds ineffectively and (2) the immediate effect of withholding disbursement on program implementation, including the delivery of disease-mitigating services. These representatives said that, overall, they strive to tie the progress update to projected results in the grant agreement. Contextual information. The secretariat also uses additional information relevant to interpreting grant progress, such as news of civil unrest, political disturbance, allegations of corruption, conflict, major currency crisis, change of principal recipient, and natural disasters. A secretariat official said that the secretariat did not document requirements for such information for phase-1 decisions but did allow grant managers to consider any information that would adversely affect grant implementation in their decisions to disburse. This information is typically obtained through informal communications with grant recipients, bilateral and multilateral donors, or other development partners, according to secretariat officials. The principal recipient is to provide the CCM with copies of its disbursement requests and progress reports, and CCM members may comment on the progress of implementation based on their local knowledge and experience, either through the local fund agent or directly to the secretariat. If the secretariat decides to approve the disbursement request, it may specify the level of disbursement and actions that the principal recipient must take. The secretariat then instructs the World Bank to make the disbursement. The secretariat may also decide not to approve the disbursement request. When a grant reaches its sixteenth month, the Global Fund invites the CCM to submit a request for continued funding for the period following the initial 2 years. The Global Fund refers to this period as phase 2 of the grant (see fig. 2). The CCM is to submit its request to the Global Fund by month 18, and the secretariat is to evaluate the CCM’s request using the four sources of information described earlier. Based on its assessment of this information, as informed by its professional judgment, the secretariat gives the grant one of four scores, as shown in figure 3. It then provides its assessment and recommendation—called a grant scorecard—to the board regarding approval of the request, and the board decides on the request by month 20. If the board approves the request, the principal recipient and the Global Fund negotiate and sign a grant agreement extension over the next 2 months. At month 22, the Global Fund instructs the World Bank to make the first phase-2 disbursement. The secretariat sends its recommended scores to the board members, who vote on the recommendations via e-mail. A “go” decision means that the Global Fund approves proceeding to phase 2. “Conditional go” means that the Global Fund approves proceeding to phase 2 after the principal recipient undertakes specific actions within the time frame specified. “Revised go” means that the principal recipient must reprogram the grant and substantially revise the targets and budgets for phase 2. “No go” means that the Global Fund does not approve the grant’s proceeding to phase 2. Currently, recipients denied further funding (“no go”) cannot formally appeal the board’s decision. However, a board subcommittee may consider a formal appeal process. If the “no go” decision affects patients on lifelong treatment, the principal recipient may be eligible to receive funding to sustain treatment for 2 more years. As figure 4 shows, the Global Fund board approved the first round of grant proposals in April 2002. The second, third, and fourth rounds were approved in January 2003, October 2003, and June 2004, respectively. The board is expected to approve a fifth round of proposals in September 2005. As of April 25, 2005, the secretariat had reviewed 36 grants that became eligible for continued funding under phase 2. The board approved 20 grants, conditionally approved 13, denied 1, and is still considering 2. The board will continue to evaluate grants for phase 2 on a rolling basis as they become eligible. According to Global Fund officials and other knowledgeable entities, recipient countries’ capacity to implement grants was an underlying factor in grant performance. In addition, principal recipients for the 38 grants as well as Global Fund and development partner officials frequently cited four factors associated with challenges or successes in grant performance: (1) guidance, (2) coordination, (3) planning, and (4) contracting and procurement. We found no significant association between the type of principal recipient, grant size, or disease targeted and the percentage of a grant’s funds disbursed to the principal recipient. Global Fund and development partner officials cited limited capacity in recipient countries as an underlying factor that can negatively affect grant performance. Global Fund grant managers said that in many cases, grants experienced early delays because of weaknesses in recipients’ financial, procurement, and monitoring and evaluation systems. For example, Indonesia’s local fund agent found the principal recipient’s management and financial plans to be insufficient and asked the recipient to rework them seven times before the local fund agent recommended grant disbursements. Also in Indonesia, TB spending increased fivefold, greatly straining capacity, particularly for monitoring and evaluating activities at the district level. In Kenya, a lack of designated, adequately trained staff at the principal recipient (the ministry of finance) and immediate subrecipients (the ministry of health and the National AIDS Control Council) slowed disbursements from the principal recipient and from the immediate subrecipients to implementing organizations. Ethiopia has been slow in implementing its first three grants, particularly those for TB and malaria, owing to lack of monitoring and reporting capacity within the ministry of health, delays in recruiting staff to manage financial systems, slow decision-making processes, delays in starting the procurement process, and cumbersome procurement procedures. Despite limited overall capacity in recipient countries, we found instances where recipient governments had worked with development partners to strengthen capacity in the health sector, thus facilitating grant performance. For example, according to the Indonesian government and WHO officials, the Global Fund grant in Indonesia is building on a strong foundation, using the country’s 5-year strategic plan for TB, a joint effort of the Indonesian government and WHO. Between 2000 and 2003, the Dutch government helped train TB “soldiers” in Indonesian provinces, which improved outreach and case-detection efforts under the Global Fund grant; Indonesia’s ministry of health had already established mechanisms to quickly disburse funds to districts. In addition, the Zambian government has worked with donors and other development partners to strengthen its health sector financing mechanisms. As a result, donors, including the Global Fund, contribute directly to an existing mechanism, the pooled health sector “basket,” and use the health sector donor group overseeing these funds to monitor and evaluate grant progress in meeting targets. Zambia’s health sector also has mechanisms in place to quickly channel funds to the country’s more than 70 districts. In Mongolia, the local fund agent reported that the principal recipient and subrecipients had adequate financial management systems in place to account for funds and that the principal recipient could immediately start implementing the program with little, if any, technical assistance. Some countries and grant recipients are also seeking to strengthen their capacity through Global Fund grants, according to the Global Fund and principal recipients. Grant recipients frequently reported that a lack of guidance from the recipient country’s government or the Global Fund caused them to fall short of grant targets. For example, recipients in three countries reported that they could not meet their targets because they had not received approved national treatment guidelines. Indonesia’s ministry of health did not have guidelines ready for the voluntary counseling and testing component of its HIV grant, delaying distribution of information to the provinces. Senegal’s ministry of health, another principal recipient, did not have treatment plans needed for implementing its malaria grant, preventing the principal recipient from receiving antimalarial medication. In addition, some stakeholders reported that guidance from the Global Fund was lacking or unclear or that they encountered difficulties with Global Fund grant policies. For example, in at least one instance, U.S. government officials reported that spending delays in Kenya resulted from unclear guidance from the Global Fund regarding altering programs to allow the use of newer, more effective but expensive malaria drugs. The Global Fund recognized that procedures for early grants were unclear and that this lack of clarity caused program delays. Further, WHO officials and at least one recipient voiced concerns over lack of flexibility when recipients sought to modify grant activities. For example, one subrecipient in Thailand expressed concern that it could not use Global Fund money to build or maintain a shelter for HIV-positive women because this type of activity was not written into the grant. Grant recipients also said that continued staff turnover in the Global Fund’s grant management teams made it difficult to receive clear, consistent guidance. For example, recipients in Thailand said that they had worked with four different grant managers over the life of their grants and that this turnover had complicated communication. However, several grant recipients reported that, under certain circumstances, Global Fund guidance allowed them to quickly redirect funds to meet existing targets. For example, the principal recipient in Indonesia cited grant flexibility as a factor positively affecting performance in both its TB and HIV/AIDS round-1 grants, because this flexibility allowed it to adjust its funding priorities in line with its targets. Similarly, in Thailand, one subrecipient stated that the Global Fund allowed it to change training modules to meet educational needs, contributing to success. The Global Fund secretariat reported that, in some cases, poor coordination negatively affected grant implementation. For example, in Ghana, internal rivalries between ministry of health units with different responsibilities in the program are slowing implementation. In Senegal, the Global Fund reported that the principal recipient did not meet its target for coordinating and developing partnerships to promote community-based programs for combating malaria. However, effective coordination between grant recipients and local community groups or development partners sometimes contributed to recipients’ meeting or exceeding their goals. Zambia’s HIV/AIDS grant exceeded its targets for training and provision of services because of development partner, NGO, and private sector contributions. Similarly, in Kenya, one NGO principal recipient leveraged the activities of other groups providing HIV care kits. Another recipient in Kenya exceeded its targets for condom distribution by working with local intermediaries to increase demand by approaching new types of clients, such as shoe shiners, open vehicle cleaners, security officers, staff at petrol stations, and young men at salons. In Indonesia, a grant subrecipient was able to provide treatment to a larger number of TB patients by partnering with private physicians, because a significant number of patients sought treatment at private clinics. Planning difficulties affected some recipients’ ability to meet grant targets. Recipients reported that they sometimes did not achieve targets for a variety of reasons, including not budgeting sufficient time or money to complete targets, or scheduling activities for the wrong time period. One recipient in Zambia underestimated the time needed to analyze baseline data on constituent needs prior to the planned distribution of educational materials on malaria prevention to 1,000 households. The recipient eventually printed the materials but did not reach the targeted households within the planned time frame. In Sri Lanka, a malaria grant recipient underestimated the cost of establishing a community center and had to redesign its program plan to remain within the grant budget. According to the progress report, the principal recipient established new targets to use the funds originally budgeted to build the center, delaying grant implementation. Further, a recipient in Kenya did not conduct 3,000 planned community education skits aimed at preventing HIV during one disbursement period and attributed the shortfall to a conflict with annual school examinations. The Global Fund recognized that recipients’ difficulty in setting targets for the initial grants derived in part from the fact that it was developing procedures and guidelines at the same time that it was approving and signing round-1 and round-2 grants. Conversely, in some cases, adept planning positively affected grant performance. In Indonesia, several grant recipients reported that effective planning for TB treatment allowed various districts to complete work plans early in the grant, in turn allowing the provinces that oversee those districts to meet their target of developing budgets on time. In Haiti, one principal recipient exceeded its targets by planning activities around World AIDS Day, increasing the demand for, and the principal recipient’s provision of, AIDS-related services such as condom distribution. Recipients frequently reported that contracting delays with subrecipients, vendors, or other service providers caused them to miss quarterly targets. For example, UNDP, a principal recipient in Haiti, was unable to hold a planned HIV conference because of delays in signing a contract with a subrecipient. Delays in selecting and reaching contracts with subrecipients caused the Argentine grant to start slowly, the Global Fund secretariat reported. In Thailand, the ministry of public health recipient could not establish TB treatment services because of a subrecipient delay in selecting a site and contract. Grant recipients and the Global Fund secretariat also cited procurement delays as reasons for missing quarterly targets. For example, recipients of malaria grants in Tanzania and Zambia reported that they did not distribute the targeted number of bed nets due to lengthy government procurement processes. In addition, during our visit to Zambia, we found that local spending restrictions also affected recipients’ ability to meet and report on targets. A district health director explained that spending restrictions delayed her purchase of a new hard drive for her office’s computer, which slowed the district’s grant activities and reports to the principal recipient. In Kenya, we found that the limited capacity of the Kenyan health ministry’s procurement agency and the ministry’s reluctance to contract with outside procurement experts led to delays and, as a result, to gaps in the supply of HIV test kits, which bilateral donors had to fill. In Ghana, according to the Global Fund secretariat, the government’s slow, bureaucratic procurement processes caused delays that contributed to the grant’s poor performance in reaching people with HIV/AIDS and opportunistic infections. However, the Global Fund secretariat reported that some principal recipients’ efficient procurement helped them meet their targets. For example, a principal recipient in Madagascar managed procurement exceptionally well throughout the grant and, as a result, exceeded its targets for distributing bed nets. The Global Fund disbursed this grant’s phase-2 funding early, because the recipient had implemented the program rapidly and was therefore able to use the additional funds. Another recipient in Madagascar consistently met targets, and its disbursements to subrecipients accelerated. The Global Fund also reported that, after initially strengthening its capacity, the principal recipient in Moldova made substantial progress with procurement activities, thereby lowering treatment costs per patient and realizing significant savings due to lower acquisition costs. To determine whether certain grant characteristics were factors associated with the percentage of funds disbursed, we analyzed 130 grants with first disbursements on or before December 31, 2003. We found no significant association between the type of principal recipient, grant size, or disease targeted and the percentage of a grant’s funds disbursed, after taking into account the time elapsed since the first disbursement. (See app. II for details of our analysis.) For example, the Global Fund disbursed a smaller percentage of grants to government recipients than to recipients in the private sector and faith-based organizations, but these differences do not incorporate other factors such as grant size or time elapsed since the first disbursement. We also considered whether disbursements were made in a timely manner, that is, within 135 days (a 90-day quarter plus a 45-day grace period allowed by the Global Fund for reporting). Overall, we found that 35 percent of the disbursements were made within 135 days and that later disbursements were more timely than earlier ones. The number of timely disbursements was too small at any given disbursement stage to determine whether timeliness varied according to recipient or disease type, or grant size. We noted problems associated with the four information sources that the secretariat draws on for periodic disbursement and renewal decisions. In addition, although the Global Fund’s stated policy is to disburse funds based on performance and to operate in a transparent and accountable manner, we found that the secretariat did not document its reasons for periodic disbursement decisions during phase 1. Similarly, some of the secretariat’s recommendations regarding grant renewals for phase 2 have not been fully documented, and stakeholders have raised additional concerns regarding the timing of the phase-2 renewal process, dated information, low grant expenditure, and potential politicization of disbursement decisions. We found the following problems associated with the sources of information that the secretariat uses in making periodic disbursement decisions during phase 1 and determining whether to renew grants during phase 2. Recipient progress reports vary in quality. Some reports do not explain why recipients missed targets, and the limited monitoring and evaluation capabilities of many recipients raise questions about the accuracy of their reporting. Secretariat officials acknowledged that guidance for planning program activities, setting indicators, and monitoring and evaluating progress was not available when initial grants were signed. However, Global Fund secretariat and other officials have raised questions about the ability of principal recipients to discharge their responsibility for reviewing and monitoring the activities of subrecipients to which they disburse funds. According to the Global Fund official in charge of grant operations, many early grant proposals were overly ambitious and hurriedly assembled; he said more recent proposals were more realistic and better designed. UNAIDS officials also stated that when principal recipients’ progress updates show poor performance, it is not always clear whether grants are underperforming or recipients are failing to effectively report performance. For example, when a progress update shows failure to achieve targets, the principal recipient and subrecipients may have actually completed the activities but not understood how to record them. Recipient expenditure data are incomplete. Recipients’ cash-flow reports do not include data on expenditures below the level of the principal recipient. In addition, principal recipients may not always document their disbursal of money to subrecipients. Moreover, Global Fund and other officials have questioned whether some principal recipients have the expertise needed to monitor subrecipients’ expenditures. Further, secretariat officials stated that although the achievement of program targets and cash flow are closely linked, recipients’ expenditures do not necessarily indicate that they are meeting their targets. The officials stated that utilizing this source of information is essential to guard against treatment interruptions or irreparable harm to struggling programs that are not yet viable but show strong potential. Local fund agent assessments are inconsistent. According to Global Fund secretariat officials and others, the ability of local fund agents to effectively verify program activities varies widely. A secretariat– commissioned assessment reported that the current local fund agent system does not provide grant managers with a sufficient level of risk assurance for continued funding. The study, as well as Global Fund and development partner officials, reported that although most local fund agents are competent to assess and verify financial accountability, they often lack the knowledge and experience needed to assess and verify recipients’ performance—specifically, recipients’ ability to meet program targets, monitor and evaluate progress, and procure and manage drugs and other medical supplies. The study also stated that local fund agents’ assessments of financial and program-related capacity and verifications of activities are limited and rarely include site visits to implementing subrecipients. Contextual information is systematically collected for phase 2 but not for phase 1. To better understand why recipients received phase-1 disbursements when they did not meet many of their performance targets, we requested full disbursement dossiers from the secretariat; however, the dossiers contained very little contextual information supporting the disbursement decisions. The contextual information provided was often in the form of hand-written notes or e-mail correspondence that had been collected ad hoc. Secretariat officials acknowledged that while they collect contextual information through detailed questions on the scorecards for phase-2 decisions, they have no systematic method for collecting such information for phase-1 decisions. Although the Global Fund considers contextual information in its funding decisions, it does not document the extent to which it uses such information. Although the files for the 38 grants we reviewed contained information on progress toward targets and cash flow, they contained little or no documentation explaining why the Global Fund approved the disbursements. Overall, for the 38 grants we reviewed, we determined that recipients met, on average, 50 percent of their targets; partially met 21 percent; and failed to meet 24 percent. For 6 percent of the targets, the information in the progress reports was insufficient to determine whether the target had been met, partially met, or not met. In some of these cases, the Global Fund disbursed funds to recipients even though they reported that they had met few or none of their targets. For example: The principal recipient for Sri Lanka’s second malaria grant received disbursements for its third and fourth quarters, although it had submitted two progress updates showing that it met only 2 of its 14 targets for the third quarter and 4 of 13 targets for the fourth quarter. The secretariat provided no written information explaining its approval of the third-quarter disbursement and provided only a one-sentence declaration of agreement regarding the fourth-quarter disbursement. In both cases, the local fund agent had recommended that the recipient receive less than the amount requested, citing cash-flow considerations but not mentioning performance against targets. In each case, the secretariat disbursed the amount that the local fund agent recommended. The principal recipient for Thailand’s TB grant received its second disbursement although it had met only 1 of 29 performance targets. The secretariat approved the full amount requested, stating that the recipient had not requested sufficient funds in its previous disbursement request, although the grant manager did not provide documentation to validate this assessment. The local fund agent had noted the grant’s poor performance and, acknowledging the grant’s low cash reserves, suggested a disbursement of 25 percent of the recipient’s request. Further, the Global Fund secretariat does not systematically track denied disbursement requests or publicly document denials. Secretariat officials acknowledged that they currently have no mechanism for tracking or documenting these instances. According to these officials, the denial may eventually be documented in a memorandum on the grant’s disbursement request history once a disbursement is approved or, if the grant is ultimately canceled without further disbursement, in a grant-closing memorandum. According to grant management officials, the secretariat is to unequivocally demonstrate satisfactory performance of all grants recommended to the board for continued funding under phase 2. However, we found that the secretariat did not always clearly explain the overall score it assigned each grant when it recommended the grant for continued or conditional funding. Although a substantial part of the score is to be based on recipients’ performance against agreed-on targets (e.g., the number of people to be reached by disease mitigation services), the final score can also reflect grant managers’ professional judgment, contextual information from multilateral and bilateral donors, and past disbursement rate data. Secretariat officials said that decisions based on these information sources should be documented when an overall score does not seem to reflect recipients’ achievement of individual targets. However, we did not find such documentation in the grant scorecards for 8 of 25 early grants that the Global Fund has considered for continued funding after an initial 2-year period. The secretariat gave 3 of the grants an overall score of B2 yet recommended “conditional go,” which corresponds to a B1 score. For another grant, the secretariat gave a B1 score for three indicators, two of which concern the number of people reached by treatment, care, or other disease mitigation services, yet made an overall recommendation of “go,” which corresponds to an A score. Such discrepancies between scores and recommendations are significant, because the recommendations determine the levels of action that recipients are to undertake before receiving phase-2 funding. Seven of the scorecards also raised concerns about the quality of recipients’ data and their monitoring and evaluation capabilities. Of the 25 grants, the Global Fund decided to cancel one, and the secretariat’s scorecard clearly explained the reasons for recommending that the board cancel the grant. According to the Global Fund, the phase-2 renewal process is a critical checkpoint to ensure that grants show results and financial accountability. However, some stakeholders raised concerns about the process that the Global Fund used to review the first set of grants eligible for renewal. For example, a representative of a local fund agent stated that this process may occur too early in the life of a grant and that progress may be better evaluated when a grant approaches the 3-year mark. Further, officials representing a Global Fund board member stated that data provided to the board during the first round of renewal decisions did not contain expenditure data. These officials stated that when they sought expenditure data (i.e., amounts spent by grant recipients on program activities) on the Global Fund’s Web site in March 2005, the most recent information for their grants of concern had been posted in June 2004. Subsequent data submitted to the board for phase-2 renewal decisions contained expenditure information. In one case, a recipient applying for phase-2 funding and recommended by the secretariat for continued funding had received more than 75 percent of its 2-year grant amount yet had transferred only 12 percent of this money to subrecipients for program activities. These officials also raised concerns over the potential for the politicization of board decisions because the board had returned three “no go” recommendations to the secretariat for further consideration after some recipients and NGOs lobbied board members. The Global Fund’s secretariat is launching a range of initiatives to address challenges to grant performance and improve the overall management of grants. Systemwide, the secretariat is (1) reorganizing and strengthening its units, (2) developing a risk assessment mechanism and early warning system, (3) streamlining reporting and funding procedures, (4) working with partners to strengthen recipient capacity, and (5) clarifying guidance for CCMs. However, the board has not clearly defined the CCMs’ role in overseeing grant implementation. The Global Fund has also responded to country-specific challenges in Kenya and Ukraine. To improve grant management and documentation of funding decisions and to better support underperforming grants, the Global Fund took the following actions in 2004: Reorganized the secretariat’s operations unit and increased the number of staff from 118 to 165. For example, it added eight grant manager positions and established regional teams, each with a team leader, so that more than one grant manager is responsible for a set of grants in the countries within a regional team. To better document periodic disbursement decisions, the secretariat added a new position, known as a program officer, to its grant management structure. The secretariat is currently recruiting program officers for each regional team, who are to be responsible for documenting disbursement and other decisions and keeping track of grant milestones. Further, secretariat officials said that the Global Fund is planning to recruit additional grant management staff to conduct increased day-to-day recipient monitoring and assistance. The program officers and the additional grant management staff accounted for most of the increase in staff at the secretariat between 2004 and 2005, according to a Global Fund administrative official. Created the Operational, Partnerships and Country Support Unit to focus on problem grants. According to secretariat officials, this unit—which also includes new positions to liaise with development and technical assistance partners, local fund agents, and CCMs—will enable the secretariat to address grant performance issues before they become serious problems and will thereby better manage risk exposure. For example, the unit could mobilize intervention by high-level recipient government officials, solicit technical assistance from partners, or engage the United Nations Children’s Fund (UNICEF) to procure health commodities until the recipient government can set up a viable procurement system. Strengthened its strategic information and evaluation unit to improve monitoring and evaluation, data reliability, and quality assurance. To enhance the quality and consistency of the data that recipients report, in June 2004 the secretariat issued a monitoring and evaluation “toolkit” developed in cooperation with other donors and development assistance partners. This toolkit guides grant recipients to select consistent indicators to measure progress toward key program goals, such as the number of people with AIDS who were reached with drug treatment or the number of people given insecticide-treated bed nets to prevent malaria. The secretariat has also required attachments to each grant agreement that outline program indicators and the specific activities that enable recipients to meet these indicators and overall program goals. According to Global Fund officials, progress will more easily and consistently be measured when all grants have aligned their indicators and activities to this toolkit. Grant managers are currently working to accomplish this goal with the recipients they cover. According to the Global Fund, these developments have been important in harmonizing monitoring and evaluation approaches among partners at national and international levels and will help simplify country-level reporting to multiple donors by ensuring the use of a common set of indicators to measure interventions. Partners provided training on the toolkit in 2004. According to the secretariat, training is to continue in 2005. Recipients we met with in Thailand confirmed that they had received the toolkit. However, they said that it was not in their native language and therefore was not useful. In March 2004, the board approved establishing a Technical Evaluation Review Group with members from UNAIDS, WHO, and other partners to develop a system for assessing and ensuring data reliability. The group first met in September 2004. According to Global Fund officials, these efforts will result in more systematic reporting and analysis by recipients, the Global Fund, and partners and, consequently, in better comparisons of grants. To strengthen strategic information for monitoring grant performance, in fall 2004, the secretariat created a “data warehouse” that contains information from recipients’ progress reports and disbursement requests, donors, CCMs, and local fund agent assessments. Secretariat staff use the database to prepare “scorecards” that rank grants for the phase-2 renewal process. The secretariat has devised a risk-assessment model and early warning system to identify poorly performing grants and to more systematically alert grant managers when they need to intervene. Because the Global Fund disburses grants to recipients in countries with varying levels of economic development and capacity, its risk-assessment model will incorporate grant size and performance as well as country development and corruption indicators. By tracking key events in the context of grant and country risk, the grant portfolio managers can determine whether recipients have missed important milestones. The early warning system is to generate reports using indicators—for example, time elapsed between disbursements—to flag problems and trigger possible interventions. The system will also incorporate contextual information from country-based partners. When the system identifies slow-moving grants, staff from the secretariat’s Operational, Partnerships and Country Support unit will be able to assess and follow up with the appropriate level of intervention. For example, if a grant recipient in a high-risk country does not submit a progress report and disbursement request at the expected time, the system will alert staff that follow-up is needed. Although the system has not been fully implemented, secretariat officials said that their recent intervention in Tanzania exemplifies the way the system should work. The Tanzania malaria grant was not demonstrating progress after 1 year, as measured by the amount of funds disbursed compared with the amount that the secretariat expected to disburse. After following up with the principal recipient, secretariat staff realized that political infighting—rather than technical limitations—were inhibiting progress of the malaria program: competing groups were vying for control of grant funds and uncertain of how to procure and distribute bed nets to vulnerable groups, such as pregnant women or women with young children. The government decided to give vouchers to members of vulnerable groups to enable them to purchase bed nets at a lower price; however, the ministry of health did not print or distribute the vouchers or specify where they should be distributed. The Director of the Operational, Partnerships and Country Support Unit traveled to Tanzania and met with development partners and high-ranking host government officials to encourage the government to take action. The Global Fund brought in UNICEF, a key development partner in Tanzania, to work with the government’s malaria advisor as well as experts from the Swiss Tropical Medicine Institute to resolve the problems and get the program back on track. In response to concerns that grantee reporting requirements are difficult and time consuming for recipients, grant managers, and local fund agents, the secretariat instituted a new policy that changes the default for reporting from quarterly to every 6 months. In addition, the secretariat is considering new, more streamlined funding mechanisms than the current round-based approach. However, the board has not endorsed these changes, and some board members, including the United States, are opposed to them at this time. To decrease the administrative burden on grantees and to bring its practice more in line with other donor agencies, the secretariat instituted a semiannual reporting policy in July 2004. Some recipients still report quarterly, such as those implementing grants that the secretariat identified as high risk—for example, in countries with limited human resource capacity—while others have the option of using quarterly disbursements to meet their needs—for example, as a hedge against currency fluctuations. However, this policy change did not require board approval, and some board members, including the United States, do not support it. Although the Global Fund strives to be a funding mechanism that seamlessly fits into many country programs by providing additional funding where needed, it recognizes that its current practice of financing grants through rounds can disrupt countries’ planning and time lines and strains recipient capacity. In addition, some associated with the Global Fund said that rounds might lead CCMs and recipients to concentrate their energy on developing new proposals rather than implementing existing grants and that repeated rounds add greatly to the secretariat’s workload. A document submitted to the board by the secretariat stated that although the round- based grant approval system worked well for launching the Global Fund and identifying countries that submitted strong proposals, this system forced recipients to adapt their planning cycles to those of the Global Fund (rather than building on preexisting planning cycles), encouraged the submission of smaller proposals, and left a considerable amount of time between proposal submission and approval. This document presented several options for the board, such as creating two continuous funding streams—one for governments and another for civil society recipients. For example, government applicants could submit their national strategic plans for the coming years, highlighting financing gaps and facilitating integration of Global Fund financing with existing planning and budgeting systems, such as sectorwide approaches. According to the document, this approach would create incentives for CCMs to improve and accelerate the disbursement of funds and would ease the secretariat’s workload, allowing secretariat staff to spend more time managing grants and less time negotiating grant agreements. The board has not set time frames for further discussing this issue. According to U.S. board members, the board has not yet fully discussed or approved these changes, and a majority of board members oppose them at this time. Because most grant performance problems are associated with limited capacity at the country level, where the Global Fund has no presence and plays no part in program implementation, the Global Fund relies on its technical partners to provide technical expertise to grant recipients. Although the partners we spoke with expressed their strong support for the Global Fund, they also voiced concern that they have not received additional resources to provide the technical support that grant recipients have requested. The Global Fund and partners reported that partners provided essential support that strengthened recipients’ capacity to prepare applications for Global Fund financing and helped address the underlying problems that affected grant performance. For example: UNAIDS, a key technical partner, has added about 30 monitoring and evaluation officers in various countries who are available to support CCMs in preparing grant performance reports for phase-2 renewals. UNAIDS has also intensified its capacity-building support at the country level. Several WHO departments have provided critical technical support. For example, WHO’s Stop TB unit supported 50 countries when they developed their applications for Global Fund financing. The Global TB Drug Facility worked with recipients in eight countries to identify and resolve procurement and supply management bottlenecks. WHO’s HIV/AIDS Department helped to develop comprehensive technical support plans for accelerating the scale-up of antiretroviral therapy and prevention services in 15 to 20 countries. In addition, according to the Global Fund, it collaborated closely with WHO’s Roll Back Malaria Department in 2004 to incorporate into existing grants new, more effective malaria treatments that use artemisinin-based combination therapy. USAID and the U.S. Centers for Disease Control and Prevention (HHS/CDC) are assisting grantees in a number of countries. For example, USAID is supporting TB grants in numerous ways, including providing training on procuring and managing medical supplies, addressing country-level financial management constraints, and conducting human resource assessments to determine existing capacity needs. In another instance, HHS/CDC is assisting one grantee in reporting and monitoring activities and revising project funds to improve grant implementation. HHS/CDC has also coordinated the implementation and monitoring of activities under another country’s TB grant, participating in supervisory visits to districts to assess their progress and compiling and submitting quarterly reports for the TB grant to the ministry of health. UNAIDS and WHO officials in Geneva and in the field expressed strong support for the Global Fund but consistently raised concerns about their organizations’ ability to respond to increasing numbers of requests from grant recipients for help in addressing issues underlying performance problems. For example, although UNAIDS recently added about 30 monitoring and evaluation officers in its country and regional offices, officials said that the agency’s resources are being stretched thin and that it cannot provide assistance to all Global Fund grant recipients. Likewise, WHO officials said that its regional and country staff are dedicated to providing technical assistance, but because WHO is not funded to support Global Fund grants it is often unable to respond to all recipients’ requests for help. According to officials from WHO’s HIV/AIDS, Stop TB, and Roll Back Malaria departments, the Global Fund works under the assumption that UN agencies have a mandate to provide technical assistance. However, unless it gets more money from its member countries for this purpose, WHO does not have the resources to keep up with the massive increase in need for technical assistance owing to Global Fund grants. In addition, WHO officials pointed out that the Global Fund does not encourage recipients in African countries to take advantage of WHO’s Global Drug Facility to procure quality-assured TB drugs at the cheapest prices available; instead, the Global Fund encourages competition and reliance on local industry. To strengthen accountability in recipient countries, the board has clarified some roles and responsibilities for the CCMs. The board has stated that CCMs are responsible for overseeing grant implementation and are therefore to play an important role in deciding whether grants should be renewed for phase-2 funding. To enhance and clarify CCM functioning, the secretariat in March 2005, convened regional workshops in Zambia and India on CCM best practices. In addition, to improve communication between the Global Fund and CCMs, the secretariat is compiling contact information for all CCM members. This information will enable it to communicate directly with the members instead of relying on the CCM chairperson to disseminate information. Secretariat officials acknowledged that no formal studies conclusively demonstrate a link between CCM functioning and grant performance. However, the Global Fund’s March 2005 report stated that many of the (then) 27 grants eligible for phase-2 funding benefited from several factors, including full levels of participation by CCM members in that body. Further, the report stated that low levels of participation and involvement by CCM members were a key factor in poor performance. Secretariat officials stated that they plan to initiate a study at the end of 2005 to systematically investigate links between CCM functioning and grant performance, given that a number of additional grants will then have neared the 2-year mark and gone through the phase-2 decision process. In response to findings from several earlier studies commissioned by the Global Fund on CCM functioning, in November 2004, the board agreed on specific requirements for CCMs. However, it has not clearly defined CCMs’ role in monitoring grant implementation. In April 2005, the board directed CCMs to develop tools and procedures for overseeing grants, stating generally that these tools and procedures “should include but need not be limited to” a list of five activities such as recording key oversight actions and developing a work plan that “could include” site visits. The board noted that because CCMs vary from country to country, these guidelines can be adapted and their application paced as needed. According to secretariat staff, the board has not reached consensus regarding CCMs’ oversight role because some members want clear, specific requirements for CCMs while others prefer the more general guidelines. In addition, in 2004, the board agreed on a checklist for measuring CCM performance that focuses mostly on the makeup of the CCMs, participation and communication among members, and governance and management. However, the checklist did not include parameters for measuring the effectiveness of CCMs in overseeing grant performance. Participants at the Zambia workshop recommended that the secretariat develop more specific guidelines defining the oversight role of the CCM. The Global Fund secretariat intervened in at least two countries in response to grant performance problems. For example, in Kenya, the secretariat intervened in 2004 at the request of donors and board members to encourage the principal recipient to hold regular meetings with subrecipients and designate staff to administer and monitor the grants. The secretariat also intervened in Kenya to improve coordination by facilitating new CCM procedures, such as designating multiple minute-takers to ensure the accuracy of the minutes and making sure that minutes are circulated promptly. According to one CCM member, two additional people now take notes at each meeting; however, the minutes are not being circulated in advance of the next meeting. In commenting on a draft of this report, U.S. government officials said that, despite these interventions, problems persist. For example, they said that CCM meetings in Kenya are too infrequent and poorly prepared; decisions are made outside of the meetings; and the minutes are often inaccurate. In Ukraine, the Global Fund suspended three HIV/AIDS grants in January 2004 after investigating irregularities in the principal recipients’ procurements that development partners had brought to its attention a month earlier. The secretariat had also found that after nearly 12 months of a 24-month program, the recipients had spent less than 4 percent of the total 2-year amount for the three grants. The Global Fund had disbursed a total of $7.1 million to the principal recipients, from whom it obtained $6.3 million in reimbursements. In March 2004, the secretariat signed an agreement with a new principal recipient to continue the HIV/AIDS mitigation activities specified in the original grants; in addition, it transferred $300,000 to this entity to avoid interrupting ongoing programs. The Global Fund’s mandate reflects inherent tensions. On the one hand, the Global Fund is to function solely as a funding entity with no implementing role and to encourage recipient country bodies such as the CCM to be responsible for implementing and overseeing grants. On the other hand, it is to disburse funds rapidly while also ensuring that recipients are able to account for expenditures and produce measurable results in addressing the three diseases. In seeking to balance these tensions and further improve its performance, the Global Fund has revised—and continues to revise—its processes. Some systemwide changes require board approval or will take time to fully implement, whereas others can be implemented relatively quickly. Capacity in recipient countries, guidance, coordination, planning, and contracting and procurement are pivotal to grant performance and therefore merit continued attention. However, local fund agents’ frequent lack of expertise in assessing these factors, and many recipients’ limited monitoring and evaluation capabilities, raise questions about the accuracy and completeness of the information that the secretariat uses to make its periodic disbursement and funding renewal decisions. In addition, despite recent improvements, the Global Fund’s lack of consistent, clear, and convincing documentation of its funding decisions may hamper its ability to justify these decisions to donors and other stakeholders, in accordance with its principles of transparency and accountability. To ensure that all funding decisions are clearly based on grant performance and reliable data, it is critical that the Global Fund resolve these issues in a timely manner. To improve the quality of the information on which the Global Fund bases its funding decisions and the documentation explaining these decisions, we recommend that the U.S. Global AIDS Coordinator work with the Global Fund’s Board Chair and Executive Director to take the following three actions: complete efforts to ensure that local fund agents have the necessary expertise to evaluate performance data on disease mitigation that recipients submit, continue to work with development partners to strengthen the quality and consistency of that data by enhancing recipients’ capacity for monitoring and evaluating their financial and program-related activities, and continue efforts to clearly document the Global Fund’s reasons for periodically disbursing funds and renewing grant agreements. We requested comments on a draft of this report from the Executive Director of the Global Fund, the Secretaries of State and HHS, and the Administrator of USAID, or their designees. We received formal comments from the Global Fund as well as a combined formal response from State, HHS, and USAID (see apps. III and IV). The Global Fund concurred with the report’s conclusion and recommendations and noted steps it is taking to improve documentation of grant performance such as organizing regional training of principal recipient staff to improve the quality of their reporting; defining universal and detailed performance indicators for each grant to more systematically track performance; and tailoring grant oversight and terms of reference for local fund agents based on grant risk. State, HHS, and USAID largely concurred with the report’s conclusions but did not comment on the recommendations in their formal response. Both the Global Fund and the U.S. agencies also submitted informal, technical comments, which we have incorporated into the report as appropriate. We are sending copies of this report to the Global Fund Executive Director, the U.S. Global AIDS Coordinator, the Secretary of HHS, the Administrator of USAID, and interested congressional committees. Copies of this report will also be made available to other interested parties on request. In addition, this report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3149. 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. In May 2003, the President signed a law directing the Comptroller General to monitor and evaluate projects supported by the Global Fund. This report reflects our review of grants that the Global Fund began disbursing before the beginning of 2004—that is, grants that have had at least 1 year to perform. In this report, we (1) describe the Global Fund’s process for managing grants and disbursing funds, (2) identify factors that have affected grant performance, (3) review the basis for, and documentation of, the Global Fund’s performance-based funding, and (4) describe the Global Fund’s recent refinements for managing grants and improving their performance. To describe the Global Fund’s process for managing grants and disbursing funds, we reviewed Global Fund documents, including The Global Fund Operational Policy Manual and related guidance documents; A Force for Change: The Global Fund at 30 Months; The Global Fund to Fight AIDS, Tuberculosis and Malaria: Annual Report 2002/2003; and Investing in the Future: The Global Fund at Three Years. We also interviewed Global Fund officials in Washington, D.C., and in Geneva, Switzerland. To identify factors affecting grant performance, we conducted three types of analysis. First, we selected 13 countries that had grants with a first disbursement on or before December 31, 2003, to allow for at least 1 year of performance, and that had grants covering more than one principal recipient. In addition, all but 4 of these countries had grants covering more than one disease. We reviewed Global Fund dossiers for 38 grants to recipients in these countries and categorized reasons given for deviation from performance targets. (Our initial scope included the 45 grants to these countries, but for 7 of the grants there were no disbursement requests available during the period of our review.) We found 75 progress reports/disbursement requests and 51 local fund agent assessments associated with 24 of the 38 grants. These 38 grants represent 29 percent of the 130 grants that had received a first disbursement by the end of 2003. Starting with the grant’s second disbursement, we included all disbursement requests from each grant that were available on the Global Fund Web site as of November, 2005, and a few that we received subsequently from the Global Fund. We requested full disbursement dossiers from the Global Fund. These dossiers contained principal recipients’ progress reports and cash-flow/expenditure data, local fund agents’ reviews of the recipients’ information and recommendations about further disbursements, and, in most cases, additional documents such as correspondence between the Global Fund secretariat and the principal recipient. Using this information, we coded reasons given for deviation from grantees’ agreed-upon performance targets into 1 of about 30 categories. We grouped this information into 5 major categories— resources or capacity; coordination; programmatic problems, needs, or changes; procurement; and factors beyond recipients’ control. Within these categories, we developed specific subcategories such as guidance, decisions or plans not made, done, or available; signing of contracts or agreements delayed or not done; and limited trained human resources. As in any exercise of this type, the categories developed can vary when produced by different analysts. To address this issue, two GAO analysts reviewed a sample of the progress reports and independently proposed categories, separately identifying major factors and then agreeing on a common set of subcategories. We refined these subcategories during the coding exercise that followed. We then analyzed the reasons for deviations from all of the recipients’ progress reports and placed them into one of the subcategories. When information in the progress reports was insufficient to determine how to code a reason, we consulted the local fund agents’ reports. We tallied the counts in each subcategory and identified the subcategories mentioned in the greatest number of grants. The information in the disbursement requests varied in detail and quality. The two analysts, together with a methodologist, therefore discussed and documented categorization criteria and procedures throughout the analysis, and the methodologist reviewed the entire analysis as a final step. As a validity check on our document analysis and to identify frequently cited factors that affected grant performance, we compared the information in the subcategories mentioned in the most grants to information available from our fieldwork (see below) and determined that both sources of information reported similar findings. In addition, we reviewed the 75 progress reports/disbursement requests associated with these 38 grants and tallied the total number of targets in each request. We ranked each target using the same numeric rating system the Global Fund uses for phase 2 (see fig. 3). Because many of the total 1,125 targets were nonnumeric (e.g., developing a monitoring and evaluation plan), we did the following: (1) if the principal recipient clearly met the target, we ranked the target as met (“meeting or exceeding expectations”) and included it with the numeric targets that fell into that category; (2) if the principal recipient clearly showed no progress toward meeting the target, we ranked it as not met (“unacceptable”) and included it with the numeric targets in that category; and (3) if the principal recipient partially met the target, we gave it a separate ranking—“partially met nonnumeric target,” and characterized it as partially met, along with the partially met numeric targets. To arrive at percentages for the targets in each category, we first calculated the percentage for each progress report/disbursement request and then averaged the percentages for the category from all the reports. Because the number of targets in each report varied greatly, we averaged the percentages rather than the numbers of targets to ensure that each report was given equal weight. We excluded from our calculations those few targets for which the information available was not adequate to determine whether or to what extent the target was met. Second, we reviewed documents obtained from field visits to four countries—Indonesia, Kenya, Thailand, and Zambia—and interviewed a wide variety of government, civil society, and bilateral and multilateral development officials in these countries involved in grant implementation or oversight. All four of these countries received more than $36 million in committed funds for several grants that covered more than one disease, and three of them (Kenya, Thailand, and Zambia) also have grants that cover both government and civil society recipients. In addition, we interviewed officials from the Global Fund, World Health Organization (WHO), and the Joint UN Programme on HIV/AIDS (UNAIDS) in Washington, D.C., and Geneva, Switzerland. Finally, to determine whether the percentage of funds disbursed for each grant (after the first disbursement) and the timeliness of the disbursements were associated with grant characteristics such as type of principal recipient, grant size, or disease targeted, we analyzed 130 grants with first disbursements on or before December 31, 2003. (See app. II for a more detailed discussion of this methodology.) To assess the reliability of the Global Fund’s data, we (1) posed a set of standard data reliability questions to knowledgeable agency officials, (2) performed basic electronic reasonableness tests, and (3) interviewed officials about a few small anomalies that we found during our analysis. We found only one minor limitation, namely that disbursement dates were not reported for less than 5 percent of the disbursements. Based on our assessment, we determined that the data were sufficiently reliable to generate descriptive statistics about the program, and to be used for advanced statistical modeling work. To review the basis for, and documentation of, the Global Fund’s performance-based funding, we examined Global Fund documents— including The Global Fund Operational Policy Manual and related guidance documents, the dossiers for the 38 grants that had a first disbursement on or before December 31, 2003, and documents supporting Global Fund decisions to continue or discontinue funding 25 of 28 grants that had reached their phase-2 renewal point and been reviewed by the secretariat as of March 31, 2005. We also analyzed local fund agents’ assessments to determine how often grant managers documented disbursement decisions. In addition, we interviewed Global Fund officials in Washington, D.C., and in Geneva, Switzerland, and officials from the Departments of State and Health and Human Services (HHS), and the U.S. Agency for International Development (USAID). To describe the Global Fund’s recent refinements for managing grants and improving their performance, we reviewed Global Fund documents including The Global Fund Operational Policy Manual and related guidance documents and organization charts, and job descriptions for the positions of local fund agent officer, country coordinating mechanism (CCM) coordinator, program officer, and fund portfolio manager (grant manager). We also examined Global Fund papers, including the Discussion Paper on the Core Business Model for a Mature Global Fund; Update on New Measures of Performance and Early Warning System; Update on the Global Fund Information Management Platform; Revised Guidelines on the Purpose, Structure and Composition of Country Coordinating Mechanisms and Requirements for Grant Eligibility; and Performance Standards and Indicators for CCM Monitoring. In addition, we reviewed the report Investing in the Future: The Global Fund at Three Years and the Monitoring and Evaluation Toolkit for HIV/AIDS, Tuberculosis, and Malaria. We also reviewed documents from a March 2005 CCM workshop conducted in Zambia. Further, we reviewed documents obtained during fieldwork in Kenya, conducted follow-up correspondence with CCM members in Kenya, and reviewed Global Fund documents concerning grants to Ukraine. Additionally, we interviewed officials from the Global Fund, the Departments of State and HHS, USAID, UNAIDS, and WHO. We conducted our work from June 2004 through March 2005, in accordance with generally accepted government auditing standards. This appendix provides descriptive information related to the 130 grants that had received their first disbursements from the Global Fund on or before December 31, 2003, and the results of analyses we undertook to determine whether some types of grants had disbursed a larger percentage of their 2-year funds than others and to estimate the number of disbursements that were made in a timely fashion. Disbursements refer to those from the Global Fund to the principal recipient, not from the principal recipient to subrecipients. Data were current as of February 4, 2005. Table 2 shows selected characteristics of the 130 grants we reviewed. Table 3 shows the performance of different grant types with respect to receiving disbursements. Some of these characteristics varied by type of grant, although many of the differences were not significant. Ministries of finance, on average, made a smaller number of disbursements and disbursed a lower percentage of their grants, although they also had made their first disbursements later and therefore had less time to make disbursements. Similarly, larger grants disbursed lower percentages of their grant amounts than smaller grants; but again, differences in the time elapsed make it difficult to know whether these differences reflect anything more than the time they had to make disbursements. Differences in disbursements, percentages disbursed, and average days since the first disbursement were insignificant across grants dedicated to the different types of diseases. To determine whether the differences in the percentage disbursed varied by type of grant, we used ordinary regression techniques. The Global Fund also analyzed grant disbursements, reporting in March 2005 that disbursements are indicative of performance. Our analysis differed from the Global Fund’s in that we looked at the percentage of the 2-year grant amount disbursed since the first disbursement, whereas the Global Fund looked at the percentage that was disbursed relative to the percentage that was expected to be disbursed since the first disbursement. Because the actual effect of time turns out to be nonlinear—meaning that although time elapsed since the first disbursement has a significant effect on the percentage disbursed, that effect decreases over time—we estimated the effect of time directly before estimating differences in the percentage disbursed across different types of grants. We fit bivariate regression models (models 1-4 in table 4) to estimate and test the significance of the gross effects of time since first disbursement, principal recipient type, disease type, and grant size (or the effects of each of these factors, ignoring all others) and a multivariate regression model (model 5) to estimate the net effects of each (or the effects of each after controlling for the effects of the others). Table 4 shows these results. Model 1 in table 4 shows the effect that time, or days between the first disbursement and February 2, 2005, has on the percentage of the grant disbursed. The significant time-squared term indicates that the effect of time is nonlinear. This nonlinearity makes the interpretation of the time coefficients somewhat less straightforward, but the positive time coefficients in table 4 indicate, not surprisingly, that grants that have had more time to make disbursements have disbursed a larger percentage of the 2-year grant amount remaining after the first disbursement. The negative coefficients associated with the squared term means that over time, time is less of a factor, or that the difference in the percentage disbursed between 100 days and 200 days is greater than the difference between 300 and 400 days. The sizable F-statistic at the base of the column for model 1 attests to the significance of the effect of time, and this nonlinear effect of time explains 17 percent of the variation in the amount disbursed of the total remaining after the first disbursement. Models 2, 3, and 4 estimate the gross effects of principal recipient type, disease type, and grant size on the percentages disbursed, after subtracting the amount of the first disbursement. These differences are estimated using dummy variables to indicate the differences between the grant categories named in the table and the omitted referent category (civil society for principal recipient type, HIV/AIDS for disease type, and less than $2 million for grant size). The constants for each of these models reflect the percentages disbursed for grants in the referent categories, and the coefficients indicate the differences between the percentages for the categories in the table and the percentages for the referent categories. The overall percentage disbursed was 21 points lower for ministry of finance grants, and roughly 15 points lower for ministry of health grants and other government grants, than for civil society grants. These differences reflect the results of ignoring, rather than controlling for, differences in time since first disbursement, grant size, and disease targeted. Model 5 estimates all of these effects simultaneously and, as such, provides us with net effect estimates, or estimates of each effect, controlling for the others. It shows that the time each grant has had since its first disbursement is the principal determinant of the amount disbursed. Grants that made their first disbursement earlier disbursed larger amounts of their remaining 2-year awards. After these effects were controlled for, the differences between principal recipient types in the percentages disbursed became smaller than they appeared before controls; and the only difference, which had appeared marginally significant before controls, became insignificant afterward. We found no significant differences by disease type or grant size when looking at either the gross or net effects. We also looked at the extent to which disbursements were made in a timely fashion (i.e., in 135 days or less). As table 5 shows, 35 percent of all disbursements were timely, or within 135 days, and the extent to which disbursements were timely was greater for later disbursements than for earlier disbursements. The number of timely disbursements is too small at most stages for us to determine whether timeliness varies across grant types. In addition to the person named above, Candace Carpenter, Martin de Alteriis, David Dornisch, Cheryl Goodman, Kay Halpern, Bruce Kutnick, Reid Lowe, Jerome Sandau, Douglas Sloane, Julie Trinder, and Tom Zingale made key contributions to this report. | The Global Fund to Fight AIDS, Tuberculosis and Malaria--established as a private foundation in January 2002--is intended to rapidly disburse grants to recipients, including governments and nongovernmental organizations. The Global Fund has signed over 270 grant agreements and disbursed more than $1 billion. Governments provide most of its funding; the United States has provided almost one-third of the $3.7 billion the Global Fund has received. In May 2003, the President signed legislation directing the Comptroller General to monitor and evaluate Global Fund-supported projects. GAO reviewed grants that the Global Fund began disbursing before January 2004. This report (1) describes the Global Fund's process for managing grants and disbursing funds, (2) identifies factors that have affected grant performance, (3) reviews the basis and documentation of performance-based funding, and (4) notes recent refinements of Global Fund processes. Global Fund policy is to manage grants in a transparent and accountable manner, disbursing funds to recipients based on their demonstrated performance as measured against agreed-on targets. In implementing this performance-based funding system, Global Fund officials are to periodically assess whether the grant's principal recipient has made sufficient progress to warrant its next disbursement. After 2 years, the Global Fund is to determine whether to continue funding the grant for an additional 3 years. In making an assessment, officials consider several information sources, including the recipient's reports on its performance and expenditures and an independent agent's verification of the recipient's reports. Recipient countries' capacity to implement grants has been an underlying factor in grant performance, according to Global Fund and other knowledgeable officials. These officials, as well as principal recipients, also cited guidance, coordination, planning, and contracting and procurement as factors associated with challenges or successes in grant performance. For example, recipients in three countries reported that they could not meet their targets because they had not received national treatment guidelines. However, several grant recipients reported that, under certain circumstances, Global Fund guidance allowed them to quickly redirect funds, thereby enabling them to meet their targets. GAO found problems associated with the information sources that the Global Fund uses in making performance-based funding decisions. For example, the limited monitoring and evaluation capabilities of many recipients raise questions about the accuracy of their reporting. Moreover, the Global Fund has not consistently documented its determinations that recipients' performance warranted additional funding. For instance, the Global Fund's documentation did not explain its decisions to disburse funds to some recipients who reported that they had met few targets. Further, the Global Fund does not track or publicly document denied disbursement requests. The Global Fund is taking steps to address challenges to grant performance and improve the overall management of grants, including (1) reorganizing and strengthening its staff; (2) developing a risk assessment mechanism and early warning system to identify poorly performing grants; (3) streamlining reporting and funding procedures; (4) working with partners to strengthen recipient capacity; and (5) clarifying certain guidance for the country coordinating mechanism--the entity in each country responsible for developing grant proposals, nominating grant recipients, monitoring grant implementation, and advising the Global Fund on the viability of grants for continued funding. However, the Global Fund has not clearly defined the role of these entities in overseeing grant implementation. |
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Major capital investment in highways, public transportation systems, waterways, and airports are currently funded, in part, through various taxes and fees on users, such as fuel taxes or sales taxes; landing fees and docking fees; and tolls on certain roads, tunnels, and bridges. However, these revenue-raising instruments do not always provide strong incentives for efficient use of transportation infrastructure. For example, the tax rates on gasoline, which are the same regardless of whether vehicles are traveling during congested or uncongested periods, provide no incentive for travelers to use the infrastructure more efficiently. Similarly, landing fees at airports that are based on aircraft weight help create incentives for airlines to shift to smaller, lighter aircraft providing more frequent service, which results in increased demand for runways at peak times and therefore increased congestion. Due in part to increasing volumes of traffic, as well as these built-in disincentives to the efficient use of the transportation infrastructure, congestion on our nation’s highways, airways, and waterways remains a national problem. On already crowded roadways, passenger vehicle travel is expected to grow by almost 25 percent this decade, and freight movement by trucks may grow by a similar amount. In the nation’s air transportation system, before the terrorist attacks on September 11, 2001, an unprecedented number of delays in commercial airline flights occurred—a substantial part of which were due to airport and airspace congestion, particularly during peak morning and evening hours. At 31 of the nation’s busiest airports, 28 percent of the domestic flights arrived late in 2000. While flight congestion declined significantly with reduced traffic after the attacks, a more robust economy and less public apprehension about flying will likely lead to renewed demands on the air transport system. At locks on our inland waterways and at major seaports, congestion has also been growing. For example, the U.S. Army Corps of Engineers estimated that 15 key locks would exceed 80 percent of their capacity by 2020 as a result of the expected growth in freight travel, as compared to 4 locks that reached that level in 1999, resulting in significantly increased delay. Numerous methods can be used to address congestion, including building new infrastructure, improving maintenance and operation of infrastructure, and using the existing infrastructure more efficiently through demand management strategies, including pricing mechanisms. Experts with whom we talked said that consideration of a full range of these methods is likely necessary to ease our nation’s transportation congestion. In theory, congestion pricing, as one of these methods, is useful for mitigating the delay costs of congestion. If highway, aviation, and waterway users were charged extra for peak-hour use, some would shift to less busy times, or make other adjustments, thereby alleviating delay at the peak periods. Many other areas of the economy frequently use peak-period pricing mechanisms when demand varies considerably by time of day or season. Electricity providers, for example, often charge higher prices at peak periods and lower prices when demand is reduced. Other industries with common peak-pricing practices include telecommunications, airlines, and hotels and resorts. In addition, Amtrak and some transit systems use peak- period pricing. In theory, using congestion pricing has the potential to enhance economic efficiency, as well as provide other benefits, such as providing market signals that can guide capital investment decisions, and generating revenue to help fund such investment directly from users of the system. There are several approaches to implementing congestion pricing on roads and at airports. However, incorporating pricing into our transportation systems involves overcoming several implementation challenges, such as current restrictions on using congestion pricing on our highways and on runways, and equity and fairness concerns. Economists generally believe that charging automobile, truck, vessel, and aircraft operators surcharges or tolls during congested periods can enhance economic efficiency by making them take into account the external costs they impose on others in deciding when, where, and how to travel. In congested situations, external costs are substantial and include increased travel time, pollution, and noise. The goal of efficient pricing on public roads, for example, would be to set tolls for travel during congested periods that would make the price (including the toll) that a driver pays for such a trip equal or close to the total cost of that trip, including external costs. In theory, these surcharges could help reduce congestion and the demand for road space at peak periods by providing incentives for travelers to share rides, use transit, and travel at less congested (generally off-peak) times or on less congested routes. Peak-period pricing may have applicability to other modes as well. For example, congestion pricing for using locks on our nation’s inland waterways might be a way to reduce delays experienced by barge operators. Similarly, congestion pricing at commercial airports—that is, charging higher landing fees during congested periods—would cause aircraft operators, both airlines and general aviation operators, to consider external costs in making their decisions. As a result, there would be incentives to shift some operations to off-peak hours or secondary airports or to provide the same carrying capacity by operating fewer but larger aircraft. In addition to increasing the efficiency with which current transportation infrastructure is used, congestion charges may be helpful in guiding capital investment decisions for new facilities. As congestion increases, the delay cost that an additional user of the system causes for other users also increases. If congestion charges are set such that they reflect external costs, then as congestion increases, congestion surcharges will increase. Rising surcharges provide signals of increased demand for specific increases in physical capacity, indicating where capital investment decisions to increase capacity would be most valuable. At the same time, congestion charges will provide a ready source of revenue for local, state, and federal governments and transportation facility operators to fund these investments in new capacity that, in turn, can reduce delays. In some cases and over a longer period, in places where external costs are substantial, and congestion surcharges are relatively high, this form of pricing might influence land-use plans and the prevalence of telecommuting and flexible workplaces. Congestion pricing could be applied to transportation systems in a variety of ways, and there are several possible approaches related to which facilities are priced, how the price is set, and how the toll is collected. In one possible form of congestion pricing for public roads, tolls would be set on an entire roadway or road segment during periods of peak use. In another form, sometimes known as value pricing, peak-period tolls would be set on only some lanes of a roadway, allowing drivers to choose between faster tolled lanes and slower non-tolled lanes. High-occupancy toll (HOT) lanes, under which drivers of single-occupancy vehicles are given the option of paying a toll to use lanes that are otherwise restricted to high-occupancy vehicles, are an example of value pricing. Fast and Intertwined Regular (FAIR) lanes is a recent proposal that is another variation of value pricing. Under the FAIR lanes approach, revenues generated from travelers using electronically tolled lanes would be transferred to travelers using adjacent non-tolled lanes on the same roadway. These transfers would be done through electronic transponders in the vehicles using the toll lanes, as well as the non-tolled lanes. Those in the non-tolled lanes would receive a credit equal to 25 to 50 percent of the current effective toll, which could then be used toward public transportation fares or toward the use of the toll lanes on another day. In this way, drivers in the non-tolled lanes would receive compensation for the additional congestion that may result from increased use of those lanes once tolls are placed on other lanes. In a third form of congestion pricing for public roads, known as cordon-based pricing, drivers would be charged a fee for entering a specific area of a city, such as a central business district, at peak hours. Two commonly mentioned methods of applying the concept of congestion pricing at airports are differential pricing and auctions. Under differential pricing, airports would set landing fees higher at times when demand for takeoff and landing slots exceeded their availability, and lower at other times, in effect applying a surcharge for using the system at peak-demand periods. An auction approach would allow airports to periodically auction a fixed number of takeoff and landing slots—equal to the airport’s capacity—to the highest bidders. For example, an airport, in conjunction with the Federal Aviation Administration, could determine its per-quarter- hour takeoff and landing capacity, and a competitive bidding process among carriers could determine fees during each period, which would also result in surcharges for using the system at peak-demand periods. Congestion pricing tolls could be levied using either a predetermined or variable approach. Under the predetermined approach, drivers would pay tolls that are preset and fixed according to the time of day they travel. In contrast, under the variable approach, drivers would pay tolls that vary according to the level of congestion on an affected roadway. For either approach, the amount of the toll to be levied would likely be set by state or local officials, or other toll facility operators, based on information from roadway usage and traveler surveys. The toll structure may also be influenced by the judgment of the toll facility operators. These tolls could then be adjusted upward or downward based on the use of the toll facility in relation to the optimal flow of traffic on the facility. Electronic methods of collection from users of public roads offer vast increases in efficiency compared to traditional tollbooths, which are labor intensive and relatively expensive to operate, and create congestion as drivers line up to pay their tolls. And, over the past decade, electronic road pricing technology has become more reliable and, as a result, more widely adopted on many toll facilities. According to a report issued by the Transportation Research Board, technologies that are currently used at some toll facilities to automatically charge users could also be used to electronically collect congestion surcharges without establishing additional tollbooths that would cause delays. In application of cordon- based pricing, drivers would typically purchase and display permits that allow them access to the cordoned section of the city before entering. Daily or monthly permits could be differentiated by color and shape for easy enforcement. One challenge in implementing congestion pricing for transportation systems is that, at present, greater use of pricing is limited by statutory restrictions. For example, tolls are prohibited on the Interstate Highway System, except for roads that already had tolls in place before they were incorporated into the system (e.g., the New Jersey and Pennsylvania Turnpikes) or where exceptions have been made for the implementation of pilot projects. Also, there are a variety of statutory restrictions on landing fees at airports that can limit use of congestion pricing. Landing fees are typically based on aircraft weight and are required to be set at levels designed to recover the historical costs of providing landing services. Costs imposed by congestion and other externalities cannot be considered in the calculation of the cost base and, hence, cannot be recovered in landing fees. Congestion fees, as well as most other types of fees, are also prohibited on the inland waterways because of the Interstate Commerce clause, according to the Army Corps of Engineers. Therefore, addressing some of these restrictions would be necessary to make greater use of congestion pricing. Another challenge involves effectively addressing concerns raised about equity and fairness. Because of this issue, political opposition to using this approach to address mobility challenges has been substantial. One equity concern that has frequently been raised about congestion pricing of public roads has been the potential effects of surcharges or tolls on lower-income drivers. Because a surcharge would represent a higher portion of the earnings of lower-income households, it imposes a greater financial burden on them and, therefore, is considered unfair. The economics literature suggests that these concerns can be mitigated to some degree. For example, proponents of congestion pricing have noted that all income groups could potentially benefit if there is an appropriate distribution of the revenues obtained through congestion pricing. These revenues could be used to build new road capacity, given back as tax rebates tilted toward lower-income households, or used in some other way so that, in theory, the net benefits for each income group would exceed its costs. Although equity considerations could potentially be addressed by constructing a congestion pricing system for roads so that all income groups received net benefits, there could still be individuals who would be negatively affected. In theory, the cost of a surcharge or toll would be less for those who could more readily make adjustments to their driving behavior that would allow them to avoid paying the toll. Conversely, drivers who had little flexibility to alter their work schedules to avoid a toll by traveling at off-peak hours could potentially be more affected than workers with such flexibility. Similarly, those whose commuting patterns make it harder for them to form carpools or use transit could also be more affected. The arbitrary nature of these distinctions, as well as opposition from those who find the concept of restricting lanes or roads to people who pay to use them to be elitist, raises fairness concerns and accounts for some of the political opposition to congestion pricing. More generally, there is often opposition to paying a charge to use something that was formerly provided “free.” A number of existing congestion-pricing transportation projects, both here and abroad, show that pricing can influence travelers’ behavior to the point of reducing congestion and thus increasing economic efficiency. For example, value pricing pilot projects in the United States show considerable usage and have provided users with a less congested alternative, thus improving traffic flows and reducing delays. In addition, congestion-pricing mechanisms, in general, have demonstrated that they can generate revenue sufficient to fund their operation and, in some cases, fund investment in transportation alternatives. The available evidence also suggests that implementation challenges can be mitigated, although to what extent is not yet clear. A number of the congestion-pricing projects we identified enhanced transportation mobility through improved traffic flows, increased speeds and reduced delays for some users. One way in which some projects have done so is by channeling some drivers into infrastructure that is not being fully utilized even at peak periods. In several locations in the United States, for example, HOT lane projects have been implemented in which vehicles with fewer passengers than would normally be needed to use high occupancy vehicle lanes have been allowed to use such lanes by paying a toll. High occupancy vehicle lanes are generally less congested than other highway lanes, and drivers who use them are thus able to shorten their trip times. The toll for such use varies, increasing during periods of peak congestion. In such HOT lane or value pricing projects in Orange County (as shown in figure 1) and San Diego, California, and Houston, Texas, drivers willing to pay to use the HOT lane saved an average of 12-20 minutes per trip in the peak period. In addition, some projects were able to shift demand on congested infrastructure to less congested time periods. In San Diego, officials were also able to spread out peak period traffic on the toll lanes over a longer period of time by charging a lower toll just before and just after the peak period. In many instances, however, a congested transportation system may have no equivalent to a high occupancy vehicle lane with additional capacity. In these cases, some other congestion pricing models have been used to encourage travelers to shift their behavior, either by traveling at another time or by using alternative transportation modes, such as buses, trains, or carpools. For example, in Singapore, London, and Norway, congestion pricing has taken the form of cordon-based pricing, where drivers pay to enter entire regions. These projects have demonstrated significant decreases in the level of congestion on roads in the cordoned area and some significant shifts to other alternative modes, as follows: In Singapore, the city government instituted a $1 charge in 1975 for private vehicles to enter the central business district in the morning rush hours. Carpools, buses, motorcycles, and freight vehicles were exempted from the charge. The result was an immediate 73 percent decline in the use of private cars, a 30 percent increase in carpools, and a doubling of buses’ share of work traffic. In London, recent implementation of cordon tolls resulted in traffic decreases of roughly 20 percent, and about a 14 percent increase in the use of buses during the morning commute. In Trondheim, Norway, cordon tolls produced a 10 percent reduction in traffic at peak times and an 8 percent increase in traffic in off-peak times in the central business district. Such projects have similarly been used to relieve congestion at crowded airports. In one case, the Port Authority of New York and New Jersey imposed surcharges beginning in 1968 for peak-hour use by small aircraft at Newark, Kennedy, and La Guardia airports. These small aircraft, known as “general aviation” aircraft, were not part of scheduled airline operations. The need to accommodate takeoffs and landings for these aircraft during peak periods was adding to passsengers’ delays on scheduled airline flights. The port authority raised the peak-period minimum take-off and landing fees for aircraft with fewer than 25 seats from $5 to $25, while keeping the off-peak fee at $5. As a result of the surcharges, general aviation activity during peak periods decreased by 30 percent. The percentage of aircraft operations delayed more than 30 minutes declined markedly over the same period. Similarly, in 1988 at Boston’s Logan Airport, the Massachusetts Port Authority adopted a much higher landing fee for smaller aircraft. Like the three New York and New Jersey airports, Logan experienced a large drop-off in use by smaller aircraft. Much of the general aviation abandoned Logan for secondary airports, and delays at Logan dropped. Proponents of congestion pricing have noted that others besides those who can afford to pay congestion pricing costs can share in the benefits through an appropriate distribution of any revenues generated. A part of these revenues will be needed to administer the system—for example, to collect tolls. However, existing projects also contain a few examples of situations in which the revenues generated from congestion pricing have been used to benefit other transportation alternatives. For example, the revenue from the HOT lane project in San Diego has been sufficient not only to pay for toll takers and other administrative expenses, but also to fund the operation of a new express bus service. This has increased travel choices for all area commuters, including lower-income populations. International experiences with congestion pricing have been somewhat more extensive and revenues generated from congestion tolls have been substantial. In Singapore, only about 12 percent of the revenue generated from their cordon-based tolls have been needed to cover the costs of operation. In Trondheim, Norway, revenues have exceeded capital and operating expenses of the toll facility by 5 times. Trondheim’s toll facility currently generates about $25 million in profit per year. These profits have been used to enhance the capacity of the entire transportation system, including financing additional road infrastructure as well as subsidizing public transportation facilities and services, and pedestrian and bicycle facilities. There is some encouraging evidence with regard to mitigating equity and fairness issues in implementing congestion pricing, although the extent to which these concerns can be mitigated is unclear. At least one project we reviewed indicates that implementation of congestion pricing needs to be carefully evaluated as an alternative in some circumstances, because it provides no automatic guarantee of benefits. In Lee County, Florida, the county instituted variable tolls on two bridges based on peak travel periods. The county reduced the toll for using the bridges in off-peak periods. On one bridge, traffic increased during the off-peak period but decreased very little during the peak period. A study from the University of South Florida found that peak-period demand for the bridge was not as flexible as compared to demand during off-peak periods. That is, drivers at peak periods may not have readily available alternatives to commute at different times, use a different mode of transportation, or take another route, and therefore have little choice but to use the bridge during the peak period, or the price of the congestion toll was set too low to influence the demand of those users. The example illustrates the fact that a pricing mechanism may not be very effective at reducing peak-period travel if the price is not set properly, or without additional measures that provide travelers with other choices. Although the congestion pricing projects we reviewed produced little evidence of congestion reductions in adjoining lanes or in other alternative routes, they also produced little evidence that congestion increased in the non-tolled lanes or on alternative routes. For example, while the value pricing projects in California and Texas resulted in less congested alternatives for individuals willing to pay the toll, only one of the projects was able to demonstrate any decreases in congestion on the remaining “free” lanes of the highway. In Orange County, California, a study found that opening two new lanes, which were designated as congestion toll lanes, decreased delays on the other “free” lanes from 30-40 minutes to about 12-13 minutes, while traffic remained stable on alternative nearby freeways. However, there is also some evidence that pricing can increase congestion on alternative routes. In Singapore, where the city used cordon pricing, there was deterioration in traffic conditions just outside the cordoned area caused by travelers attempting to bypass it. Such congestion would adversely impact individuals who do not pay the toll or individuals not using the congested facility. However, at least one study said that the costs of increased traffic on alternative routes did not outweigh the benefits of reduced congestion in the cordoned area. There are other encouraging signs in relation to distributional impacts from existing projects, although there is no conclusive evidence on the distributional impacts of congestion-pricing techniques. A report on the value-pricing project in Orange County found that there was significant usage of the toll facility by individuals at all income levels. This demonstrates that low-income individuals also value the time they save, and that some value their time enough to be willing to pay a toll that amounts to a higher percentage of their income than that paid by individuals with greater income. However, in value-pricing pilot projects in Orange County, San Diego, and Houston, those using the toll lanes tended to have higher incomes than those using the adjoining lanes. Experts have noted that tolls might become more acceptable to the public if they were applied to new roads or lanes as demonstration projects, so that tolls’ effectiveness in increasing commuter choices could be evaluated. For example, in the Orange County pilot project, where two new toll lanes were added to the highway, opinion surveys have shown a high rate of public acceptance. Other pilot projects in Houston and San Diego have also demonstrated public satisfaction. In addition, recent proposals, such as FAIR lanes and HOT networks, show promise to further mitigate equity and fairness concerns. FAIR lanes, as previously discussed, and which have been proposed in New York, would credit users of the adjoining lanes, using revenues generated by the toll lanes, allowing those users to use the toll lanes on another day for a reduced or no charge. The HOT network proposal couples HOT lanes with bus rapid transit initiatives, similar to the experience of the pilot project in San Diego, thereby using the revenues from the tolls to broaden the transportation alternatives available for all commuters, including lower-income populations. Traffic on already congested surface, maritime, and air transportation systems is expected to grow substantially over the next decade. This congestion can be considered a shortage; it occurs when more services— from lanes of highway, airport runways, locks on rivers—are demanded than can be supplied at a given time and place. A range of approaches and tools must be applied to solve the pervasive transportation congestion problems that our nation faces in the next decade and beyond. Congestion pricing—although only one of several approaches that can be used to reduce congestion on our nation’s roads, airways, and waterways—shows promise in reducing congestion and better ensuring that our existing transportation systems are used efficiently. Pilot projects and experiences with congestion pricing abroad demonstrate the promise of this approach for reducing congestion and promoting more efficient use of transportation systems by users. Despite this promise, there continue to be concerns over fairness and equity in the application and implementation of congestion pricing, which current projects have not fully alleviated. Some proposed projects, such as FAIR lanes, which use revenues generated to compensate other users of the transportation system, could help alleviate some of the fairness and equity concerns that have been raised. Experts suggest and some projects demonstrate that public opposition to congestion pricing will lessen as these projects show that equity and fairness concerns can be mitigated. However, if congestion pricing is to be more widely applied to transportation systems, the Congress will need to ease statutory restrictions on the use of congestion-pricing applications on transportation systems. For further information on this statement, please contact JayEtta Hecker at (202) 512-8984 or [email protected]. Individuals making key contributions to this report include Nancy Barry, Stephen Brown, Jay Cherlow, Lynn Filla Clark, Terence Lam, Ryan Petitte, Stan Stenersen, Andrew Von Ah, and Randall Williamson. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The nation's transportation systems have become increasingly congested, and pressure on them is expected to grow substantially in the future. Most transportation experts think a multifaceted approach is needed to address congestion and improve mobility. One potential tool is congestion pricing, that is, charging users a toll, fee, or surcharge for using transportation infrastructure during certain peak periods of travel. Pilot projects to test this approach are currently under way in the United States and the technique has been used more extensively abroad. Interest in the usefulness of congestion pricing has been growing, as evidenced by several recent proposals. However, there have also been concerns raised about the fairness of such practices to some users of transportation systems. GAO was asked to identify (1) the potential benefits that can be expected from pricing congested transportation systems, approaches to using congestion pricing in transportation systems, and the implementation challenges that such pricing policies pose, and (2) examples of projects in which pricing of congested transportation systems has been applied to date, and what these examples reveal about potential benefits or challenges to implementation. This statement is based on prior GAO reports and other publicly available reports. Congestion pricing can potentially reduce congestion by providing incentives for drivers to shift trips to off-peak periods, use less congested routes, or use alternative modes, thereby spreading out demand for available transportation infrastructure. Congestion pricing also has the potential to create other benefits, such as generating revenue to help fund transportation investment. Possible challenges to implementing congestion pricing include current statutory restrictions limiting the use of congestion pricing, and concerns about equity and fairness across income groups. In theory, equity and fairness concerns could be mitigated depending on how the revenues that are generated are used. Evidence from projects both here and abroad shows this approach can reduce congestion. Such projects have also shown they can generate sufficient revenue to fund operations--and sometimes fund other transportation investment as well. However, projects were not necessarily able to demonstrate benefits for the full range of transportation users. For example, those who were able to use the special freeway lane saw a decrease in travel time. But, in some cases, there was little systemwide reduction in travel times, and congestion increased on alternative routes. Nonetheless, there is some evidence that equity and fairness concerns can be mitigated. Some projects have shown substantial usage by low-income groups, and other projects have used revenues generated to subsidize low-cost transportation options. In addition, some recent proposals for refining congestion-pricing techniques have incorporated further strategies for overcoming equity concerns. For example, the Fast and Intertwined Regular (FAIR) lanes proposal in New York suggests crediting users of the non-tolled lanes to partially pay for them to use public transportation, or to use the express lanes on other days. |
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In 1995, we compared the 4 common years (1996-99) in DOD’s 1995 and 1996 FYDPs and reported that DOD projected substantial shifts in funding priorities. Specifically, about $27 billion in planned weapon system modernization programs had been eliminated, reduced, or deferred to 2000 or later. Also, the military personnel, operation and maintenance, and family housing accounts had increased by over $21 billion and were projected to continue to increase to 2001 to support DOD’s emphasis on readiness and quality-of-life programs. Moreover, the total DOD program was projected to increase by about $12.6 billion. The Secretary of Defense wants to reform the acquisition process and reduce and streamline infrastructure to help pay the billions of dollars that DOD projects it will need to modernize the force. In our September 1995 report, we said that although DOD anticipated reducing infrastructure to achieve substantial savings, our analysis of the 1996 FYDP showed that savings accrued or expected to accrue from base closures and a smaller force appeared to be offset by increased funding for other infrastructure priorities, such as base operations and management headquarters. In May 1996, we analyzed the infrastructure portion of DOD’s 1997 FYDP and reported that infrastructure costs are projected to increase by about $9 billion, from $146 billion in 1997 to $155 billion in 2001. The FYDP includes anticipated future inflation. Therefore, changes in anticipated inflation affect the projected cost of the FYDP. The Secretary of Defense testified in March 1996 that the 1997 FYDP, which covers fiscal years 1997-2001, includes the funds to buy all of the programs in the 1996 FYDP plus billions of dollars in additional programs at less cost overall. According to DOD, the increase in programs at lower projected costs results because inflation estimates were substantially reduced for future DOD purchases, from 3 percent to about 2.2 percent for fiscal years 1997-2001. The executive branch substantially reduced its forecast of the inflation rate for fiscal years 1997 through 2002, resulting in a decline in the estimated costs of DOD’s purchases of about $45.7 billion, including about $34.7 billion over the 1997-2001 FYDP period. However, the price measure used in the executive branch’s projections had inherent limitations and has since been improved. Using a different price measure, CBO projected a much smaller drop in inflation and estimated that the future cost of DOD’s purchases would be reduced by only about $10.3 billion over the 1997-2001 period. The executive branch reduced its inflation forecasts from 3 percent per year for the period 1997-2001 to 2.2 percent per year, or 8/10 of 1 percent.As a result, DOD projected that the cost of defense purchases would decline by $34.7 billion for the 1997-2001 period and an additional $11 billion for 2002. Based on these projected cost reductions, the executive branch reduced DOD’s projected budgets for fiscal years 1997-2001 by about $15.2 billion. The executive branch allowed DOD to retain about $19.5 billion of the projected increase in purchasing power. The distribution of this assumed additional purchasing power was $4.3 billion in 1997, $3.9 billion in 1998, $4.6 billion in 1999, $3.8 billion in 2000, and $2.9 billion in 2001. According to DOD, about $6 billion of the $19.5 billion was applied to the military personnel and operation and maintenance accounts for must-pay bills such as for the military retired pay accrual and ongoing contingency operations. The remaining $13 billion was applied primarily to DOD’s modernization priorities. Funding was allocated to purchase trucks and other support equipment, accelerate the acquisition of next generation systems, upgrade existing systems, and fund Army base closure costs. A detailed list of these planned purchases is provided in appendix I. For more than a decade, OMB has used projections of the Commerce Department’s Bureau of Economic Analysis’ (BEA) implicit price deflator for gross domestic product (GDP) based on a “fixed-weighted” methodology to adjust the future costs of defense nonpay purchases other than fuel. According to OMB officials, anecdotal information for recent years suggests that changes in this measure have been an accurate gauge of inflation in DOD purchases. The fixed-weighted methodology was used to prepare the President’s fiscal years 1996 and 1997 budgets. Economists within the government and in private organizations generally recognize that the implicit price deflator based on a fixed-weighted methodology has inherent limitations, in part because it is derived from the values of goods and services based on a fixed base year such as 1987. This fixed-weighted methodology has in recent years tended to overstate economic growth and understate inflation as time progressed beyond the base year. Because of the limitations in the fixed-weighted methodology, BEA switched to a new “chain-weighted” inflation methodology, just after the President’s fiscal year 1997 budget had been prepared in January 1996. The “chain-weighted” methodology, which is continuously updated by using weights for 2 adjacent years, ensures that differences in relative prices, such as the drop in computer prices, will not distort overall GDP statistics. Economists have maintained that this methodology is superior to the fixed-weighted methodology. According to BEA officials, the improved methodology gives a more accurate measure of inflation because it eliminates the potential for cumulative errors under the old (fixed-weighted) methodology. For the 1997-2001 period, the executive branch projected an annual inflation rate of 2.2 percent as measured by the fixed-weighted methodology and 2.7 percent as measured by the chain-weighted methodology. In discussing the transition from the GDP implicit price deflator based on fixed weights to the chain-weighted GDP price deflator, OMB officials stated that the two differing numerical measures represent the same inflation, in the same economy, at the same time. According to the officials, the difference is “precisely analogous” to measuring the same temperature on Celsius or Fahrenheit scales. The only difference between the two measures is the methodology used. However, as a practical matter, OMB provides DOD a specific numerical index of inflation, and DOD applies this index to estimate future funding requirements. Therefore, the index used has a direct impact on DOD’s estimated future funding requirements. For example, our analysis shows that had DOD applied the new chain-weighted inflation assumption of 2.7 percent to develop its 1997-2001 FYDP rather than the fixed-weighted assumption of 2.2 percent, DOD’s increased purchasing power would be only about $12.7 billion, not $34.7 billion. OMB officials told us they have not decided what methodology they will use to project inflation for the next FYDP, which will encompass the 1998-2003 defense program. However, in commenting on a draft of this report, DOD said that OMB has indicated its intention to adopt the chain-weighted methodology for budgeting beginning with the fiscal year 1998 submission. In addition, the President’s budget for fiscal year 1997 emphasized the limitations of the fixed-weighted methodology and featured the improved chain-weighted methodology in presenting economic assumptions for the future. If OMB uses the improved chain-weighted methodology to provide inflation guidance to DOD, DOD’s funding estimates for fiscal years 1998 and beyond could be affected. For example, on a chain-weighted basis, two major private forecasting firms currently project an inflation rate of about 2.5 percent per year over the next 5 years, which is a decline from the 2.7 percent chain-weighted inflation assumption that appears in the fiscal year 1997 budget. If OMB gives DOD an inflation projection of 2.5 percent per year for the 1998-2003 period, a question arises as to whether such a factor will be interpreted as an increase (from the 2.2 percent as measured by the fixed-weighted methodology) or a decrease (from the 2.7 percent as measured using the chain-weighted methodology.) Without further guidance, DOD may increase its estimates of future funding requirements for inflation when inflation is projected to be lower than the earlier forecast. During consideration of the fiscal year 1997 defense budget, the Chairman of the Senate Committee on the Budget requested that CBO estimate the adjustments that should be made to DOD’s budget estimates through 2002 that would keep its purchasing power constant given lower inflation rates. CBO chose not to use the implicit price deflator for GDP based on the fixed-weighted methodology that OMB had used to calculate inflation because it had been replaced by the new chain-weighted methodology. Instead, CBO based its inflation forecast on the Consumer Price Index, which measures changes in the average cost of a fixed market basket of consumer goods and services because that measure had not been revised. Neither the executive branch’s nor CBO’s estimate presumes any ability to forecast prices of goods and services purchased by DOD. Instead, the two estimates calculate the change in a general index of inflation and assume that prices of defense goods and services would change by the same amount. Using the Consumer Price Index, CBO projected a much smaller decrease in inflation between the 2 budget years than the executive branch did. Whereas the executive branch projected an 8/10 of 1 percent drop in inflation, CBO projected that inflation would drop only 2/10 of 1 percent. As a result, CBO projected that DOD’s purchasing power would increase by only about $10.3 billion for the 1997-2001 period. This estimate is about $24.4 billion less than DOD’s estimated $34.7 billion increase. Further, because the executive branch reduced DOD’s estimated 1997-2001 FYDP by about $15.2 billion, CBO’s estimate indicates that DOD’s real purchasing power was reduced by about $5 billion. In action on the fiscal year 1997 budget resolution, the Senate adjusted defense totals downward to reflect CBO’s more conservative estimate. The House did not make any adjustments for lower inflation. The conference agreement on the budget resolution recommended the Senate level for fiscal year 1997 and levels somewhat closer to the House amounts in later years. Our analysis shows that resource allocations in the 1997 FYDP vary considerably from the 1996 FYDP. These resource adjustments result primarily from inflation adjustments and transfers between accounts. Table 1 shows a year-to-year comparison of DOD’s 1996 and 1997 FYDPs by primary accounts. The following sections discuss some of the more significant changes in each of the primary accounts. Overall, funding for military personnel accounts increased by $4.7 billion for the 1997-2001 period, although DOD plans to reduce the number of military personnel below the levels reflected in last year’s FYDP. The increase primarily reflects (1) higher pay raises for fiscal years 2000 and 2001 than were included in the 1996 FYDP and (2) the transfer of U.S. Transportation Command costs from a revolving fund supported mainly by operation and maintenance accounts to the military personnel accounts. Programs that are expected to receive the largest funding increases are Army divisions ($1.5 billion) and Army force-related training ($1.6 billion). Other programs are projected to be reduced. Some of the largest declines are projected for Army National Guard support forces ($2.6 billion), Army Reserve readiness support ($1.6 billion), and Air Force permanent change-of-station travel ($650 million). The 1997 FYDP shows that DOD plans to lower active duty force levels in fiscal years 1998-2001. The planned smaller force would bring force levels below the permanent end strength levels set forth in the National Defense Authorization Act for fiscal year 1996 (P.L. 104-106). Table 2 shows the minimum force levels in the law and DOD’s planned reductions. The Commission on Roles and Missions recommended that DOD perform a quadrennial review to assess DOD’s active and reserve force structure, modernization plans, infrastructure, and other elements of the defense program and policies to help determine the defense strategy through 2005. The National Defense Authorization Act for fiscal year 1997 directed the Secretary of Defense to conduct the review in fiscal year 1997. Congress will have an opportunity to examine the assessment and recommendations of the review. The act also requires the Secretary of Defense to include in the annual budget request funding sufficient to maintain its prescribed permanent active end strengths. If DOD is precluded from implementing its planned personnel reductions, it will have to make other compensating adjustments to its overall program. The operation and maintenance accounts are projected to decrease by about $10.1 billion during the 1997-2001 period due to lower inflation rates. In addition, there were a number of funding reallocations among operation and maintenance programs from the 1996 FYDP to the 1997 FYDP. Programs that are projected to receive the largest gains include Army real property services ($3.9 billion), real property services training ($1.1 billion), and Navy administrative management headquarters ($1.5 billion). Programs that are projected to decrease the most include Navy servicewide support ($2.1 billion); defense health programs, including medical centers, station hospitals, and medical clinics in the United States ($2.3 billion); Army National Guard reserve readiness support ($1.4 billion); Army base operations ($4.2 billion); DOD environmental restoration activities ($1.3 billion); and DOD’s Washington headquarters services ($1 billion). Projected savings from the latest round of base closures are also less than were anticipated in the 1996 FYDP. The 1996 FYDP projected savings of $4 billion during 1997-2001 from the fourth round of base closures beginning in fiscal year 1996. The 1997 FYDP projects total savings of $0.6 billion, $3.4 billion less than the 1996 FYDP projection. The decrease in savings is primarily due to higher than anticipated base closure-related military construction costs for environmental cleanup activities in fiscal year 1997. Typically, the planned costs to conduct contingency operations have not been included in DOD’s budget submission. However, given that forces are deployed in Bosnia and Southwest Asia and these known expenses will continue into fiscal year 1997, DOD included $542 million for the Bosnian operations and $590 million for Southwest Asian operations in the President’s fiscal year 1997 budget. The Bosnian estimate was later revised to $725 million, and DOD has informally advised the Senate and House Committees on Appropriations of this increase. Most of these funds are in operation and maintenance accounts. The procurement accounts are projected to decrease by about $26 billion during the 1997-2001 period. About $15.3 billion of the reduction can be attributed to the use of the lower inflation rate. A comparison of the 1996 and 1997 FYDPs indicates that about $10.4 billion of the $26 billion reduction is due to a transfer of intelligence and classified program funding from the procurement accounts to classified research, development, test, and evaluation accounts. According to DOD officials, the programs are more accurately classified as research, development, test, and evaluation than procurement. The comparison also shows that DOD eliminated a $5.4-billion program in the procurement accounts that was called “modernization reserve” in the 1996 FYDP. According to DOD officials, this funding was redistributed among procurement programs. The 1997 FYDP continues the downward adjustments in the procurement accounts, which we first identified in our September 1995 report on the fiscal years 1995 and 1996 FYDPs. We reported that the fiscal year 1995 FYDP, which was the first FYDP to reflect the bottom-up review strategy, reflected relatively high funding levels for procurement of weapon systems and other military equipment. The funding level for procurement was estimated to be $60 billion by fiscal year 1999. Since the 1995 FYDP, DOD has steadily reduced programmed funding levels for procurement in favor of short-term readiness, quality-of-life improvements, research and development, and infrastructure activities. DOD now projects that the procurement account will not contain $60 billion until 2001. Table 3 shows DOD’s planned procurement reductions. In addition to the $10-billion transfer of intelligence and classified programs, significant planned decreases in funding and quantities of items include $2 billion for 1 Navy amphibious assault ship (LHD-1) and $1.1 billion for 240 theater high-altitude area defense systems. Funding levels for some programs were increased in the 1997 FYDP over last year’s plan. For example, $1.5 billion was added in the 1997 FYDP for 172 Army UH-60 Blackhawk helicopters, and $4 billion for 2 new SSN submarines. The National Defense Authorization Act for fiscal year 1997 authorized the addition of about $6.3 billion more than the President’s budget request for procurement. Programs receiving significant increases include the new SSN submarine; DDG-51 destroyer; the E-8B, C-130, V-22, and Kiowa warrior aircraft; and the Ballistic Missile Defense Program. The report also authorized $234 million for F/A-18 C/D fighter jets that was not included in the President’s budget. The research, development, test, and evaluation accounts are projected to increase by about $10.9 billion during the 1997-2001 period. Additionally, increased purchasing power in these accounts due to the use of the lower inflation rate is projected at about $6.5 billion. As mentioned earlier, about $10.4 billion was transferred from the procurement accounts. As a result of the transfer in programs and other adjustments, intelligence and classified programs experienced the most growth. Our analysis shows that the largest increase is in advance development activities, which increased about $3 billion per year over 1996 FYDP projections. The National Defense Authorization Act for fiscal year 1997 authorized the addition of about $2.6 billion more than the President’s budget for research, development, test, and evaluation. The largest portions of the increase went to missile defense programs. The 1997 FYDP projects that funding for military construction will increase by about $1.5 billion over the 1997-2001 period compared to the 1996 FYDP. One reason for the increase is that the 1996 FYDP projected savings based on interim base closing plans that subsequently changed, and actual closing costs were higher. Specifically, compared to the 1996 FYDP, the 1997 FYDP reflects spending increases in military construction expenditures of about $2.7 billion. The increase also reflects the transfer of some environmental restoration funds to the military construction account for cleanup at specific bases scheduled for closing. DOD considers family housing a priority. Nonetheless, when compared to the 1996 FYDP, the 1997 FYDP shows that the family housing accounts will decrease by about $1.8 billion. Improvements and other new construction are projected to decrease by about $1.3 billion during 1997-2001. Current family housing plans include improvements to 4,100 housing units, construction or replacement of 2,300 units and 13 support facilities, and the provision of $20 million for private sector housing ventures. We received comments on this report from OMB and DOD. DOD generally agreed with our report and offered some points of clarification, which we have incorporated where appropriate. OMB indicated that the change in inflation is important in forecasting the cost of the FYDP, not the level of inflation. Our review indicated, however, the level of inflation was also important because DOD makes its cost projections based on OMB guidance that specifies a level of inflation, not the rate of change. OMB and DOD comments are published in their entirety as appendixes II and III, respectively. To evaluate the major program adjustments in DOD’s fiscal year 1997 FYDP, we interviewed officials in the Office of Under Secretary of Defense (Comptroller); the Office of Program Analysis and Evaluation; the Army, Navy, and Air Force budget offices; CBO; OMB; and BEA. We examined a variety of DOD planning and budget documents, including the 1996 and 1997 FYDPs and associated annexes. We also reviewed the President’s fiscal year 1997 budget submission; our prior reports; and pertinent reports by CBO, the Congressional Research Service, and others. To determine the implications of program changes and underlying planning assumptions, we discussed the changes with DOD, CBO, OMB, and BEA officials. To verify the estimated increased purchasing power in major DOD accounts due to revised estimates of future inflation, we calculated the annual estimated costs for each 1996 FYDP account using inflation indexes used by DOD from the National Defense Budget Estimates for fiscal years 1996 and 1997. The increased purchasing power was the difference between these calculated costs estimates and the reported 1996 FYDP account costs. Our work was conducted from April through November 1996 in accordance with generally accepted government auditing standards. We are providing copies of this report to other appropriate Senate and House Committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; and the Director, Office of Management and Budget. We will also provide copies to others upon request. If you have any questions concerning this report, please call me on (202) 512-3504. Major contributors to this report are listed in appendix IV. The following are GAO’s comments on the Office of Management and Budget’s (OMB) letter dated November 8, 1996. 1. We agree with OMB that estimates of the Future Years Defense Program (FYDP) in any given year include anticipated future inflation and that changes in anticipated inflation affect the projected cost of the FYDP. We have made this more explicit in our report. However, the levels of forecasted inflation are also important to project future costs. As we explain in this report, the Department of Defense (DOD) projects costs based on OMB guidance that specifies an annual level of inflation for the FYDP period, not the changes in forecasted inflation. 2. The report was amended to reflect this comment. 3. As explained in comment 1, DOD projects costs based on the forecasted inflation rates it receives from OMB. Therefore, we believe the forecasted inflation rates have a direct impact on DOD’s estimated future funding requirements. 4. Our example is meant to show how application of a specific inflation rate to the FYDP can affect assumed purchasing power. As we explained previously, we believe the projected costs of the FYDP are affected not only by the change in inflation rates but also by the level of inflation. OMB asserts that under its forecast, the two inflation measures declined by the same amount. However, the Analytical Perspectives of the Budget for Fiscal Year 1997 shows a smaller decrease in inflation under the chain-weighted methodology—5/10 of 1 percent compared to 8/10 of 1 percent under the fixed-weighted methodology. Therefore, use of the changes in either methodology consistently would not have yielded the same change in the price of the FYDP. 5. The sentence was deleted from the final report. Defense Infrastructure: Costs Projected to Increase Between 1997 and 2001 (GAO/NSIAD-96-174, May 31, 1996). Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization (GAO/NSIAD-96-131, Apr. 4, 1996). Future Years Defense Program: 1996 Program Is Considerably Different From the 1995 Program (GAO/NSIAD-95-213, Sept. 15, 1995). DOD Budget: Selected Categories of Planned Funding for Fiscal Years 1995-99 (GAO/NSIAD-95-92, Feb. 17, 1995). Future Years Defense Program: Optimistic Estimates Lead to Billions in Overprogramming (GAO/NSIAD-94-210, July 29, 1994). DOD Budget: Future Years Defense Program Needs Details Based on Comprehensive Review (GAO/NSIAD-93-250, Aug. 20, 1993). Transition Series: National Security Issues (GAO/OCG-93-9TR, Dec. 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO compared the Department of Defense's (DOD) fiscal year (FY) 1997 Future Years Defense Program (FYDP) with the FYDP for FY 1996, focusing on the: (1) impact of the reduction in the inflation rate on DOD's 1997 FDYP; (2) major program adjustments from the 1996 FDYP to the 1997 FDYP; and (3) implications of these changes for the future. GAO found that: (1) as a result of projecting significantly lower inflation rates, DOD calculated that its future purchases of goods and services in its 1997 FYDP would cost about $34.7 billion less than planned in its 1996 FYDP; (2) according to DOD, the assumed increased purchasing power that resulted from using the lower inflation rates: (a) allowed DOD to include about $19.5 billion in additional programs in FY 1997-2001 than it had projected in the 1996 FYDP; and (b) permitted the executive branch to reduce DOD's projected funding over the 1997-2001 period by about $15.2 billion; (3) the price measure the executive branch used in its inflation projections for future purchases in the 1997 FYDP had inherent limitations and has since been improved; (4) if the executive branch decides to use the improved price measure for its 1998 budget, DOD may need to adjust its program as a result of that transition; (5) Office of Management and Budget officials told GAO they have not decided what price measure they will use to forecast inflation for the 1998 FYDP; (6) using projected inflation rates based on a different price measure from that used by the executive branch, the Congressional Budget Office estimated that the future cost of DOD's purchases through 2001 would decline by only about $10.3 billion, or $24.4 billion less than DOD's estimate; (7) resource allocations in the 1997 FYDP vary considerably from the 1996 FYDP as a result of the lower inflation projections, program transfers, and program changes; (8) the projected savings from the latest round of base closures and realignments changed considerably from the 1996 FYDP to the 1997 FYDP; (9) in the 1996 FYDP, DOD estimated savings of $4 billion from base closures; however, the 1997 FYDP projects savings of only $0.6 billion because: (a) the 1996 FYDP projected savings based on interim base closing plans that subsequently changed; and (b) military construction costs related to environmental cleanup of closed bases are projected to be $2.5 billion higher than anticipated in the 1996 FYDP; (10) a comparison of the 1996 and 1997 FYDPs also shows that DOD plans to reduce active duty force levels; (11) the smaller force planned for FY 1998-2001 would bring force levels below the minimum numbers established by law; and (12) if DOD is precluded from carrying out its plan to achieve a smaller force, it will have to make other adjustments to its program. |
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The Stafford Act defines FEMA’s role during response and recovery after a major disaster. One of the principal programs that FEMA operates to fulfill its role is the PA program. Under the program, FEMA provides grants to state and local government agencies, Indian tribes, authorized tribal organizations, and specific types of nonprofit organizations. In this process, one of FEMA’s key objectives is to maintain proper management controls, thereby creating a climate of stewardship and accountability in the use of federal funds. As in the case of many federal grant programs, FEMA provides funds to a state government, which, in turn, passes these funds along to a local grant applicant. Unlike a typical federal grant program, there are no caps on the amount of funding an applicant can receive under the PA program as long as the project meets eligibility requirements. The PA program categorizes funds into broad groups: emergency work (such as debris removal or emergency protective measures to preserve life and property) and permanent work (such as repairing and replacing damaged buildings, utilities, roads and bridges, recreational facilities, and water-control facilities). PA is a complex and multistep grant program administered through a partnership between FEMA and the state grantee. In Gulf Coast recovery, the role of Louisiana’s state grantee was initially carried out by the Governor’s Office of Homeland Security and Emergency Preparedness (GOHSEP). In January 2008, Louisiana’s Governor assigned the Louisiana Recovery Authority as the lead state agency working with FEMA on recovery operations. In Mississippi, this role is carried out by the Mississippi Emergency Management Agency (MEMA). The program is structured to provide financial assistance while ensuring a high level of accountability and control over spending. Thus, it entails an extensive paperwork and review process based upon a number of specific eligibility rules that outline the types of damage that can be reimbursed by the federal government and steps that federal, state, and local governments must take in order to document eligibility. After a disaster, FEMA typically works with the affected state government to set up a field office at or near the disaster site to administer PA grants. FEMA staffing usually consists of (1) permanent full or part-time employees, (2) nonpermanent reserve staff, and (3) technical-assistance contractors. In addition, the field office is staffed by the affected state’s emergency management personnel. In general, the majority of FEMA staff assigned to the field office consists of nonpermanent reserve staff and can be used in any capacity, depending upon their skills, and are typically deployed for shorter-term assignments (i.e., 90 to 120 days). Technical- assistance contractors typically provide assistance in specialized areas such as structural, mechanical, and civil engineering. Federal, state, and local officials each play a significant role in carrying out many of the steps of the PA funding process (see fig. 1). In this process, the state is the official “grantee,” while the local government or equivalent entity is the “subgrantee” or “applicant” that ultimately receives the funding. After a disaster is declared, FEMA and state representatives brief applicants on the program, and FEMA assigns a Public Assistance Coordinator as well as Project Officers and technical specialists to assist the applicant through the PA funding process. After determining that the applicant and type of facility are eligible for funding, FEMA, the state, and the applicant work together to develop a project worksheet describing the scope of work and estimated cost. As part of FEMA’s approval process, the agency also conducts historical and environmental reviews. FEMA generally defines a project in its 2007 Public Assistance Guide as a logical grouping of work that will be funded as a unit. Under this definition, a project may cover work for one damage site (e.g., all of the damage to a single school) or for similar types of damage that one contractor may repair at various locations (e.g., all sewer pump stations in a city). The Stafford Act provides a simplified procedure for smaller projects whose cost estimate is under a certain dollar threshold. After FEMA approves a project, funds are obligated—that is, they are made available—to the state grantee, which, in turn, passes the funds along to applicants. For large projects, funds are generally distributed to applicants on a reimbursable basis after project work is completed, although PA program rules allow applicants to receive PA funds from states earlier under certain conditions. For small projects, funds are provided up front to the applicant based on FEMA’s approval of the project’s cost estimate. The cost estimate or scope of work may change after project approval when new information comes to light. For example, if an applicant discovers that the actual costs for a project are higher than FEMA’s estimate, the applicant may apply to FEMA for additional funds. However, if the actual cost is lower than FEMA’s estimate, the applicant will receive only the actual costs incurred. In another example, FEMA may approve the scope of work for repairing damage to part of a wall or ceiling, but when an applicant seeks bids to repair the damage a contractor might conclude the entire wall or ceiling must be replaced in order to maintain the integrity of the building. Under these circumstances, a scope of work and cost adjustment might be approved by FEMA. In October 2006 Congress passed the Post-Katrina Emergency Management Reform Act of 2006 (PKEMRA) which, among other changes, reorganized FEMA, elevated FEMA’s position within DHS, and increased FEMA’s independence. PKEMRA gave FEMA new human capital authorities and responsibilities, including requiring FEMA to develop a strategic plan on human capital, authorizing recruitment and retention bonuses for difficult-to-fill positions, and providing for the professional development of FEMA employees through rotations within DHS. Further, FEMA was to establish a Surge Capacity Force of trained individuals prepared to respond to disasters. PKEMRA also made specific changes to the Public Assistance program such as authorizing incentives for the timely closing of PA projects and making educational nonprofit facilities eligible for PA funds. PKEMRA also authorizes FEMA to conduct a PA pilot program intended to reduce the cost, increase the flexibility, and expedite the provision of assistance. FEMA established new procedures under the pilot program and waived certain Stafford Act provisions and PA regulations for the purposes of the program. To respond to the 2005 Gulf Coast hurricanes the federal government has already committed a historically high level of resources—more than $126 billion as of August 2008. More than half of this assistance was directed to emergency assistance and meeting shorter-term needs arising from the hurricanes, such as relocation assistance, emergency housing, immediate levee repair, and debris removal efforts. FEMA’s PA grant program is a significant federal tool to support longer-term recovery efforts. One year after the disaster, the Brookings Institution estimated that approximately $35 billion of the federal resources had been provided to support longer- term rebuilding efforts. In addition to the PA program, other examples of federal longer-term rebuilding assistance include the U.S. Department of Housing and Urban Development’s Community Development Block Grant program primarily to help rebuild homes and apartments; the U.S. Department of Transportation’s funding for roads, bridges, and aviation facilities; U.S. Small Business Administration’s low-cost disaster loan program; and tax incentives and relief for hurricane victims and small businesses through the Gulf Opportunity Zone Act. Federal funding for the PA program in the Gulf Coast has already surpassed that of any previous disaster, and the total cost will likely be higher than FEMA’s estimate. Costs are likely to increase because the agency’s estimate of the total PA cost does not reflect additional projects that have yet to be approved or the final costs for already-approved projects, which may be higher than FEMA’s original estimates. In addition, FEMA’s estimates do not include its own administrative costs for the PA program. As in the case of costs, the number of PA projects in the Gulf Coast is unprecedented but FEMA’s reporting to Congress and the public on the number of total projects may have been misleading. As of September 2008, about 90 percent of PA funding made available to the Gulf Coast states has gone to Louisiana and Mississippi primarily for large permanent rebuilding projects. Within these two states, about half of this funding has been provided to local PA applicants to date. This is because many large projects take several years to complete and PA generally reimburses applicants after work is complete, as well as the challenges that will be discussed later in this report. As of September 2008, FEMA had made $11.1 billion available to PA applicants in the Gulf Coast. FEMA estimates that PA funding in the Gulf Coast will reach approximately $13.2 billion, surpassing all previous disasters, but final costs will likely be even higher. The PA program accounts for a substantial amount of the federal assistance committed to longer-term rebuilding efforts in the Gulf Coast region. Already, FEMA’s estimate for the PA program in the Gulf Coast has greatly surpassed PA funding for any prior disaster, including the $4.8 billion of federal PA funds spent for the 9/11 terrorist attacks on the World Trade Center (see fig. 2). Furthermore, total PA funding will likely be higher than FEMA’s estimate because: (1) some projects, not yet approved, are not reflected in FEMA’s total; and (2) the cost of some projects already reflected in FEMA’s recent estimate may turn out to be higher once FEMA has refined the scope and costs of these projects. For example, FEMA has already significantly increased its estimate of total cost from its projections of July 2007, when it estimated total spending of $10.3 billion. The gap between this estimate and FEMA’s September 2008 estimate of $13.2 billion indicates that anticipated PA funding increased by $2.9 billion in the intervening 14 months. In order to understand the entire cost of the PA program to the federal government, it is necessary to account for administrative costs as well. FEMA’s estimate captures some of the administrative costs incurred by applicants and states. However, for a full accounting, it is also necessary to consider the cost to FEMA for its administration of the program. Given the large number of contract staff and FEMA employees involved in administering the program, these expenses are likely extensive. For example, during 2006, staffing for field locations in Louisiana and Mississippi exceeded 3,500 staff. FEMA provided us with the cost for contractors supporting the administration of the PA program in the Gulf Coast as $1.7 billion through April 2008. However, other administrative expenses such as FEMA salaries, travel allowances, and overhead are unknown because the agency estimates such costs centrally, rather than by program. As of September 2008, the states of Louisiana and Mississippi have received about 90 percent of all PA funds distributed to the four Gulf Coast states. Specifically, Louisiana and Mississippi have received $7.2 billion and $2.9 billion respectively, while Texas has received $919 million and Alabama has received $116 million. (See fig. 3 for dollars made available to Louisiana and Mississippi for each PA category of damage.) The vast majority of the funding in Louisiana and Mississippi has gone toward large projects, even though small projects greatly outnumber larger projects. For instance, there were 23,886 projects in Louisiana and Mississippi funded for less than $55,600 whose total value equaled $222 million. On the other hand, 321 projects funded for $5 million or more had a total value of $5.2 billion. Of the four states affected by the 2005 Gulf Coast hurricanes, Louisiana and Mississippi have disbursed relatively the least amount of funding for projects (51 percent and 53 percent respectively). However, they are also the states with the largest amount of funding going toward permanent rebuilding projects, which can take several years to complete, and thus reimburse. For example, in Louisiana, PA applicants have received 77 percent of the $3.2 billion made available to the state for emergency work, while they have only received 29 percent of the $3.8 billion made available to the state for permanent rebuilding. Mississippi has a similar distribution of funds (see fig. 4). While there has been some concern about why more of these funds have not been distributed to applicants, there are at least two key reasons for this distribution of funds. Since the bulk of PA program dollars are distributed as reimbursements to the applicant, the applicant typically does not receive full funding for projects until costs have been incurred—even though FEMA has already made these funds available to the state. Most funds for emergency projects have already been passed along to applicants. However, permanent rebuilding projects can take several years to complete, so a significant portion of funds for these projects have not been passed on to applicants. Additional factors contributing to this gap include some of the operational challenges that we identify later in this report. As in the case of overall costs, the number of PA projects in the Gulf Coast is very large. The number of projects in the Gulf Coast, as reported by FEMA, is projected to be more than 81,000, with Louisiana alone accounting for more than 44,000. According to FEMA, the average number of projects for major disasters occurring between October 1998 and January 2007 was just over 700. Although there is no question that the number of Gulf Coast rebuilding projects is very large, the figure reported by FEMA in its status report to Congress and the public may be misleading. This is because the figure does not represent the number of unique PA projects, but rather, includes the number of changes (or “versions”) that have been made to project worksheets. Our analysis of the number of projects in Mississippi and Louisiana—the two states with the vast majority of projects—showed that in arriving at its total number of projects, FEMA often counted projects 2 or 3 times and in some cases project were counted as many as 11 times. Overall, FEMA’s decision to include multiple versions in its external reports roughly doubled the total number of projects (see table 1). FEMA officials acknowledged that reporting on the total number of project changes might be misleading but noted that this can be a useful measure of FEMA workload because it captures the effort involved in preparing multiple versions. In addition, FEMA officials noted that they were reluctant to change reporting metrics because they believed such a change might confuse users of the reports. We agree with FEMA that continued reporting of the total number of project changes can be useful— both as a measure of the projects being processed by the agency and to provide continuity with previous data reports. However, it is not clear why it is necessary to continue reporting this figure under the potentially misleading label of “number of projects,” nor why information on the actual number of unique projects is not also provided in the agency’s regular PA data reports. As of November 2008, these reports only included the total number of project versions and not the number of unique projects. Federal, state, and local officials experienced a variety of challenges in the day-to-day operation of the PA program in rebuilding the Gulf Coast. These included challenges in developing projects, sharing and communicating project information, and making and appealing project decisions. These challenges resulted in slowing rebuilding progress. These difficulties were exacerbated by the amount of damage from the 2005 Gulf Coast hurricanes and the sheer number of rebuilding projects initiated in their wake. Rebuilding projects faced significant challenges during project development and start up, which slowed down rebuilding projects and, at times, increased costs. A critical step in the PA process is the completion of a project worksheet, which documents eligible work and estimated cost. Large rebuilding projects typically involve some modifications in finalizing the scope of eligible work and determining related costs through the creation of subsequent “versions” of the original project worksheet. For example, modifications resulting in a new version may occur when, after initial building repairs begin, additional damage is discovered. In the Gulf Coast large PA projects faced several challenges during the project development and start up process including difficulties in: (1) determining how much of the damage was disaster related, (2) assessing project scope including the decision to repair or replace structures, (3) estimating project costs in the postdisaster environment, (4) using program flexibilities to rebuild to post disaster needs, and (5) obtaining resources to initiate projects. Sometimes several of these challenges were encountered in a single project, thereby magnifying their effect. In response to some of these challenges, FEMA, the Office of the Federal Coordinator for Gulf Coast Rebuilding and the states of Louisiana and Mississippi have taken a variety of actions and plan to do more. For many rebuilding projects on the Gulf Coast, it took time to make determinations regarding the amount of damage structures received as a direct result of the 2005 Gulf Coast hurricanes and distinguishing this from nondisaster related damage. This task has been complicated by a number of factors including the overall scope of the damage caused by the hurricanes, the large number of rebuilding projects, and the fact that some applicants lacked records to document the predisaster condition of buildings and infrastructure. The PA program will not reimburse applicants for damage to buildings or infrastructure that was the responsibility of the applicant to repair prior to a disaster (such as deferred maintenance) or protect against after a disaster (such as the failure to patch a damaged roof to prevent further damage to a building’s interior). Identifying the amount of damage that already existed before the hurricanes has been especially difficult, particularly for large infrastructure projects such as roads and water lines. FEMA officials noted that water lines were particularly difficult to assess because much of the damage was underground. FEMA conducted extensive inspections in order to make eligibility determinations for many of these projects, and these determinations took time to work through. In addition, disagreements between applicants and FEMA, as well as changes to project scope decisions contributed to slowing down project development. For example, although much of the New Orleans water and sewer system sustained damage as a result of the disaster, FEMA and city officials had difficulty agreeing on the amount of damage due to the storm as opposed to that due to deferred maintenance. New Orleans officials stated they had valid records on the condition of the city’s water and sewer lines up to January 2005—approximately 9 months before the Hurricane Katrina. Given this gap in records, FEMA began a review of the entire system for disaster-related damage and inspected roughly 46,000 leaks by July 2007. The agency funded the installation of flow meters and data-logging devices to assist in determining the location of leaks. FEMA concluded that in about 80 percent of the cases, it could not determine whether a leak had existed prior to the 2005 Gulf Coast hurricanes or whether it was caused by the hurricanes. In an effort to resolve this issue, FEMA, the state, and the New Orleans Sewer and Water Board entered into a memorandum of understanding agreeing to engage a third-party contractor to perform a damage assessment and propose restoration alternatives. According to FEMA officials, the agency has since reimbursed the applicant for those leaks that were identified as being caused by the hurricanes. Postdisaster damage also complicated project development. Under the PA program, in order for postdisaster damage to be covered it must be directly related to the disaster, such as damage to roads from heavy trucks hauling away debris, or certain cases of mold in buildings. In addition, reasonable protective measures by the applicant could not have prevented this damage from occurring. Therefore, decisions on project eligibility took additional time to sort out poststorm-related damage. For example, PA inspectors sought to determine whether applicants protected their buildings well enough to secure them from poststorm damage such as rain or from thieves who stole copper pipes for their salvage value. In St. Bernard Parish, roughly 2 years passed before FEMA and parish field inspection teams completed identification of PA-eligible damage to approximately 2,500 blocks of local streets. The parish had no records to document the condition of its streets prior to the 2005 Gulf Coast hurricanes, so according to state officials, FEMA inspections were performed on each parish street in an attempt to distinguish predisaster damage from that caused directly as a result of the hurricanes. In addition, FEMA and St. Bernard Parish officials disagreed over the standards FEMA used to determine eligibility, which further prolonged the project- development process. In contrast, Jefferson Parish did not encounter similar challenges with distinguishing predisaster damage from damage directly related to the hurricanes. This is because the parish maintained a road repair-management information system (including a road- maintenance plan) prior to the disaster that enabled the parish to identify preexisting road conditions to FEMA officials, thereby helping to expedite their road-repair projects. The PA program typically provides funds to restore buildings, equipment, or infrastructure back to their condition, location, and function before the disaster. The program does permit changes from how things were prior to the disaster—through alternate and improved projects—but these approaches typically come with restrictions in funding. Since many PA applicants in the Gulf Coast found that the population of their neighborhoods changed significantly from pre-Katrina levels, it was important for their rebuilding projects take into account the new conditions. In order to do this, localities often needed time to develop and obtain agreement on broader recovery plans, which provide a coordinated approach to rebuilding their communities. According to FEMA officials, the Stafford Act was not designed for the level of project reconfiguration necessary for post-Katrina rebuilding. For example, given postdisaster population changes and educational needs, Louisiana’s Recovery School District officials sought flexibility in rebuilding schools as well as the number of students attending each school. Typically, the approval for an alternate or improved project designation is done on a site-by-site basis. Accordingly, FEMA officials initially sought rebuilding decisions from the school district on a campus- by-campus basis to move ahead with project development. However, it took time for school district officials to devise a plan for rebuilding its large school system given the changing demographic pattern of returning school age children and the need to consider community input. These officials also wanted to consider how much money FEMA would allow for damages when making its final planning decisions. However, FEMA could not determine how much PA money would be available until they were informed of the school district’s project development decisions. Recovery School District officials devised an interim short-term plan to help ensure that school campuses opened as quickly as possible. These challenges, coupled with pressures to open schools in time for the school year, led to FEMA funding approximately $70 million in temporary modular facilities. FEMA and school district officials ultimately are working together to resolve differences in developing the project by moving towards a systemwide approach to rebuilding schools to address Louisiana’s postdisaster needs rather than developing projects on a campus-by- campus basis. St. Bernard Parish government also faced challenges with replacing equipment to address postdisaster needs. The parish lost almost all of its vehicles and equipment as a result of the disaster, but local officials reported that state PA officials only allowed one-for-one and in-kind replacements. For example, St. Bernard Parish officials claimed that the state required them to replace one of their damaged 1988 Ford Crown Victoria police cruisers with the same make, model, and year. Instead, the officials wanted to use the total value of the damaged equipment to purchase a smaller number of vehicles appropriate for their current and future needs. It took many months to work through the applicable rules in order to address the parish’s concerns. FEMA officials told us that they ultimately utilized the PA program’s improved-project option to provide funds from the replacement value of older vehicles toward the purchase of new vehicles. As part of this process, the Office of the Federal Coordinator for Gulf Coast Rebuilding entered into a correspondence with St. Bernard Parish officials in fall 2007 with the intent of expediting project development offering a dedicated team to provide specialized assistance to resolve this issue. This effort was part of a broader initiative by the Federal Coordinator, along with FEMA, to reach out to local officials in selected hard-hit areas to identify their top five priority PA projects. FEMA plans to incorporate some project development flexibilities into its regular practices. For instance, FEMA’s Public Assistance Catastrophic Disaster Recovery Concept Plan, finalized in May 2008, recognizes the need for PA regulations to allow applicants to more easily tailor projects to meet postdisaster needs. In September 2008, FEMA officials informed us that policies to address this issue as well as a range of other initiatives related to the plan are in development and are expected to be complete by March 2009. Under PA rules, if a facility is 50 percent or more damaged, the program will fund its replacement value. This “50 percent rule” is important because the applicant stands to receive significantly more money when this damage threshold is crossed. Because of the size and complexity of the damage caused by the 2008 Gulf Coast hurricanes, making the determination to repair or replace could be particularly difficult. This challenge was more evident in Louisiana as FEMA and state officials noted that the damage generally involved flooding and wind damage so that most buildings were not completely destroyed, as was the case with much of the damage in Mississippi. In St. Bernard Parish local officials had plans to consolidate its seven separate wastewater (and sewer) treatment plants prior to the 2005 Gulf Coast hurricanes in order to meet EPA compliance rules, among other things. When parish officials developed project worksheets for the wastewater treatment plants, they wanted to structure the projects so that PA funds could be used to accomplish this goal, rather than rebuilding a system that they planned to decommission. Although the parish plan to consolidate its wastewater treatment plants was not contingent upon whether the individual plants qualified for replacement rather than repair, these decisions affected whether the parish would receive enough funding to build the consolidated wastewater treatment facility. Initial assessments led FEMA to determine that the facilities were not sufficiently damaged to qualify for funds to pay for the replacement of the plants, but just for their repair. According to parish officials, the parish sought a reassessment of the damage and after FEMA recalculated costs, they determined that two out of the seven water treatment sites were, in fact, eligible for full replacement, while the other five qualified for the cost of repairs. As project issues were being discussed, heavy trucks were used to pump and haul sewage as an interim measure until the system was repaired. These trucks were needed to operate for a much longer-than-expected period of time resulting in a considerable cost as well as damage to the parish’s roads. These temporary measures have already cost the federal government more than $60 million. St. Bernard Parish officials estimate that, had they been able to move ahead with their original plans, it would have taken about 1½ years for the new consolidated facility to become operational. More than 2 years have passed since the project was proposed and rebuilding has not yet begun. Another example of the challenges related to difficulties in determining whether to repair or replace damaged structures involves New Orleans’s public schools. Over 3 years after the disaster, damaged school buildings under Louisiana’s Recovery School District agency are still being assessed to determine whether they qualify for replacement funding. According to Recovery School District officials, in some cases, this determination was reached after the school district already paid for architectural plans to renovate rather than replace the school facility, thereby incurring extra expenses and further slowing rebuilding. School district officials told us that working through repair versus replacement eligibility for the 122 school campuses under their control will be a very long process if delays in assessment continue. For example, the Fannie C. Williams Elementary School in New Orleans was initially assessed by FEMA as being less than 50 percent damaged, therefore not qualifying it for replacement. After the Recovery School District hired an architectural and engineering firm to reassess the damage, FEMA agreed to change its original determination and the school qualified for replacement funding. During Gulf Coast recovery, state and local officials reported that FEMA’s cost-estimating methods often undervalued the cost of rebuilding, and, in many cases project estimates were conducted very early in the project- development process before knowing the full extent of the damage. Developing accurate cost estimates is particularly important for alternate and improved projects. This is because these projects rebuild the structure to be different from its predisaster condition, but project payouts are capped at an amount estimated to restore the structure to its predisaster condition. In contrast, in projects that ultimately restore structures to predisaster conditions there is no funding cap because the actual costs of rebuilding will be funded, if reasonable. According to federal and state officials, it was difficult to develop rebuilding estimates because of uncertain labor and material costs after the storms. To better address these types of situations FEMA developed a methodology called Cost Estimating Format. This methodology provides a uniform method of estimating costs for permanent large projects and includes consideration of both direct costs (i.e., materials) and indirect costs (i.e., safety and security measures, storage and staging, insurance, and other overhead). However, according to senior FEMA officials, many agency staff had not been trained to use this methodology in the aftermath of the 2005 Gulf Coast hurricanes. A study contracted by FEMA of major disasters occurring between April and October 2007 found that about 70 percent of FEMA staff and 50 percent of technical assistance contractors were not trained on the Cost Estimating Format that FEMA recommended for use in developing estimates for projects. In addition, FEMA, state, and local officials reported that cost estimates were often made very early in the project-development process before knowing the full extent of the damage. FEMA officials noted that the earlier in the process that a cost estimate is developed, the greater the likelihood that the estimate will be inaccurate since these early estimates may not factor in all of the damage that exists. These officials told us that early estimates typically cover only obvious damage since conducting detailed investigations of damage shortly after a major disaster can be difficult. For example, upon further investigation of a roof, damage to the underlying flashing and underpinnings may be discovered that was not recognized during FEMA’s initial inspection. FEMA officials stated that project officers were focused on developing as many project worksheet estimates as they could to facilitate the project development process. There were trade-offs, however, in developing early estimates. Applicants reported that low cost estimates, resulting from challenges cited above, contributed to delays in project development until these estimates were revised. According to testimony by the former Acting Director of the Louisiana GOHSEP before the Subcommittee on Disaster Recovery in July 2007, many PA rebuilding projects were underestimated by millions of dollars. For example, out of the 23 cases he cited, the estimated amount was less than the lowest bid that the applicant received for the work by a factor of 1.5 to 10 times. Because of low cost estimates, applicants were sometimes hesitant to move forward on projects for fear that they may owe more than FEMA would ultimately reimburse them for, despite the fact that PA rules allow for reimbursements for large projects to be above the original estimates if costs are reasonable. When FEMA agrees that actual repair or rebuilding costs would significantly vary from their original estimate, the agency updates the project scope or estimated cost by creating a new version of the project worksheet. However, state and local officials reported that it sometimes took several months for FEMA to make agreed-upon changes to project worksheets—including revised cost estimates—and applicants were responsible for covering these costs in the meantime. Louisiana applicants faced an additional challenge with moving forward on projects because they reported that state law requires that applicants identify 100 percent of their funding for projects before they can enter into contracts to rebuild. These applicants reported that gaps between PA estimates and contractor bids delayed rebuilding projects since they were not able to identify 100 percent the project’s funding. FEMA officials in Mississippi noted that they increased project worksheet cost estimates by about 20 percent to compensate for low project cost estimates. FEMA’s PA Catastrophic Disaster Recovery Concept Plan proposes that the agency, the state, and the applicant take steps to more effectively develop comprehensive damage descriptions in order to reduce conflicts regarding project cost estimates later in the process. Toward this end, the plan acknowledges the importance of deploying sufficient resources to promote rapid completion of damage assessments including funding for technical assistance to applicants. According to FEMA officials, some steps related to improving damage assessments, such as developing a catalog of assessment methodologies, have been completed. However, an additional task relating to this issue is still underway, and other follow-on activities relating to the plan have yet to start. State and local officials in Louisiana and Mississippi told us that factors such as insufficient resources for up-front project costs and contractors delaying work until they were paid also led to project delays. Some of these challenges have been addressed during the course of recovery. Applicants reported challenges in covering substantial up-front costs for project development such as the costs of hiring architectural and engineering firms and associated human capital costs to prepare documentation for PA requirements. Local officials told us that they often needed to hire an architectural and engineering firm to document the scope of damage and subsequent work to fully justify funding of projects. However, in some cases, applicants did not have the resources to hire an architectural and engineering firm without first obtaining initial PA funding for the project. Also, some applicants reported that they lacked funds to pay for staff to prepare PA documents needed to request PA funding. Local officials noted that provisions in the PA program that provide up-front funding can be quite burdensome to applicants. According to FEMA officials, FEMA designed an initiative to fund professional technical resources to support local recovery efforts. Initiating projects was a special challenge in Louisiana. For example, New Orleans city officials reported that their economy was stagnant for weeks after the storm, which led to reduced city revenues. Furthermore, their ability to raise money was limited due to low credit ratings, and they were unable to borrow funds to cover the costs of maintaining the city’s staff or paying for expenses such as architecture and engineering activities as cited above. As a result, many critical rebuilding projects were not started for several months. In another example, a senior St. Bernard Parish official reported facing delays until the parish identified funding provided from other recovery funding sources to cover architecture and engineering costs for PA projects. Specifically, the officials reported using $8.9 million that they received from insurance refunds to pay for some of the architecture and engineering work necessary to initiate critical PA projects, such as the sewer system. In addition, officials in Louisiana reported that applicants were concerned about their ability to afford PA cost-share requirements when this requirement was still in place, contributing to project delays. The PA program typically requires a 75 percent federal and 25 percent state cost share. Shortly after the storms the federal government adjusted this match for the Gulf Coast states to 90 percent federal and 10 percent state for Gulf Coast recovery, and this matching requirement was removed in 2007—15 months after the disaster was declared. Having enough resources to cover PA cost-share requirements was less of a challenge in Mississippi as officials in that state reported that state legislation allowed the state to bond up to $200 million for three coastal counties. As a result, applicants were better able to move forward with rebuilding without hesitations associated with their inability to meet PA cost-share obligations. Further, officials from several parishes reported that due to their reliance on state reimbursements—which some claimed were slow—they did not have the resources to pay contractors, some of whom threatened to sue for nonpayment. FEMA officials stated that PA rules are flexible enough to provide some funding up front, if the state chooses to do so, and states can make arrangements to pay for phases of projects, as they are completed, rather than being reimbursed for the completed project at the end. Further, in February 2008, Louisiana initiated a program to streamline payments to applicants to provide more rapid disbursement of PA funds. Louisiana’s “Express Pay System” allows an applicant to submit a reimbursement request with the required supporting documentation and receive payment within 10 to 14 business days, rather than 45 to 60 business days as was the case for the previous process. We found that applicants from Mississippi used some of PA’s funding flexibilities, which state and local officials said were critical to their ability to move ahead on projects without delay. Senior officials from MEMA and the Governor’s Office of Recovery and Renewal said that the state’s approach to providing up-front funding was possible because state laws allow them to advance up to 75 percent of PA project funds to applicants, and FEMA worked with the state to advance funding. In addition, according to a state official, Mississippi law does not prevent local governments from bidding out projects before they have identified or received 100 percent of their funding. As a result of the funding flexibility that Mississippi had, MEMA and FEMA established an agreement for the state to provide funding for initiating projects and reimbursement throughout the phases of rebuilding work. As an example, MEMA paid applicants 90 days before their next contractor payment was due for phases of rebuilding. Using this method, MEMA funded up to the first 85 percent of the project’s cost, while applicants were responsible for funding the remaining 15 percent until they received full FEMA reimbursement. More recently, in 2008, Louisiana began to implement similar PA funding flexibilities. Specifically, the state initiated a revolving fund for the City of New Orleans that can be used by applicants to fund initial PA project costs. While applicants reported that this initiative has improved their ability to move projects along, this initiative began 2½ years after recovery started, and the revolving fund only provides assistance to New Orleans. Finally, in June 2007 FEMA began implementation of a pilot program, required by PKEMRA, which provides participants with funding up front rather than through the reimbursement of actual costs. This program is not available for recovery projects relating to the 2005 Gulf Coast hurricanes. Applicants participating in the pilot receive payment for the entire estimated cost of the project, up to $500,000, for either emergency or permanent work projects. If the actual cost of the project is lower than this amount, the applicant may keep the extra funds for other projects or approved uses. If the actual cost is higher, the applicant must pay the difference. After being in operation for over a year, FEMA officials told us that participants have been reluctant to use the program for permanent work projects. Out of 2,725 projects in the pilot as of September 2008 only 140, or less than 1 percent, were coded as being for permanent work. These officials attributed this to reluctance on the part of participants to having to make up the difference if their project comes in higher than originally estimated, and to giving up their right to appeal, which they are required to do under the terms of the pilot. While these terms also apply to emergency work projects participating in the pilot, this was thought to be less of a concern because such projects were generally more straight-forward and presented fewer uncertainties than large permanent work projects. PKEMRA requires FEMA to submit a report to Congress on the results of the pilot by March 31, 2009. Because the PA process is complex and requires collaboration among federal, state, and local officials, effective sharing of project information is particularly important. We identified challenges to sharing project information between federal, state, and local officials during project development, and limitations in tracking the status of projects. Challenges in the first area were more prevalent in Louisiana than in Mississippi because of the information-sharing strategies used. Taken together, limitations in these areas slowed PA project development and contributed to additional human capital burdens for local governments. In response, FEMA has taken several steps to improve sharing information and project tracking. In Louisiana, federal, state, and local officials involved in the PA program reported facing challenges in effectively sharing critical operational information about projects including documents used to support scope and cost estimates, such as receipts, invoices, and facility assessments. This situation was made worse because key federal and state officials responsible for reviewing and approving documentation were not primarily located in the same place. Typically, FEMA colocates with state grantees in order to facilitate information sharing. In Louisiana, FEMA had some staff located in important areas throughout the state. However, we found that the state grantee conducted its work primarily from Baton Rouge while FEMA’s Transitional Recovery Office was based in New Orleans—approximately 80 miles away. Given that key staff from FEMA and the state were located in different cities, it was particularly important for them to ensure effective sharing of project information. Although Louisiana and FEMA employed the use of a Web-based system to track the status of PA project funding, it did not facilitate the day-to-day exchange of documents related to project development. Due to this lack of effective information-sharing, some local officials told us that they had to frequently submit the same documentation to the state of Louisiana and FEMA because it was not shared between the agencies. In some cases, this slowed project development because applicants needed to reproduce critical project documents. Federal and state officials acknowledged that they faced difficulties in sharing project information and that documents were sometimes lost during the exchange between their agencies. In Mississippi, federal, state, and local officials adopted strategies that helped to facilitate the sharing of PA project information. For example, following the disaster, FEMA’s Mississippi Transitional Recovery Office and the state grantee were located in the same office complex in Biloxi, Mississippi, and officials from these agencies were are also positioned throughout the state. They reported that this colocation had multiple benefits for information sharing and exchange, including the timely sharing of critical documents and facilitation of daily meetings on project- development issues. In addition to colocating, FEMA and Mississippi state officials used PA funding to secure an on-line accounting system that made operational documents associated with projects readily available to all parties. According to state and local officials, the state contracted with an accounting firm that worked hand-in-hand with applicants to regularly scan and transmit documentation on architecture and engineering estimates, contractor receipts, and related materials from this Web-based system. As a result, FEMA and the state had immediate access to key documents that helped them to make project approval decisions. Further, local officials reported that this information-sharing tool, along with contractor staff from an accounting firm, helped to relieve the documentation and resulting human capital burdens that applicants faced during project development. Typically, FEMA only tracks the status for rebuilding projects up to when the agency makes funds available to the state and at the end of the process, when FEMA reconciles approved cost estimates with an actual project’s cost. While we recognize that this approach toward tracking PA projects may be appropriate for most disasters, the high level of interest from Congress and the public regarding the status of Gulf Coast rebuilding—including information on the construction of specific projects—highlights the need for this type of information. Providing such information on project status presented FEMA with two challenges. First, information on rebuilding status between the point when funds are made available to the state and cost reconciliation is not tracked by FEMA’s NEMIS database. NEMIS data are derived from information collected in project worksheets, which capture the estimates for individual rebuilding projects. Second, FEMA does not track information by specific rebuilding site, but rather, by project worksheet, which may encompass multiple buildings or partial rebuilding sites. Because of this there was no easy way to provide updates on specific PA projects, such as a school or police station, to interested parties. To address the first challenge, FEMA and state officials in Mississippi and Louisiana have made efforts to more effectively gather and report on the status of PA projects. They developed databases to maintain more complete information on the status of PA projects. Although this effort has been labor-intensive because of the need to use multiple information sources, these officials said that they have been able to generate reports on whether applicants have received PA funds that were made available to the state as well as on the status of construction for PA projects. The latter involves tracking construction bids, groundbreaking, and other stages of rebuilding. As a result, PA managers reported that they have been able to respond to stakeholder and applicant requests for information on project status. For example, FEMA reported that it developed a separate database, which provided FEMA and state officials with visibility on flexible funding PA grant options used by applicants—such as alternate or improved projects—in order to keep applicants informed of FEMA and GOHSEP activities and decisions related to these types of projects. According to FEMA officials, these types of tools may not be necessary in smaller disasters, but have proved to be useful in tracking long-term rebuilding efforts in the Gulf Coast. To address the second challenge, the Office of the Federal Coordinator for Gulf Coast Rebuilding, working with FEMA, established a transparency initiative in February 2008. This Web-based information sharing effort provides detailed information about selected buildings and types of projects in the Gulf Coast receiving PA funds and makes this information available to the public by sector. For example, the Web site provides information on whether specific New Orleans schools are open or closed and how much federal funding is available for each school site. To do this, FEMA and the Office of the Federal Coordinator worked with the state and local applicants as well as spreadsheets maintained by PA project officers in the field to obtain the necessary data. Although labor-intensive, these officials said it has been very useful to a wide range of stakeholders including the general public. FEMA officials told us they are taking steps that will improve national data collection. For example, FEMA has piloted a new information management system, called the Emergency Management Mission Integrated Environment (EMMIE), which, according to agency officials, will provide better tracking and management of PA projects. According to these officials, the agency has incorporated stakeholder feedback into system development to respond to some of the data-collection challenges faced in Gulf Coast rebuilding. EMMIE will allow FEMA staff, state grantees, and applicants to perform PA grant-management activities online, including allowing applicants to apply for, view the status of, and manage their grants. Although EMMIE promises considerable additional functionality, its use by state and local governments is optional. FEMA plans to convert NEMIS information on the 2005 Gulf Coast hurricanes into EMMIE once the system is fully deployed in 2009. PA applicants rely on FEMA project-approval decisions to make key repair or rebuilding decisions of their own; however, both applicants and FEMA officials told us that the agency’s decisions were occasionally reversed. This led to hesitancy on the part of some applicants in moving forward on other projects. In addition, some applicants expressed concerns about the timeliness of FEMA’s appeal process and that it was not perceived as being independent. On some occasions, FEMA changed project-approval decisions after applicants moved ahead on their projects based on these decisions, resulting in additional expenses for the applicant. According to a senior FEMA official, both program staff and auditors from the Office of Inspector General may change project approval decisions if they determine that an earlier decision was incorrect, that is, if the project funding decision was legally ineligible. A senior FEMA official told us that, in these cases, the agency has no choice but to change its funding decision. In other situations, decisions were changed because a FEMA official later disagreed with an earlier interpretation of a PA program rule by another FEMA representative. These decisions were in areas that FEMA had some discretion, that is, when FEMA rules allowed for more than one rule interpretation. The official noted that this happened more during the recovery from the 2005 Gulf Coast hurricanes than in other disasters. According to the official there were cases when FEMA staff made incorrect project-scope or cost-estimating decisions for which applicants were ultimately held responsible. In these cases FEMA may deobligate funding even after construction had started. For example, there were cases when FEMA changed its decision on whether a building qualified for replacement funding rather than repair funding, to the detriment of the applicant. FEMA and local officials reported that as a result of occasional reversals of FEMA decisions and guidance, applicants were sometimes hesitant to move forward on other projects. State and local officials in Louisiana and Mississippi expressed concern about the timeliness and perceived independence of the project appeals process. Applicants may appeal project decisions if they disagree with FEMA’s decisions on project eligibility, scope of damage, or cost estimates. FEMA regulations outline the time frame for applicants to file an appeal and for the state and FEMA to respond to applicant appeals (see fig. 5). However, applicants reported that project appeal decisions were often not made within the time frames required under the Stafford Act. FEMA officials told us that the extraordinary large numbers of PA projects led to a large number of applicant appeals. Also, some applicants said that they were not provided with information on the status of their appeal from either the state or FEMA. Finally, applicants also expressed concerns about the independence of FEMA officials making appeals determinations since in Louisiana appeals were reviewed by the same office that made the decision being appealed in the first place—which some applicants perceived to be a conflict of interest. FEMA has taken steps to improve the timeliness of appeal decisions as well as perceptions about the lack of independence in FEMA’s appeal process. Specifically, in March 2006 the FEMA region responsible for settling appeals from Louisiana designated a special team of dedicated staff to help address the backlog of appeals. In addition, FEMA has made changes to the appeals process within Louisiana so that an applicant’s appeal is not reviewed by the same office that made the project decision in the first place, but rather by an independent appeals team outside of the agency’s Louisiana office. According to FEMA officials, appeals following most disasters are not reviewed by the same office that made the decision about the project in the first place, but rather by the FEMA regional office responsible for the disaster. These officials told us that because of the size of the Louisiana Transitional Recovery Office and the number of projects it handled, the agency had initially tasked this office with the appeals review function rather than the regional official located in Texas. Human capital challenges at the federal, state, and local level underlie many of the operational difficulties faced during Gulf Coast rebuilding. During the initial phases of rebuilding, shortages of staff with the right skills and abilities, as well as the lack of continuity among rotating staff, contributed to delays in developing PA projects in Louisiana and Mississippi. It is not surprising that a disaster with the effect of the 2005 Gulf Coast hurricanes would strain the PA program’s human capital capacity. We have previously reported that FEMA did not have the human capital capacity it needed to implement PA in the wake of the 1989 Loma Prieta earthquake, which was considerably smaller in size and scope than the 2005 hurricanes. In the Gulf Coast, FEMA’s human capital challenges included not initially having enough staff to effectively implement the PA program and, then, when the programs was staffed up, not having staff with the right experience, knowledge, and abilities. The agency has taken some steps to address these challenges, which state and local officials told us have resulted in improvements. It took time for FEMA to provide sufficient numbers of PA staff to meet the large need in the wake of the 2005 Gulf Coast hurricanes. According to FEMA officials, their staffing approach is generally adequate for most disasters, which typically require 75-100 staff. However, given the unprecedented size and scope of the damage caused by the 2005 storms, FEMA needed to deploy a far larger number of people to administer the PA program than it typically used. For example, during 2006, the year with largest number of PA staff assigned to Louisiana and Mississippi, the agency deployed more than 3,500 people. FEMA had not previously staffed its transitional recovery offices at such high levels. According to senior FEMA officials, even when FEMA’s staff levels were sufficient, their inexperience and limited training presented significant challenges to their ability to effectively administer the program in Gulf Coast. Many of the more-experienced FEMA staff were still actively working on recovery efforts related to the 2004 Florida hurricanes, or needed time off after recently working on other disasters. Senior FEMA officials told us that at least 50 percent of FEMA staff working in the Gulf Coast, especially technical assistance contractors, did not have any PA program experience or adequate training prior to being assigned to the Gulf Coast. These officials stated that, as a cost-benefit decision, FEMA does not require its contractors to take PA training prior to a disaster, but the agency typically provides some training on the PA program to staff right before they are deployed to a specific disaster. In addition, the agency lacked sufficient numbers of experienced PA employees to fully review all of the project decisions made by less-experienced staff, especially early in the recovery. Senior FEMA officials involved in the administration of the program noted that closer supervision of these inexperienced staff might have reduced the number of problems encountered later on, but conditions after the 2005 Gulf Coast hurricanes made such supervision difficult. We have previously identified insufficient training of PA staff as a challenge and have reported on the importance of having FEMA employees appropriately trained in the application of relevant PA policies and information systems. We recommended that FEMA implement a credentialing program to help ensure that staff who make program and cost eligibility decisions meet minimum standards. Recently, FEMA adopted an agencywide credentialing program that would identify the skills and abilities needed for key positions as well as the amount of training, mentoring, and experience necessary to obtain proof of these skills. In December 2008, FEMA officials reported that they completed development of this program and expect to conduct field testing in early fiscal year 2009. Federal, state, and local officials reported that FEMA’s use of inexperienced staff resulted in changing or inaccurate decisions that slowed down the project development process, especially during early recovery efforts. For example, FEMA officials reported that inexperienced staff sometimes misinterpreted PA program rules, such as promising that the agency would fund the replacement of a fleet of vehicles under conditions not allowed under the Stafford Act. Further, some staff also lacked experience and training in technical subjects that were important during project development, including how to assess certain types of damage requiring specialized skills such as road and water system damage. Officials from almost all of the localities included in our review reported that advice provided by FEMA staff was, at times, changed or incorrect, and that this not only contributed to slower project development, but sometimes resulted in applicants spending funds on projects that FEMA later determined would not be reimbursed. According to federal, state, and local officials many of the human capital challenges experienced in the earlier days after the 2005 Gulf Coast hurricanes have improved. However, lessons learned in the aftermath of these storms provide an opportunity for a discussion of the appropriate resource level and staff capacity in the event of a future catastrophic disaster. In this regard, FEMA’s Strategic Human Capital Plan, issued in May 2008, sets a goal to determine the proper number and type of employees required to staff FEMA’s various organizations, including the directorate in charge of the PA program. Given the intergovernmental nature of the PA program, FEMA relies on state and local efforts for its successful implementation. As such, having adequate human capital capacity at the state and local level also plays a key role in successfully developing rebuilding projects. However, as was the case with the federal government, Louisiana and Mississippi initially lacked the human capital capacity to administer the PA program during recovery from the 2005 Gulf Coast hurricanes. In addition, local applicants initially lacked the staff to fully participate as partners in the program. As with FEMA’s challenges, it is understandable that state and local entities would not have the human capital capacity to address this disaster given the sheer number of rebuilding projects. Early on, Louisiana and Mississippi state offices administering the PA program had insufficient staff to carry out their respective roles; however, later the states obtained the assistance that they needed from various sources. As with the federal experience, staff had to be quickly trained, resulting in some staff not having the expertise to effectively assist applicants. Further, local governments in Louisiana and Mississippi reported that their own human capital resources were limited because of the disaster, thus, further constraining their ability to fully participate in the PA process. In Louisiana, officials from GOHSEP reported that they only had four staff to administer the program when Hurricane Katrina occurred. As a result, they hired contractors to process grants and obtained support from Louisiana’s Office of the Legislative Auditor to assist in conducting up- front document and eligibility reviews. Although the Office of Legislative Auditor established a dedicated team to assist the state with PA project reviews, the office only consisted of a small number of staff to review thousands of project worksheets. Similarly, Mississippi officials reported facing staff shortages until they received contractor assistance using PA funds. A senior official from MEMA reported that they only had eight state employees dedicated to their initial response to the 2005 Gulf Coast hurricanes. According to the official, the state received federal PA funding in order to hire qualified PA contract staff and an accounting firm to assistant applicants through the complex PA process since state staff alone could not effectively administer the program. Officials from MEMA and the Mississippi Transitional Recovery Office reported that state contractors were knowledgeable about disaster recovery, but inexperienced with PA program rules. Therefore, they had to be trained quickly before going into the field. Local officials reported that their own human capital resources were also limited because of the disaster, contributing to challenges in moving through the PA funding process. Local governments in Mississippi and Louisiana reported that they laid off many of their staff immediately after the hurricanes, which made it difficult to provide enough staff to assist FEMA in surveying all of the damage sites as well as respond to the significant documentation requirements during project development. For example, according to New Orleans officials, because the city was severely cash-strapped after the disaster, many employees, including capital- projects staff, were laid off. This compromised the ability of the city to provide staff to effectively survey the damage to all city buildings, including the architectural and engineering staff needed to assess damage and oversee projects. Other local governments in Louisiana and Mississippi described similar challenges with addressing extensive project- management duties that applicants are required to fulfill under PA program rules. Federal officials agreed that limitations in applicants’ human capital capacity were a major challenge during the PA funding process. They highlighted that when any level of government can not adequately fulfill its role within the PA process, the associated projects almost always have difficulties. The lack of staff continuity during project development also contributed to rebuilding delays. According to several federal, state, and local officials, a succession of FEMA staff were involved in the preparation of many of these projects and faced difficulties with sharing project information as they rotated on and off a project, resulting in a lack of continuity. Officials from all of the localities with whom we spoke noted that FEMA staff assigned to assist them rotated frequently (e.g., every 60 or 90 days) often without providing advance notice that they were leaving. GAO analysis of NEMIS data supports the idea that a succession of staff were often involved in the development of large PA projects (see table 2). This situation, especially early-on in the recovery effort, resulted in a loss of knowledge of project-specific information because of a lack of effective strategies to share this information. For example, because rotating staff did not always document FEMA’s decisions or advice or share project- specific information with staff taking their place, applicants often had to restart negotiations about project eligibility and cost determinations with their new FEMA representative. In many cases, applicants reported that replacement staff changed agreements that previous staff had made with them or requested information that had previously been provided. However, many applicants noted that this issue has improved recently and that staff were working with them for longer periods of time. In addition, FEMA officials told us that have developed ways to share project information among rotating staff. State and local officials reported that the lack of continuity in FEMA staffing resulted in delays and changing project decisions. This was due to two reasons: (1) applicants had to spend additional time familiarizing the new FEMA staff with the project, and (2) FEMA staff rotating onto the project sometimes provided different interpretations of program rules. For example, according to a senior Plaquemines Parish official, parish staff spent a significant amount of time familiarizing 10 different FEMA PA representatives with project details—7 during the first several months of recovery—and replacement staff differed in their interpretations of PA processes and procedures. The lack of continuity was further complicated by challenges with information and document sharing among FEMA staff rotating on and off projects. Federal, state, and local officials reported that there was a lack of documentation of the rationale behind project decisions, further contributing to continuity problems. One FEMA official told us that part of the challenge with maintaining continuity was due to difficulties staff encountered when trying to access the case-management files used to track information about projects from a remote location. In the absence of reliable electronic access to the case management files, this official suggested that staff could maintain notebooks on applicant projects and pass them on to replacement staff. Several local officials also reported that there was often no notice of when a new FEMA PA representative was assigned to their projects and no “hand off” meeting with all parties present to share project information. These officials said that such a meeting could have saved time and effort that federal, state, and local officials spent on readdressing issues, and may have reduced the number of times previously agreed-upon decisions were changed. Difficulties ensuring continuity during disaster recovery efforts are not new. We have previously reported that the lack of continuity presented challenges to the effectiveness of the PA program during recovery efforts following the Loma Prieta earthquake of 1989. FEMA officials acknowledged that lack of continuity, especially in the first year after the disaster, caused some project disruptions but these were unavoidable given the magnitude of the event. According to these officials, insufficient numbers of experienced staff necessitated the rotation of FEMA personnel. In addition, FEMA transferred staff who were otherwise willing to continue working with the same communities on the Gulf Coast in order to avoid subjecting them to possible income tax increases that would affect personnel deployed for a year or more under the federal tax code. FEMA officials told us that, in Louisiana, they are taking steps toward providing additional continuity in PA staffing. For example, FEMA’s Transitional Recovery Office has started to employ a team approach to help address this issue so that no individual staff person is the only one responsible for retaining knowledge about a specific project. Further, the officials reported that they have implemented changes during recovery from the 2005 Gulf Coast hurricanes, which they recently institutionalized during the recovery of Hurricanes Gustav and Ike. These changes included recruiting and hiring more long-term staff to function as a single point of contact for these disasters, resulting in what they believe is greater accountability for staff, reductions in rotations and roll-offs, and sustained institutional knowledge among resident policy and decision makers. While increasing the stability of staff is a very important step in addressing limitations in project continuity, it is also important for FEMA to develop methods to more effectively share important project information between staff whenever staff rotation is necessary and to communicate expectations about staff rotations with applicants. The huge size and unprecedented scope of the devastation caused by Hurricanes Katrina and Rita created very difficult conditions for all involved in the recovery of the Gulf Coast, and the challenges described in this report must be understood in this context. Since the storms, FEMA has approved tens of thousands of PA grants making available more than $11 billion for the rebuilding and repair of public buildings and physical infrastructure—a scale of assistance unmatched by any previous U.S. disaster. Given this level of assistance, FEMA plays an important role in helping to ensure fiscal accountability to the American taxpayer. FEMA has faced a wide range of challenges in administering PA grants including difficulties related to developing projects, barriers to sharing information, and shortcomings in some of its project decision processes. For example, we found cases where PA information was not effectively shared among federal, state, and local entities directly involved in the process as well as others including Congress and the public. Furthermore, when FEMA reverses a key decision it has previously made, such as the approval to rebuild instead of repair a structure, it can have a negative effect on an applicant who may have already moved forward on the project. Human capital limitations at the federal, state, and local level underlie many of these operational difficulties as well as present challenges of their own. For example, while it may have been impossible to avoid rotation of FEMA staff given the magnitude of the 2005 Gulf Coast hurricanes, the agency did not take sufficient steps to ensure that continuity of knowledge about projects was maintained as staff came and went. Some of these challenges were familiar to FEMA, having been identified by us and others in the past, but often the magnitude of the 2005 Gulf Coast hurricanes considerably worsened their effect. In addition, FEMA has encountered a whole set of new challenges related to applying the PA program to a catastrophic disaster and the unique needs associated with rebuilding entire communities in the wake of such an event. For example, the agency has wrestled with how to adapt a program traditionally focused on restoring buildings and infrastructure back to predisaster conditions, to circumstances on the Gulf Coast where the reality of significant demographic change may have fundamentally changed the need for such structures in those locations. In order to operate, the PA program relies on a partnership involving FEMA, state governments, and local entities. Therefore, it is critical for the agency to look for ways to foster constructive and collaborative relationships with other key participants. We found that some of FEMA’s policies and practices—particularly reversal of project decisions and the lack of transparency in FEMA’s decisions—may work against efforts to achieve effective collaboration. Because of the active role that state and local governments must play in the PA process, it is also important for states and locals to have the capacity needed to carry out their role in the process. Similar to the federal experience, state and local governments in both Louisiana and Mississippi initially lacked the necessary human capital capacity to administer the program. Given the significant human capital challenges involved in rebuilding after a major disaster, it would benefit state and local governments to now consider approaches to help ensure that they have, or have plans to develop or access, staff with the right mix of skills needed to carry out their role in the PA process. Some of the rebuilding challenges encountered following the 2005 Gulf Coast hurricanes may be faced again as Texas, Louisiana, and Alabama recover from the recent devastation caused by Hurricanes Ike and Gustav. Accordingly, opportunities exist now to take steps to further refine the PA program to better address these challenges as the current recovery continues on the Gulf Coast and in advance of future disasters. FEMA has already taken steps toward this end, which state and local officials report are improving the implementation of the program in the Gulf Coast. It is important that FEMA continues to institutionalize these lessons by taking action to ensure that changes are made to program polices and procedures, and then appropriately disseminated. The challenges faced by the PA program in the Gulf Coast also highlight some broader issues regarding the way the federal government approaches rebuilding. At your request, we are beginning a review of these issues including whether there may be a need for more fundamental changes to the Stafford Act when providing funds to help communities rebuild after catastrophes. This is among the many issues that face Congress as the nation works to strengthen the United States’ ability to recover from the next catastrophic event. To help DHS improve the operation of the PA grant program and build on some of the actions taken to date, we recommend that the Secretary of Homeland Security direct the Administrator of FEMA to take the following four actions: Improve PA reporting by better defining information presented in FEMA’s periodic reports to Congress and the public; specifically provide the number of unique PA projects in addition to figures that include changes to projects. Improve information sharing within the PA process by identifying and disseminating practices that facilitate more effective communication among federal, state, and local entities, including the development of tools that promote document sharing such as Mississippi’s online accounting system. Strengthen continuity among staff involved in administering the PA developing protocols to improve information and document sharing among FEMA staff, such as requiring that staff maintain a record of project decisions to share with rotating staff, or by more broadly adopting a team approach so that more than one individual is aware of the details of specific projects, and communicating the timing of expected FEMA staff rotations to applicants directly affected by those staffing changes. On October 29, 2008, we provided a draft of this report to the Secretary of Homeland Security for comment. We received written comments on December 11, 2008. In its written comments, which appear in appendix II, DHS generally agreed with our recommendations. In addition, the department provided technical clarifications that we incorporated where appropriate. We also provided drafts of relevant sections of this report to state and local officials involved in the specific PA examples cited in this report. We incorporated their comments as appropriate. We will provide copies of this report to other interested congressional committees, the Secretary of Homeland Security, the FEMA Administrator, and state and local officials we contacted for this review. 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 about this report, please contact me on (202) 512-6806 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. We focused our review on Louisiana and Mississippi because these two states accounted for 90 percent of all Public Assistance (PA) funding made available to Gulf Coast states. We selected localities within these two states based upon (1) the amount of PA funding they were expected to receive, (2) whether local officials reported experiencing challenges or successes during PA program implementation, or (3) whether the locality had been identified by others as experiencing significant challenges or successes during PA program implementation. Accordingly, we included the following localities from Louisiana in our review: the City of New Orleans, St. Bernard Parish, Plaquemines Parish, and Jefferson Parish. Similarly, we included the following localities from Mississippi in our review: Waveland, Bay St. Louis, Gulfport, and D’Iberville. To address our first objective, we obtained and analyzed funding data from September 2005 though September 2008 from the Federal Emergency Management Agency’s (FEMA) Global Reports on Public Assistance in the Gulf Coast, and for September 2005 though July 2008 from FEMA’s National Emergency Management Information System (NEMIS). NEMIS data included project information on project cost, the status of project development, and project type and location. We assessed the reliability of the data by performing standard electronic testing of the data, comparing published funding reports to raw data from the NEMIS database, as well as interviewing FEMA officials with responsibility for both data sources. Where we identified discrepancies in the sources of data, we note this in our report. However, we found that the data sources were comparable and sufficiently reliable for our purposes. We did not independently verify the validity of these data. To address objectives two and three, we relied primarily on interviews with key officials and corroborated this evidence with NEMIS data, documents provided by PA applicants, the states of Louisiana and Mississippi, and FEMA. Further, we obtained and reviewed FEMA documents such as FEMA guidance for applicants and staff, the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), regulations, policies, and procedures and observed damaged sites in several locations in Louisiana and Mississippi. We also reviewed past GAO and Department of Homeland Security Inspector General reports on the PA program or Gulf Coast recovery. As our primary source of evidence, we interviewed and obtained information from a variety of sources in the Gulf Coast and Washington, D.C. At the federal level, we interviewed officials and obtained information from FEMA, the Department of Homeland Security’s Office of the Inspector General, and the Office of the Federal Coordinator for Gulf Coast Rebuilding. We also interviewed and obtained documentation from state and local officials in Louisiana and Mississippi. We did not choose a representative sample of officials to interview, but rather, chose individuals based upon their knowledge, experience, or leadership role in the PA program in these two states. We did not observe the PA funding processes in operation. In Louisiana, at the state level, we interviewed and obtained documentation from officials in the Governor’s Office of Homeland Security and Emergency Preparedness (GOHSEP), which was the official PA grantee for the state, with responsibility for partnering with FEMA to administer the grant to local entities. We also interviewed and obtained information from the Louisiana Recovery Authority, which was the policy advisor for Gulf Coast rebuilding and, as of January 2008, became the state’s lead agency working with FEMA on recovery operations, including PA; the Office of the Legislative Auditor, which assisted in the reviewing of PA grant applications; and the State Department of Education, which was a major applicant in the PA process. At the local level, we interviewed and obtained documentation from PA applicants from the City of New Orleans and from St. Bernard, Plaquemines, and Jefferson Parishes. In Mississippi, at the state level, we spoke with the Mississippi Emergency Management Agency (MEMA), which was the official PA grantee for the state, with responsibility for partnering with FEMA to administer the grant to local entities; the Governor’s Office of Recovery and Renewal, which acted as a policy advisor on Gulf Coast rebuilding; and the Joint Committee on Performance and Evaluation and Expenditure Review, which is an audit organization of the Mississippi state legislature that has previously assessed implementation of the PA program. At the local level, we spoke with city officials who were PA applicants in the cities of Bay St. Louis, Gulfport, Waveland, and D’Iberville. We conducted this performance audit from August 2007 through November 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We requested comments on a draft of this report from the Department of Homeland Security, which are reprinted in appendix II. We also provided drafts of relevant sections of this report to state and local officials involved in the specific PA examples cited in this report, and incorporated their comments as appropriate. Major contributors to this report were Peter Del Toro, Assistant Director; Latesha Love; and Robert Yetvin. Tyler Duffy, Cynthia Grant, Adam Shifriss, A.J. Stephens, and Kate Wulff also made key contributions. | The devastation caused by the 2005 Gulf Coast hurricanes presented the nation with unprecedented rebuilding challenges. The Federal Emergency Management Agency's (FEMA) Public Assistance (PA) grant program is a key tool for providing funds to support recovery, including rebuilding public schools, roads, and utilities. GAO was asked to examine the amount of PA grants FEMA has provided for rebuilding the Gulf Coast; challenges in the day-to-day operation of the PA program; and human capital challenges; as well as actions taken to address them. Toward this end, GAO reviewed relevant laws, PA regulations and procedures, and analyzed data from FEMA's National Emergency Management Information System. GAO also interviewed federal officials from FEMA and the Department of Homeland Security's (DHS) Office of the Federal Coordinator for Gulf Coast Rebuilding as well as more than 60 officials from state government and eight localities in Louisiana and Mississippi. Funding for PA grants related to the 2005 Gulf Coast hurricanes is already more than $11 billion, surpassing that of any previous disaster, and will likely be higher than FEMA's total cost estimate of $13.2 billion. About 90 percent of these funds have gone to the states of Louisiana and Mississippi, about half of which have passed from the states to grant applicants to date. GAO identified challenges in the following broad areas, many of which contributed to slowing down rebuilding projects. (1) Project Development: Challenges in the development of PA projects included difficulties determining the amount of damage that was disaster-related, using PA program flexibilities to rebuild in a way that meets postdisaster needs, assessing project scope including whether to repair or replace damaged structures, estimating project costs, and having sufficient resources to initiate projects. For example, assessing the damage to New Orleans's water and sewer system was complicated by the difficulty distinguishing disaster-related from preexisting damage. Estimating the cost of PA projects presented special challenges because of unusual market conditions for labor and materials in the postdisaster economy. (2) Information Sharing and Tracking: GAO identified challenges in sharing information among federal, state, and local participants in the PA process as well as in tracking the status of projects. For example, in Louisiana, information sharing was made more difficult in the absence of an effective document-sharing system and because key FEMA and state officials who review PA applications are located in different cities. (3) Project Approvals and Appeals: FEMA's approval decisions on some projects were reversed after applicants had already moved ahead with construction. In addition, decisions on appeals were often not made within required time frames due to the large number of rebuilding projects. (4) Human Capital: Human capital challenges at all levels of government underlie many of the above challenges and also slowed rebuilding projects. Shortages of experienced and knowledgeable staff were particularly problematic during the initial stages of rebuilding. FEMA's early reliance on temporary rotating staff did not provide the level of continuity needed for the complex demands of Gulf Coast rebuilding. Among the actions DHS has taken to address these challenges are the finalization of a PA catastrophic disaster recovery concept plan that recognizes the need to more easily tailor projects to meet postdisaster conditions; the development of new management information systems to better track and manage projects and increase the transparency of PA funding; and the creation of a credentialing program for employees. |
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The mortgage assignment program was created in 1959 by section 230 of the National Housing Act. However, HUD only began operating the program in 1976 in settlement of a lawsuit. The program, intended to help mortgagors who have defaulted on HUD-insured loans to avoid foreclosure and retain their homes, provides mortgagors with financial relief by reducing or suspending their mortgage payments for up to 36 months until they can resume making regular payments. To enter the program, a mortgagor must apply and meet certain criteria, including that the default must have been caused by circumstances beyond the mortgagor’s control, such as the loss of employment or serious illness. However, after the 36-month period, a mortgagor’s delinquencies are not required to be eliminated or reduced by a specified time other than over the remaining term of the loan, which HUD can extend for up to 10 years. Most of the mortgages assigned under the program are insured by FHA under its Mutual Mortgage Insurance Fund (Fund). For these mortgages, the cost of the assignment program is financed by the Fund, which insures private lenders against losses on mortgages that finance purchases of one to four housing units. To cover losses, FHA deposits borrowers’ insurance premiums in the Fund. Historically, the Fund has been financially self-sufficient. However, if it were to become exhausted, the U.S. Treasury would have to directly cover lenders’ claims and administrative costs. We based our analysis of whether the assignment program helps borrowers avoid foreclosure and reduces FHA’s foreclosure losses primarily on data from two of HUD’s national information systems—the Single-Family Mortgage Notes Servicing System and the Single Family Insurance System—as of September 30, 1994. We used these data to analyze foreclosures and delinquencies and forecast the foreclosure rates of the 68,695 mortgages assigned since fiscal year 1989. We also built a cash flow model and prepared analysis to estimate the financial loss to FHA’s Fund from these loans by estimating the revenue and expense flows for these loans over their life. Our data reflect nationwide mortgage assignment statistics on single-family loans that were entered in HUD’s two national data systems as the Fund’s mortgage defaults that were assigned to avoid foreclosure—71,500 mortgage loans as of September 30, 1994. Loans assigned to HUD for other reasons were not included in our analyses. To determine how to improve the program and reduce its losses, we obtained information from four other mortgage assistance institutions that provide foreclosure relief to borrowers in default on single-family housing loans—the Department of Veterans Affairs (VA), Rural Housing and Community Development Service (RHCDS), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac). (See app. I for additional details on the scope and methodology of our work.) To improve the administration of the program, HUD recently has initiated changes to the program. These include selling its currently assigned loans; implementing Activity Tracking, an automated collection computer subsystem; studying the costs and benefits of alternatives to foreclosure; permitting lenders to provide relief to borrowers, such as suspending or reducing mortgage payments, without prior approval from HUD; implementing a “compromise offer” program under which borrowers’ loans are considered to be paid off for less than the amount owed; and implementing for a limited period of time a program for reducing interest rates on certain program loans. HUD has also proposed contracting for loan servicing. The Office of Management and Budget (OMB) considers FHA’s mortgage assignment program to be a high-risk area because controls do not protect the financial interests and resources of the government. In the President’s fiscal year 1996 budget, OMB stated that the servicing of assigned loans was expensive, inefficient, and labor-intensive. Also, OMB noted that there is little evidence that the program achieves its goal of giving homeowners a chance to keep their homes during a temporary interruption of income. According to OMB, legislative changes should be considered to reduce or eliminate the assignment of loans in the future by greater reliance on the private sector as well as legislation to reduce the program’s forbearance period from 3 years to 1 year. To reduce the number of assigned loans and the required servicing of loans, OMB recommended that HUD continue to sell its assigned loans. We forecast, on the basis of historical data on the disposition of program loans, that about 35,400 (52 percent) of the 68,695 borrowers accepted into the program since fiscal year 1989 will eventually lose their homes through foreclosure. For the remaining loans (48 percent), we forecast that borrowers will pay off the loans and avoid foreclosure by either selling their homes or refinancing their mortgages, often after remaining in the program for a lengthy period of time. Some of these borrowers who eventually pay off their loans may have, under the compromise program, paid HUD an amount less than the total amount owed. (A detailed discussion of our methodology for forecasting the program’s foreclosure rates appears in app. II.) Figure 1 shows our estimates of conditional foreclosure rates based on loans that remained active until a given year and were assigned during a 17-year period (fiscal years 1977 through 1994). We estimate that conditional foreclosure rates will increase sharply over the first 7 years after a loan is accepted into the program, peaking at about 13 percent. The program’s conditional foreclosure rates substantially exceed those experienced on FHA’s nonassigned single-family loans during the same 17-year period. HUD’s records show that since fiscal year 1977, at least 96,500 borrowers have been accepted into the assignment program. About 71,500 of these borrowers were still assigned to HUD as of September 30, 1994. A large portion of them—39,603, or 55 percent—have been in the program fewer than 3 years (see fig. 2). As shown in figure 3, of the approximately 71,500 borrowers in the program as of September 30, 1994, 59 percent were current with forbearance agreements or current with their original mortgage payments. The remaining 41 percent were delinquent or pending foreclosure. Only 5 percent of the program’s borrowers were making full mortgage payments. When borrowers remained in the program beyond the 3-year relief period and therefore were required to make full mortgage payments, the proportion of borrowers current with repayment agreements dropped and the proportion of borrowers in foreclosure increased. Similarly, the average amount of delinquencies owed by borrowers increased. (See app. III for detailed information on borrowers’ compliance with repayment agreements.) Most of the 25,041 borrowers who left the program for whom records are available did so following foreclosure, while other borrowers paid off their loans and at times eliminated delinquencies. Of the 25,041 borrowers, HUD foreclosed on 14,707 borrowers (59 percent), while 10,334 borrowers (41 percent) paid off their loans. An example of a borrower who left the program through foreclosure is a Chicago mortgagor who was accepted into the program in November 1990 and was $9,495 behind in payments at that time. The loan’s outstanding principal balance at that time was $34,862. Although HUD determined that the mortgagor’s income was sufficient for him to make more than full mortgage payments, the mortgagor made only five payments over the next 3-1/2 years. By September 1994, when HUD began foreclosure, the borrower was over $25,000 behind in payments. Borrowers who paid their loans generally did so following the sale of their homes at a price that, in most cases, allowed them to repay the outstanding mortgage and the delinquent amount. For example, a Seattle, Washington, mortgagor defaulted on an $89,890 loan 15 months after obtaining it. The mortgagor found a new job after experiencing a salary cut on his previous job. When the mortgage was assigned in November 1990, the mortgagor was already $6,333 behind in payments. Initially, the mortgagor was allowed to make reduced payments of $400 per month, about half the full payment. After 2 years, the mortgagor was unable to pay off the delinquent amount, which had grown to $19,229 when he sold the house in April 1993. However, the sale proceeds enabled the mortgagor to fully satisfy his obligation to HUD. (See app. IV for cases in which some borrowers paid off mortgages and others did not.) Given the lower income of FHA borrowers, which can make them financially vulnerable, the assignment program’s operating procedures do not provide assurance that delinquent amounts will be repaid and that borrowers will succeed in avoiding foreclosure. These procedures include (1) accepting borrowers into the program after they have accumulated substantial loan delinquencies and therefore have an uncertain repayment ability and (2) a 36-month relief period when payments can be reduced or suspended, which permits outstanding delinquencies to grow even if borrowers are current with repayment agreements. Most FHA home loans are for moderate-income individuals. These individuals are likely to be more financially vulnerable than other mortgagors who are able to obtain home loans without FHA’s assistance. Under the assignment program, a borrower must miss at least three mortgage payments before submitting an application to enter the program. During the acceptance process, additional payments may be missed, and substantial delinquencies may accumulate over a period of 6 months or more. We randomly selected, as case studies, 136 loans from four loan categories—paid-off, current with payments, foreclosed on, and delinquent—from files at four HUD field offices—Boston, Chicago, Ft. Worth, and Spokane—to illustrate, among other things, the amount of delinquencies that borrowers had accumulated when they entered the program. Our review of these loans showed that borrowers were, on average, 8 months behind in mortgage payments of $4,014 on their loans at the time they were accepted into the program. These loans had an average outstanding principal balance of $39,886 at that time. These figures, and others reported later that are based on these case studies, are not projectable to the universe of assigned loans. The program also allows 3 years of reduced or suspended mortgage payments. For borrowers who qualify for this program feature, delinquencies for unpaid interest and other expenses continue to grow. As shown in figure 4, as of the end of fiscal year 1994, all borrowers in the program for more than 1 year but fewer than 3 years experienced, on average, an increase in delinquent amounts from about $7,000 to $15,000. On average, after 9 years in the program, delinquencies for all borrowers continued to grow, peaking at about $22,000. Similarly, delinquencies for borrowers current with forbearance agreements also grew at about the same rate as those of all borrowers during the first 3 years but began to decline after the borrowers had been in the program for 3 years. Once the 36-month relief period is completed, borrowers are expected to resume full mortgage payments and, if possible, increase payments to reduce accumulated delinquent amounts. If borrowers cannot make full payments, HUD may initiate foreclosure action. There is no requirement, however, that borrowers pay off their delinquent amounts or leave the program in a specified time period, other than over the remaining term of the loan, which HUD can extend for up to 10 years. About 31,900 (45 percent) of the borrowers in the program as of September 30, 1994, had been in the program for more than 3 years. About 1,000 borrowers had been in the program for over 15 years. In assessing the cost to FHA of operating the program, we (1) forecasted the foreclosure and payoff rates for loans assigned since fiscal year 1989 and (2) estimated the expenditure and revenue flows for these loans over their expected life. Using historical data on the performance of individual loans in the assignment program, we developed estimates of loan-servicing costs, acquisition costs, and other costs for all surviving loans over their anticipated life. In addition, we estimated revenues received from loan payoffs, mortgage payments, and the sale of properties after foreclosure. In order to estimate the program’s net loss to FHA, we compared the resulting cost per assigned loan to the average loss that FHA would have experienced on these loans had they gone directly to foreclosure rather than to the assignment program. Our analysis showed that losses on the 68,695 loans assigned to HUD since fiscal year 1989 will be an estimated average of about $49,000 each. We subtracted from the estimated average loss of $49,000 the estimated $27,000 loss that FHA would have experienced had the loans not entered the assignment program, leaving an estimated net loss to FHA of about $22,000 per assigned loan. On the basis of this analysis, we estimate that FHA’s Fund will experience additional losses of about $1.5 billion over what it would have incurred if the loans entering the assignment program since fiscal year 1989 had immediately gone to foreclosure instead. Table 1 summarizes our estimates of the expenses and income associated with the program’s 68,695 loans over their life. The additional costs incurred by FHA are primarily attributable to the partial payments it received on mortgage loans; delays in receiving funds from the sale of the assignment program’s properties that are eventually foreclosed; administrative costs; and advances made by HUD for taxes, insurance, and other expenses. FHA borrowers’ premiums pay for these losses, not the U.S. Treasury. To cover losses, FHA deposits borrowers’ insurance premiums in the Fund. According to 12 U.S.C. 1711, the Fund must meet or endeavor to meet statutory capital ratio requirements designed to achieve actuarial soundness; that is, it must contain sufficient reserves and funding to cover estimated future losses resulting from the payment of claims on defaulted mortgages and administrative costs. To offset substantial losses to the Fund that were incurred in the 1980s, FHA borrowers were required to pay higher insurance premiums beginning in July 1991. In our recent report and testimony on the actuarial soundness of the Fund, we reported that the economic value of FHA’s Fund clearly has improved significantly in recent years but that the Fund as of the end of fiscal year 1993 had not yet accumulated sufficient capital reserves to cover losses during periods of adverse economic conditions as defined by the law. Options are available to the Congress to change the assignment program that would reduce the losses incurred by the program. These options include directing HUD to shorten the 36-month relief period, set a time limit on eliminating delinquencies, and accept into the program only those borrowers who can afford half or more of their mortgage payments. Information provided by officials from four mortgage lending or purchasing institutions indicates that these institutions provide borowers in default a shorter time period to begin full mortgage payments under the original loan or a modified loan and to repay delinquent amounts. They also use techniques different from HUD’s that could improve the effectiveness and reduce the cost of the program. VA usually capitalizes the delinquency and reamortizes the new loan balance (i.e. extends the time period for payment of the loan principal) as soon as it acquires the loan. In addition, VA will reduce the interest rate on the reamortized loan to as low as 3 percent below the current market rate if a reduction is necessary to bring the veteran’s payments to an affordable level. VA may also acquire loans for borrowers who are not able to resume payments immediately if they show the ability to be able to do so in a reasonable period of time. VA field stations have significant discretion in deciding what constitutes a reasonable period; however, it is usually not extended beyond the point at which the loans reach a full year’s delinquency. During this period, VA may provide relief by agreeing to accept payments of less than a full installment or by extending complete forbearance. Fannie Mae and Freddie Mac provide relief for up to 18 months. They may extend this period longer under certain circumstances, but during the relief period, the borrower must eliminate the delinquency. Although RHCDS does not have a specified relief period, an RHCDS official told us that its county supervisors provide short-term relief on a case-by-case basis. Another option for reducing the program’s losses would require borrowers to pay half or more in monthly mortgage payments. We estimate that if all 68,695 borrowers who have entered the program since fiscal year 1989 had paid and continue to pay 50 percent of their original mortgage payments, the program would lose about $433 million more than what would have occurred if the loans had gone immediately to foreclosure, or substantially less than our estimated loss of $1.5 billion. The mortgage payments being made by borrowers as of September 30, 1994, averaged about a third of the original mortgage payments. These borrowers would have to pay 67 percent of their original mortgage payments for the program to break even. In addition to a shorter period of relief, other mortgage assistance institutions stress resolving the delinquency by the end of the relief period. In contrast, the mortgage assignment program gives borrowers many years beyond the relief period to repay a delinquency, as evidenced by some borrowers who have been in the program for 15 years. If the borrower is unable to pay the delinquency within the 3-year relief period, HUD’s regulations require that the borrower must repay the delinquency on or before the mortgage maturity date, but the borrower may be given up to 10 years beyond the maturity date. Freddie Mac, Fannie Mae, and VA also work closely with borrowers to provide long-term solutions, such as modifying the structure of a loan to resolve delinquencies. Officials from these organizations told us that they believe techniques such as refinancing and reducing interest rates to reduce monthly mortgage payments are successful alternatives to costly foreclosure. However, HUD seldom uses its authority to modify borrowers’ mortgage loans. Rather, HUD uses repayment agreements both before and after the 36-month relief period to secure repayment of outstanding delinquencies. These are generally 1-year term agreements based on the borrowers’ estimated income and expenses to repay a debt. HUD field office officials told us that the preparation and monitoring of these agreements requires extensive staff resources. According to HUD’s Director, Single-Family Servicing Division, the primary strategy HUD plans to follow to reduce the program’s losses is to sell its assigned loans and thereby reduce the number of loans it holds and services. In June 1994, HUD sold at auction about 15,000 performing and nonperforming (loans in compliance with repayment agreements and those not in compliance) single-family loans that were not in default when assigned, including 357 loans that were facing foreclosure. FHA received about $12.6 million from the sale of the 357 loans, which represents about 70 percent of the unpaid principal balance on these loans. FHA officials consider these results encouraging and believe that future sales will provide significant relief to field offices that have a large number of assigned loans. FHA plans to sell an additional 15,000 loans in calendar year 1995 and most of the remaining assigned loans over the next 2 years. By fiscal year 1997, HUD expects its inventory to consist only of newly accepted assigned loans that would be held by HUD for a short time before being sold. The purchasers of these loans would be required to comply with HUD’s assignment program’s servicing standards, including permitting 3 years of reduced or suspended mortgage payments. The assignment program operates at a high cost to FHA’s Fund and has not been very successful helping borrowers avoid foreclosure in the long run. The program helps about half of the financially troubled homeowners to avoid foreclosure permanently. However, the costs incurred by HUD to achieve this result exceed the costs that would have been incurred if all assigned loans had gone immediately to foreclosure without assignment. While FHA borrowers’ premiums pay these costs, not the U.S. Treasury, the program’s costs lessen the Fund’s ability to build reserves. Options are available to the Congress to make changes to the program to reduce its losses. The options, such as requiring borrowers to pay more in monthly mortgage payments, would reduce but not eliminate the program’s additional losses. The assignment program would have to require borrowers to begin full mortgage payments within a few months after entering the program in order to nearly eliminate the additional losses incurred by the program. All of these options pose the trade-off of preventing some individuals and families from entering the program who would eventually bring their loans current and/or avoid foreclosure. However, unless changes are made to the present assignment program, its costs will continue to make it more difficult for the Fund to maintain financial self-sufficiency. If the Congress believes that the additional losses incurred by the assignment program are excessive in relation to the number of borrowers that avoid foreclosure, it could consider eliminating the program. However, since some borrowers who default on their FHA mortgages can avoid foreclosure with some assistance, the Congress could consider establishing a short-term, temporary relief program of a few months for such borrowers to replace the mortgage assignment program. If, however, the Congress believes that the borrowers served by FHA’s single-family program are at high risk and therefore in need of additional assistance in the form of forbearance, changes to the program should be considered that would reduce but not eliminate additional future losses. The following are options that the Congress could consider: Require borrowers to (1) resume full mortgage payments within a shorter time period than the 36 months currently allowed and/or (2) eliminate outstanding delinquency amounts within a specified period. For example, the Congress may wish to require that borrowers resume full mortgage payments within 1 year of entering the program and eliminate outstanding delinquencies within 2 years. If borrowers are unable to bring their loan payments current and/or eliminate delinquencies within the specified time, the Congress may wish to consider requiring that HUD foreclose. Require that only borrowers who can pay half their original mortgage amount or more be assigned to the program. We provided a draft of this report to HUD, VA, RHCDS, Fannie Mae, and Freddie Mac officials to obtain their comments. We met with HUD and VA officials and obtained their comments. In a meeting with a HUD Special Assistant to the Assistant Secretary for Housing-Federal Housing Commissioner, HUD’s Director of the Single-Family Servicing Division, and officials from HUD’s Offices of General Counsel and Policy Development and Research, we obtained HUD’s comments. The comments focused on (1) the effects of past litigation efforts on HUD’s management of its mortgage assignment program and (2) alternatives available to prevent foreclosure other than the options we suggest for changing forbearance relief (reducing or suspending monthly mortgage payments for a certain period of time) provided through the assignment program. Specifically, HUD commented that litigation has affected the evolution and operation of the assignment program. According to HUD officials, a consent decree, which the Department entered into in 1979, and litigation preceding and subsequent to entering the consent decree known collectively as the Ferrell v. Pierce litigation have limited HUD’s options to modify the assignment program. The Department believes the Congress needs to understand these limitations when it considers changing the program. Under the consent decree, HUD agreed to, among other things, (1) operate the assignment program for 5 years in compliance with its January 1979 handbook without any modification that would curtail the rights of the mortgagors under the program and (2) after the 5-year period, operate either the present assignment program or an equivalent substitute to help mortgagors avoid foreclosure during periods of temporary financial distress. A series of lawsuits concerning HUD’s implementation of the consent decree followed. We agree that the consent decree and the Ferrell v. Pierce litigation have limited HUD’s options to change the program. It is because of this limitation that the forbearance relief options we present were addressed to the Congress and not to the Secretary of HUD. So that the Congress has a full understanding of the litigation’s effects when considering options to forbearance relief provided through the mortgage assignment program, HUD’s description of the current operation of the assignment program and the effect of past litigation on that program is provided in appendix V. HUD also commented that if the Congress were to consider alternative relief measures for borrowers, there are methods widely used to prevent foreclosure by the private sector that are not discussed in our report. The alternatives to forbearance relief cited by HUD included (1) “modifying defaulted borrowers’ mortgage loans by reducing interest rates, (2) extending the remaining period of the loans, and/or (3) paying partial claims to remedy default with a new obligation from the borrower to repay FHA the amount of the claim.” HUD noted that while our report discusses some relief options used with other federally related mortgages, the options we present to the Congress for change do not include such options. HUD also commented that pursuant to section 918 of the Housing and Community Development Act of 1992, it is studying the adequacy of existing programs authorized to help FHA borrowers avoid foreclosure and alternatives to foreclosure being used with other federally related mortgages. HUD expects to issue this study shortly. We agree that there are alternatives to foreclosure other than the forbearance relief measure provided through HUD’s assignment program. In fact, our report points out that Freddie Mac, Fannie Mae, and VA provide borrowers long-term solutions, such as modifying the structure of their loans to resolve delinquencies. Officials from these organizations told us that they believe techniques such as refinancing and reducing interest rates to reduce monthly mortgage payments are successful alternatives to costly foreclosure. However, this report did not seek to analyze all possible alternatives to the mortgage assignment program because of the focus of our work and our desire not to duplicate HUD’s efforts in studying such alternatives. However, it should be noted that HUD has seldom made use of modified mortgage loans. Consequently, assessing the merits of modifying financially troubled FHA loans to single-family borrowers in lieu of the forbearance that HUD currently provides is difficult. In addition, no matter how successful other alternatives are in avoiding foreclosure, not all borrowers will be able to resume mortgage payments immediately, which is required under such options as refinancing, reducing interest rates, and extending the period of the loan. We recognize, however, that to the extent that such alternatives are effective in helping borrowers retain their homes without entering HUD’s assignment program, they could be a more effective way to avoid costly foreclosure than the current assignment program. HUD’s study on alternatives to foreclosure should be helpful to the Congress in assessing these alternatives. Our report should be helpful to the Congress in assessing changes needed to HUD’s mortgage assignment program to reduce losses on those mortgages that enter the program, regardless of other alternatives that may be used to prevent assignment. While HUD officials agreed that the program’s losses have exceeded those that would have been incurred if loans had gone immediately to foreclosure without assignment, they did not agree with the magnitude of our estimate of the additional cost that FHA incurs. We received no official estimate from HUD of the additional cost, although one HUD analyst said that he believes the additional cost is about one-third of our estimate. HUD currently has a contracted study under way that will produce an estimate of the additional cost to FHA of the program. HUD also provided clarifying information and technical and editorial comments for our consideration in completing our report, which we incorporated where appropriate. VA’s Assistant Director for Loan Management, Loan Guaranty Service, generally agreed with the factual information presented in this report on that agency. We incorporated suggestions by VA to further clarify our report as appropriate. In telephone conversations with RHCDS, Fannie Mae, and Freddie Mac officials, they told us that they agreed with the factual information presented in this report on their organizations and had no further comments. We conducted our work between October 1993 and October 1995 in accordance with generally accepted government auditing standards. Unless you 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 send copies to interested congressional committees; the Secretary of HUD; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. Please call me at (202) 512-7631 if you or your staff have further questions. Major contributors to this report are listed in appendix VI. Concerned about the rising number of loans assigned to the Department of Housing and Urban Development (HUD) and their financial impact, the Chairman, Subcommittee on Housing and Community Opportunity, House Committee on Banking and Financial Services, asked us to determine whether the mortgage assignment program (1) helps borrowers avoid foreclosure, (2) reduces the Federal Housing Administration’s (FHA) losses, and (3) can be improved to reduce losses. To determine whether the program helps borrowers avoid foreclosures, we analyzed information on foreclosures, delinquencies, and borrowers’ compliance with repayment agreements contained in two of HUD’s national information systems—the Single-Family Mortgage Notes Servicing System and the Single Family Insurance System—as of September 30, 1994. Our data reflect nationwide mortgage assignment statistics on single-family loans that entered these systems as section 203(b) mortgage defaults to avoid foreclosure. Loans assigned to HUD for other reasons were not included in our analyses. We did not perform a reliability assessment of controls over the data in the systems; however, we checked our data results through discussions with HUD personnel, making comparisons to related automated accounting and financial reports and reviewing sampled mortgagors’ repayment files. We randomly selected and examined 136 case example assigned loans from four loan categories—paid-off, current with payments, foreclosed on, and delinquent—from files at four HUD field offices—Boston, Chicago, Ft. Worth, and Spokane—to illustrate, among other things, cases in which some borrowers were able to and chose to pay off their mortgages or become current with their payments and others did not. We selected these field offices to obtain geographic diversity to recognize differences in real estate markets. To determine whether the program reduces losses, we used the data systems mentioned above as well as HUD’s Single-Family Accounting and Management System to estimate the foreclosure rates of mortgages assigned since 1989 and revenue and expense flows for these loans over their life. We used this historical mortgage data to estimate loan servicing, acquisition, and other costs of surviving mortgages. We also assessed revenues received from early loan payoffs, mortgage payments, and sales of properties following foreclosure. We further compared the cost per assigned mortgage loan to the average loss experienced by FHA on mortgages that went directly to foreclosure rather than being accepted into the program. A detailed discussion of our methodology for forecasting program foreclosure rates and estimating program costs appears in appendix II. To determine how to improve the program and reduce program losses, we obtained records, reports, and studies from HUD, the Department of Veterans Affairs (VA), Rural Housing and Community Development Service (RHCDS), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac) and analyzed appropriate loan servicing guidelines and foreclosure prevention options. We also interviewed HUD (including HUD’s Office of the Inspector General), VA, RHCDS, Fannie Mae, and Freddie Mac officials at their headquarters locations in Washington, D.C., and local HUD officials in Boston, Chicago, Dallas, and Spokane. We also interviewed officials of five organizations concerned with defaulted loans—the Mortgage Bankers’ Association in Washington, D.C., Legal Assistance Foundation, Public Action Housing Policy Center, Community and Economic Development Corporation of Cook County, Inc., and the Spanish Coalition for Housing. This appendix describes the cash flow model we built and the analysis we conducted to estimate the financial loss to FHA’s Fund for program loans assigned during fiscal years 1989 through 1994. We estimated the loss the Fund will incur on the 68,695 loans that entered the program during this period on the basis of assumptions stated in this appendix. To do so, we (1) estimated the costs that FHA has incurred on and revenues it has received from these loans as of September 30, 1994, and (2) forecasted future costs and revenues during the remaining life of these loans. We converted all cash flow estimates to 1994 present values using an annual discount rate of 7 percent. The largest element of cost to the Fund is the cost associated with settling the lender’s claim on the mortgage, a cost that FHA must pay whether or not the foreclosure occurs immediately or the mortgage enters the assignment program. FHA incurs additional costs while loans are in the program, including the administrative costs to operate the program. Revenues received by FHA, including proceeds from the sale of properties following foreclosure and borrowers’ loan payments, partially offset program costs. The following sections of this appendix contain a detailed description of the data we used and how we estimated the costs and revenues associated with the program. In our analysis, we used three of HUD’s computerized databases—the F-60 database that provides current and historical information on all mortgage loans that HUD services under the assignment program, the A-43 database that provides historical information on mortgages insured under the Fund before assignment, and the Single-Family Accounting and Management System (SAMS) database that tracks properties held and eventually sold by HUD following foreclosure. From these databases, we obtained information on the initial characteristics of each loan, such as the year the loan was assigned, the initial unpaid principal and delinquency amount, and the loan interest rate and term. We also obtained information on the current status of each loan, such as the current unpaid balance, the last payment date, and the delinquency status. We categorized the loans as either foreclosed, prepaid, or active as of the end of fiscal year 1994. We estimated the financial losses for program loans by examining all loans by the year assigned. Costs and revenues were computed for each year’s group of assigned loans over the life of the loans in the program. Cash flows out of the Fund when FHA pays (1) lenders’ mortgage claims, (2) taxes and insurance on properties, and (3) salaries and other administrative costs. Cash flows into the Fund when FHA collects revenues from (1) the sale of properties following foreclosure, (2) the early payoff of loans, and (3) payments made by mortgagors (borrowers). All cash flows are discounted at 7 percent to a 1994 base year. We assumed that the net cost to the Fund was partially a function of foreclosure and payoff rates. Other factors that affected costs included the percentages of unpaid principal to original loan amount, receivables due FHA to original loan amount, advances to original loan amount, and the policy year of the loans. In addition, we assumed that FHA would continue to receive partial and delayed payments for some mortgages assigned and that both foreclosure and prepayment behavior will remain the same in future years as it has been in the past. This is a critical assumption because of data limitations. As a result, our analysis does not take into account that the loans assigned from fiscal years 1989 through 1994 may differ from earlier loans in ways that affect their prepayment and foreclosure probabilities beyond 6 years from the date of assignment. Given these assumptions, we projected future loan activity for foreclosures, prepayments, and surviving loans. Because of inadequate historical data, it was not possible to rigorously estimate foreclosure and prepayment probabilities incorporating economic indicators, such as unemployment rates, payment-to-income ratios, current interest rate, and house price appreciation rates. The Fund incurs a number of costs associated with operating the program, including the costs to acquire loans following default, to administer the program, and for property expenses. The largest cost relates to the acquisition of loans before they enter the program. Acquisition costs were compiled for each year’s book of business. The total acquisition costs for all 68,695 loans is about $4.9 billion, about 89 percent of the total cost of $5.5 billion incurred by FHA’s Fund on these loans. Administrative costs include staff salaries for those servicing program loans and other costs related to the program’s application approval process and the processing of defaulted loans for foreclosure. Administrative costs used in our estimates were those developed by the Congressional Budget Office (CBO). CBO estimated the assignment program’s administrative costs and staffing needs—full-time equivalents (FTE)—for each phase of the loan assignment process: assignment requests, endorsements, servicing, and defaulting mortgages. First we used CBO’s estimates for the costs of each administrative function in 1994 to estimate the cost per loan for each function. We then applied this figure to each year’s loan activity to estimate the costs incurred in that year for each function. Next, we used a real discount rate of 3.5 percent per year to convert the estimates to 1994 present values. CBO’s FTE estimates and GAO’s cost per loan and total cost estimates are shown in table II.1, which illustrates that the administrative cost for the 68,695 loans assigned between fiscal year 1989 and the end of fiscal year 1994 totals about $451 million over the life of these loans, about 8 percent of the costs incurred by FHA’s Fund. Total cost (in millions over the life of the loan) Salary costs, which averaged $48,017 per FTE in fiscal year 1994, are used for all FTEs listed. Assignment request costs were allocated to all program loans, although the majority of these costs were for processing loans that were not accepted into the program. Endorsement costs were computed for all 68,695 loans. Servicing costs were applied every year for as long as the loan remained in the program. Default costs were computed for foreclosed loans by year of default. When borrowers are not current on their mortgages, additional costs are often incurred by FHA, including advances for property taxes, insurance, and other costs. HUD makes these payments to ensure clear title to the property and to protect its investment in case of fire. These costs totaled about $100 million, about 2 percent of the costs incurred by the Fund on these loans, and at times are not recovered from the borrower. To estimate the program’s revenues, we recorded the characteristics and status of loans for each year’s book of business. These data were used to estimate ultimate foreclosure and prepayment probabilities of 52 percent and 48 percent, respectively. The conditional foreclosure and prepayment probabilities for each year were based on the actual number of loans that were foreclosed on and paid off between fiscal year 1989 and the end of fiscal year 1994. We estimated these conditional probabilities using data for the 6-year period ended September 30, 1994. These probabilities were for loans entering the program during a 17-year period (fiscal years 1977 through 1994) and represented loan years 1 through 17. We assumed that the conditional foreclosure and prepayment rates for years beyond 1994 (18-30) were the same as for loan year 17. Figures II.1 and II.2 illustrate the estimated conditional foreclosure and prepayment probability rates by loan year. Revenue estimates were based on the percentage of loans in five loan status categories—current, current with forbearance, delinquent with forbearance, delinquent with no forbearance, and pending foreclosure—and their expected performance in the future. For each year’s book of business, we analyzed the unpaid balance to loan amount, the amount of receivables outstanding, the amortized payment amounts, and the actual payments made for each loan category. We also included the amount of advances owed and original loan amounts in the estimates. To estimate foreclosure revenues, an average recovery rate for loans foreclosed and sold was obtained from the SAMS data on 203b loans foreclosed during fiscal years 1983-94. Recovery rates ranged between 43 and 67 percent of acquisition costs each year, averaging 59 percent. The average recovery rate of 59 percent was applied to the acquisition costs of all foreclosed loans. Average acquisition costs were used in estimating foreclosure revenues. Specifically, the average acquisition costs for each year times the recovery rate for each foreclosed loan results in the estimated total foreclosure revenue of about $1 billion, about 48 percent of the $2.1 billion in revenues to be obtained by FHA’s Fund on these mortgages. Prepayment revenues are based on data for all loans. Using the number of loans that paid off and those forecasted to be paid off, the unpaid principal balance at the time of payoff was estimated and summed for all loans, totaling about $955 million, about 45 percent of the revenues to be obtained by FHA. In estimating the unpaid principal balance, we used the ratio of unpaid balance to original loan amount for each year. Using the average loan amount, year in program, and the number of expected prepayments, we estimated prepayment revenues for each year. For years 19 through 30, we assumed that the unpaid balance to original loan amount will continue to decrease at an accelerated rate. To determine the unpaid balance for years 19 through 30, a simple regression was applied to the unpaid balance to original loan amount ratio for years 1-18, in which each year’s ratio is dependent on the previous year’s ratio. The resulting parameters were used to estimate the unpaid balance to loan amount schedule for years 19-30. We forecasted loan payment revenues using the estimated number of loans remaining in the program and the actual and scheduled payments made for each loan category. Actual loan payments averaged about 34 percent of scheduled payments. It was assumed that the assigned loans will have the same distribution over the loan categories that they did in fiscal year 1994 but that the length of time in the program varies. Actual to scheduled payment ratios were also assumed to vary by time in program. As loans age, payment ratios rise, indicating that older loans are paying a higher percentage of scheduled payments. Mortgagors’ total payments for each year through the year 2023 for each year’s book of business were summed to obtain the estimated total payment revenue of about $152 million, about 7 percent of the revenues obtained by FHA’s Fund for loans assigned since the beginning of fiscal year 1989. Approximately 39,600 (55 percent) of the 71,500 borrowers in the program as of September 30, 1994, had been in the program 3 years or fewer. HUD’s records show that of the 39,600 borrowers, 26,000 (66 percent) are current with repayment agreements while the remaining 34 percent are not current. Of the 26,000 borrowers who are current with repayment agreements, 36 percent are current with original mortgage payments. The remaining borrowers (64 percent) are current with repayment agreements that call for reduced or suspended payments. When borrowers remain in the program beyond the 3-year relief period and therefore are required to make full mortgage payments, the proportion of borrowers current with repayment agreements drops and the proportion of borrowers in foreclosure increases. Similarly, the average amount of delinquencies owed by borrowers increases (see figs. III.1 and III.2). Of the approximately 31,900 borrowers who have been in the program more than 3 years and are required to make full mortgage payments, 38 percent are current on their repayment agreements. People buy homes for shelter and investment purposes. Normally, they do not plan to default on a loan. However, conditions that lead to defaults occur. Defaults may be triggered by a number of events: unemployment, divorce, death, etc. These events are not likely to trigger foreclosure if the home can be sold for more than the mortgage balance and selling expenses. However, if the property is worth less than the mortgage, these events may trigger a foreclosure. Prepayments may be triggered by other events such as declining interest rates or rising house prices, which in turn may result in the refinancing or sale of a residence. To illustrate that some borrowers were able to and chose to pay their mortgages while others did not, we randomly selected 136 case example loans from four loan categories—paid-off, current with payments, foreclosed on, and delinquent—from files at four HUD field offices—Boston, Chicago, Ft. Worth, and Spokane. Of the 136 borrowers, 78 had paid off their loans, 34 were current with their mortgages, and 24 had either been foreclosed on, provided HUD with a deed in lieu of foreclosure, or were delinquent on their loans. Borrowers who had been foreclosed on, had given FHA a deed in lieu of foreclosure, or had experienced growing delinquencies were generally unable to resume full payments, and they experienced additional problems after assignment that intensified their financial difficulties. These borrowers generally encountered one or more of the following situations after assignment: (1) intermittent job loss with a reduction in income, (2) reduction in income due to divorce, (3) one or more serious illnesses or injuries, (4) loss of a high paying job and reduced income from a new job, and/or (5) unanticipated housing repairs. Only a few borrowers did not make their mortgage payments because they had high installment debt. While FHA does not keep track of borrowers after foreclosure, FHA loan servicers familiar with foreclosures told us that after foreclosure, borrowers generally either rent an apartment or are able to stay with relatives. Furthermore, program borrowers who experience foreclosures have experiences that are similar to those of FHA borrowers who experience foreclosures immediately without assignment, according to the servicers. However, officials from two housing counseling agencies told us that some borrowers could become homeless after foreclosure. In contrast, the 34 borrowers who were able to become current with their loans generally did not experience such a litany of problems. Although their incomes also declined, they either still had jobs, found new jobs by the time HUD accepted their loans for assignment, or were able to obtain second jobs to supplement their incomes. As a result, 25 (about 73 percent) of the borrowers who became current were able to resume full or increased mortgage payments immediately upon entering the program. Of the 34 borrowers who became current on their loans, 13 cured their delinquencies in less than 2 years. However, the remaining 21 borrowers took 92 months on average to cure their delinquencies. Seven borrowers took over 10 years to become current with their original mortgage payments. Almost all of the 78 borrowers included in our case studies who had already paid their mortgages did so by selling their homes or refinancing their mortgages. Of the 78 borrowers, 71 sold or refinanced their homes, 4 paid mortgages from insurance settlement payments, and 3 paid through regular or increased payments. Borrowers who sold their homes were, on average, 8 months behind in mortgage payments of $4,169 at the time their loans were assigned, which increased to $6,088 when they sold or refinanced their homes. However, the proceeds from the sales were generally sufficient for these borrowers to pay off their original notes and the delinquencies. Generally, these borrowers had either held the properties for more than 10 years or lived in areas where housing had significantly appreciated in value since the homes were purchased. For example, according to a HUD field office official, housing in Spokane has almost doubled in value since 1985. In contrast, the value of homes in the Fort Worth area did not significantly appreciate during this period. Thus, mortgagors in areas where housing had significantly appreciated in value who sold their homes had equity in their homes when they defaulted on their mortgages. Almost half of the 78 borrowers who paid off their mortgages did so within 2 years of assignment, and almost two-thirds did so within 3 years of assignment. Sally S. Leon-Guerrero, Staff Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed whether the Housing and Urban Development's (HUD) mortgage assignment program: (1) helps borrowers avoid foreclosure; (2) reduces the Federal Housing Administration's (FHA) foreclosure losses; and (3) can be improved to reduce such losses. GAO found that: (1) HUD mortgage assignment program helps borrowers avoid immediate foreclosure, but is not successful in helping borrowers avoid foreclosure or retain their homes on a long-term basis; (2) about 52 percent of the 68,700 borrowers in the mortgage program will lose their homes through foreclosure, and the remaining borrowers will pay off their loans after the sale or refinancing of their homes; (3) the mortgage assignment program has not reduced FHA foreclosure losses, since FHA incurs additional costs under the program which more than offset the costs from saving some loans from foreclosure; (4) FHA will incur losses of more than $1.5 billion for those borrowers accepted into the mortgage program since fiscal year 1989; (5) although FHA borrowers' premiums pay for these additional losses, it is more difficult for the single-family insurance program to remain self-sufficient; (6) options that would reduce additional program losses include reducing the 3-year relief period provided to borrowers, setting a time limit on eliminating delinquencies, and accepting borrowers that can pay half or more of their mortgage payment; and (7) FHA would have to require borrowers to begin full mortgage payments within a few months after entering the program to eliminate additional program losses. |
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In 1981, Congress created the research tax credit to encourage business to do more research. The credit has never been a permanent part of the tax code. Since its enactment on a temporary basis in 1981, the credit has been extended six times and modified four times. The research tax credit has always been incremental in nature. Taxpayers receive a credit only for qualified research spending that exceeds a base amount. Beginning in 1981, taxpayers could reduce their tax liability by 25 percent of qualified research that exceeded a base amount that was equal to the average research expenditure of the 3 previous years or a base amount that was equal to 50 percent of the current year’s expenditures, whichever was greater. The Tax Reform Act of 1986 modified the credit by reducing the rate to 20 percent of qualified spending above the base amount and more narrowly defining qualified expenditures. The credit was changed again in 1988 to require that taxpayers reduce their deductions for research expenditures by an amount equal to 50 percent of the credit they claim. In 1989, this amount was increased to 100 percent of the credit they claim. The Omnibus Budget Reconciliation Act of 1989 changed the method for calculating the base amount. The base calculated as the average expenditure of the 3 previous years was replaced by a base amount equal to the ratio of total qualified research expenses to total gross receipts for 1984 through 1988, multiplied by the average amount of taxpayer’s gross receipts for the preceding 4 years. This base change removed the link between increases in current spending and future base amounts that had reduced the incentive to undertake additional research spending under the prior method for calculating the base. The evaluation of the effectiveness of the credit requires first estimating the additional research spending stimulated by the credit. Ideally, this additional spending should then be evaluated according to the net benefit it produces for society. However, this net social benefit is difficult to determine because it depends on how the research of some companies affects the costs and products of other companies. Some researchers who have studied the credit have instead calculated a “bang-per-buck” ratio, the amount of spending stimulated per dollar of revenue cost. Once a decision has been made to provide some form of credit, this ratio is a relevant criterion for assessing alternative designs. Most early studies of the research tax credit found that, although the credit may have stimulated some additional research spending, the effect on spending was relatively small. For example, Edwin Mansfield in his 1986 study asked a random sample of corporate officials to assess the effect of the credit on research spending and estimated from their responses that the additional spending induced by the credit equaled about one-third of the revenue cost. Robert Eisner, et al., in 1984 compared the growth of research spending that qualified for the credit and spending that did not qualify in 1981 and 1982, and found no positive impact of the credit on the growth of research spending. Other early studies relied on estimates of the responsiveness of research spending to reductions in its price to arrive at similar conclusions. Because the credit is effectively a reduction in the price of research, the greater the responsiveness of research spending to price reductions, the more additional spending the credit is likely to stimulate. Economists measure the responsiveness in terms of the “price elasticity” of spending, which shows the percentage increase in spending that would result from a 1-percent reduction in the after-tax price of research and development (R&D). In 1989, we reported that the best available evidence indicated that research spending is not very responsive to price reductions. Most estimates of the price elasticity of spending fell in the range of –0.2 to –0.5, implying that a 1-percent reduction in the price of research would lead to between a 0.2 percent and 0.5 percent increase in spending. In our 1989 report, we used Internal Revenue Service (IRS) data to estimate that between 1981 and 1985, the credit provided companies with a benefit of 3 to 5 cents per dollar of additional spending. This benefit to companies is equivalent to a reduction in the price of research. Combining these price reductions with the range of elasticity estimates, we estimated that the credit stimulated between $1 billion and $2.5 billion of additional research spending between 1981 and 1985 at a cost of $7 billion in tax revenue. Thus, we estimated that each dollar of taxes forgone stimulated between 15 and 36 cents of research spending. Reports on the research tax credit by KPMG Peat Marwick and by the Office of Technology Assessment (OTA) include reviews of studies of the credit’s effectiveness that were issued since our 1989 report. The KPMG Peat Marwick report concludes that the studies provide evidence that the spending stimulated by the credit equals or exceeds its revenue cost. Specifically, the report concludes that the recent studies show that one dollar of credit stimulates about one dollar of R&D spending in the short run, and as much as two dollars in the long run. According to the KPMG Peat Marwick report, the recent studies KPMG Peat Marwick reviewed provide better estimates of the effectiveness of the credit than earlier studies because they analyze longer data series and because they use what it considered to be better methodologies for analyzing the effect of the credit. The OTA report reviewed the same recent studies as KPMG Peat Marwick and observed that the available literature generally reports that the credit stimulates about one dollar of additional spending per dollar of revenue cost. However, OTA pointed out that the studies contain data and methodological uncertainties. For our review, we evaluated the studies cited in these two reports as well as other studies not included in either report. We also addressed some methodological issues that were not addressed in these reports and provided a more detailed evaluation of each study. Our first objective was to evaluate recent studies of the research tax credit for the adequacy of the data and methods used to determine the amount of research spending stimulated per dollar of revenue cost. In particular, we were to determine if recent studies provided adequate evidence to conclude that each dollar of tax credit stimulates at least one dollar of research spending in the short run and, over the long run, stimulates about two dollars of research spending. Our second objective was to identify the factors other than spending per dollar of revenue cost that determine the credit’s value to society. To meet our first objective, we reviewed the six studies cited by the KPMG Peat Marwick report and two studies that the report did not cite that we identified from our review of the literature on the credit and from our interviews with authors of research tax credit studies. In general, these recent studies were published since our 1989 report, although one study cited by KPMG Peat Marwick was published in 1987. The studies are listed in appendix I. We used standard statistical and economic principles in our review and evaluation of the studies of the research tax credit. We relied upon internal economists to carry out this evaluation. In our evaluation, we considered such factors as the adequacy of the data used to estimate the effect of the credit, the adequacy of the variables used to measure the incentive provided by the credit, and the sensitivity of the estimates to assumptions about taxpayer behavior. We also interviewed the authors of the studies of the research tax credit and requested comments on a draft of our evaluation of their studies. We received comments from the authors of six of the eight studies that we reviewed. All agreed that our report accurately summarized their studies. However, not all agreed with the importance of the data and methodological limitations that we identified in their work. A summary of their comments appears on pages 12 and 13. We also requested comments on a draft of our report from the authors of the KPMG Peat Marwick report. They stated that they appreciated the opportunity to comment on our report but that after reviewing our report, they had no comments to submit. To meet the second objective, we reviewed academic articles and government studies about the determinants of the social benefits of research spending. We also reviewed studies that describe the difficulties encountered when attempting to measure the full social costs and benefits of research. We did our work in Washington, D.C., from December 1995 through January 1996 in accordance with generally accepted government auditing standards. The recent studies that we reviewed provided mixed evidence on the amount of spending stimulated per dollar of revenue cost. Of the eight studies we reviewed, three supported the claim that one dollar of credit stimulated about two dollars of additional research spending. Another study, which did not directly evaluate the research tax credit, reported estimates of the responsiveness of research spending to other tax incentives. These estimates appear to be consistent with the claim that the credit stimulates spending that exceeds its revenue cost. However, two studies reported that the credit stimulated spending that was less than its revenue cost, and another two of the studies reported estimates of additional spending that do not appear to support the claim that spending exceeded revenue cost. One of these latter studies does not compare additional research spending to revenue cost but does report an estimate of additional spending that is likely to be less than the revenue cost. The other study reported that additional spending exceeded revenue cost through 1985 but reported estimates of additional spending that were likely to be less than the revenue cost after 1985. Most of the recent studies used more sophisticated methods than prior studies when analyzing the effectiveness of the credit. For example, the studies improved on prior studies by using methods that attempt to distinguish the credit’s effect from other influences on research spending like the potential size of the market for the product of the research. However, the studies have the following data and methodological limitations. The most appropriate data for assessing the effect of the credit are tax return data. These confidential tax return data were not available to the authors of the studies. Instead, they used publicly available data sources, chiefly the COMPUSTAT data service, which do not accurately reflect the incentive provided by the credit. This incentive depends on a company’s ability to earn credits by having qualified research spending that exceeds the base amount and on a company’s ability to claim its credits by having sufficient taxable income. We concluded from our own comparison of tax return data with COMPUSTAT data and from studies by other researchers that differences in the measurement of research spending and taxable income make COMPUSTAT an unreliable proxy for tax return data when analyzing the credit. Because studies that use the public data cannot accurately determine the credit’s incentive, they may not accurately measure the amount of spending stimulated by the credit. Three studies that analyzed the credit at the industry level may not accurately measure the credit’s incentive. Analysis at the industry level of aggregation does not reflect the different incentives the companies face and their different responses to these incentives. Industries include firms that earn no credit because their spending is less than the base amount or claim no credit because they have no tax liability. An analysis at the industry level that assigns the same incentive to all these firms would not capture these differences and is not likely to produce very precise measures of the credit’s effect on research spending. The eight studies all used measures of the tax incentive that did not incorporate important interactions with other features of the tax code. For example, studies that measured the tax incentives by reductions in the cost of research and development due to tax policy changes did not include all the research and development provisions of the tax code. In addition to the credit, the cost of R&D depends on other tax code provisions like those governing the allocation of research expenses between foreign sources and the United States. The studies included some of these provisions but not others. Including all relevant provisions of the code may change the estimates of the research credit’s effectiveness. The estimates in several of the studies were highly sensitive to assumptions made about the data and taxpayer behavior. For example, one study’s estimate of the responsiveness of spending to tax incentives was reduced by half when more firms were included in the sample studied or the assumptions were changed on how taxpayers allocate research and development expenses between domestic and foreign sources. Other studies that differed in terms of how they measured the tax incentive produced significantly different estimates of the spending stimulated by the credit. This sensitivity to the assumptions made by the authors leads us to conclude that much uncertainty remains about the effect of the credit on research spending. The estimates presented in the most recent studies do not provide all the information needed to evaluate the effectiveness of the latest version of the credit. The amount of spending stimulated per dollar of revenue cost depends on how the design of the credit affects the incentive to increase research spending and on how the design affects the revenue cost. Only one of the recent studies estimated the effectiveness of the credit for years after its redesign in 1989, and the author of that study is not confident of her results for the post-1989 period. Some reviewers have implied that the recent studies’ estimates of the responsiveness of research spending to price reductions—the price elasticity of spending—are equivalent to the amount of research spending stimulated by the credit per dollar of revenue cost. They said that using an empirical estimate that a 1-percent reduction in the price of R&D will lead to a 1-percent increase in research spending implies that one dollar of credit will lead to one dollar of additional spending. However, these may not be equivalent estimates because the amount of research spending stimulated by the credit per dollar of revenue depends on the design of the credit as well as the responsiveness of spending to price reductions. For example, the credit’s effect on spending and revenue cost will depend on whether it is designed as a flat credit, which applies to total research spending, or as an incremental credit, which applies only to spending that exceeds a base amount. For the same responsiveness of spending to price reductions, a flat credit with a 10 percent rate should stimulate roughly the same amount of spending as an incremental credit with the same rate because both credits provide the same 10 percent effective reduction in the price of research. However, the flat credit would allow a company to earn a credit equal to 10 percent of its total qualified research spending, while the incremental credit would give the company a credit equal only to 10 percent of the difference between its current qualified spending and some base spending amount. Consequently, the 10 percent flat credit would have a higher revenue cost and, therefore, a lower bang-per-buck than the 10 percent incremental credit. Incremental credits that differ from one another in terms of how base spending is defined can also differ substantially in terms of how much spending they stimulate per dollar of revenue cost. The bang-per-buck of the current incremental credit may be significantly different from that of the credit that existed prior to 1990. As we reported in our May 1995 testimony, the redesign of the credit in 1989 should have increased the size of the incentive provided per dollar of revenue cost. However, as we also reported in our testimony, there is evidence that the incentive provided by the redesigned credit had eroded over time and that the revenue cost of the additional spending stimulated by the credit had increased. The value of the research tax credit to society cannot be determined simply by comparing the amount of research spending stimulated by the credit versus the credit’s revenue cost. To fully evaluate the credit’s effect, one would have to (1) estimate the total benefits gained by society from the research stimulated by the credit; (2) estimate the resource costs of doing the research; (3) estimate the administration, compliance, and efficiency costs to society resulting from the collection of taxes (or the borrowing of money) required to fund the credit; and (4) compare the benefits to the costs. Simply knowing how much additional research spending the credit stimulates does not tell you the value of that research to society. Similarly, the amount of revenue needed to fund the credit does not tell you the total cost to society of the credit. There is a general consensus among economists that research is one of the areas where some government intervention in the marketplace may improve economic efficiency. From society’s point of view, individual companies may invest too little in research if the return on their investment is less than the full benefit that society derives from the research. If the research leads to new products, reduces costs or increases productivity for other companies and consumers throughout the economy, the benefits to society may exceed the return on investment of the companies that conduct the research. Therefore, companies may not do as much research as society finds desirable, and government policy to encourage research may be viewed as appropriate. However, as the Joint Committee on Taxation and OTA have noted, it is also possible to decrease economic efficiency by encouraging too much spending on research. Because not all research generates social benefits that exceed the returns to companies conducting the research, encouraging more research may not be economically efficient. It would be very difficult to determine, given the difficulty of measuring the social benefit, whether the research tax credit increases or decreases economic efficiency. No one that we are aware of, including the authors cited by KPMG Peat Marwick, has undertaken a study that could answer that question conclusively. As previously discussed, we requested comments from the authors of the KPMG Peat Marwick report. After reviewing a draft of our report, they stated that they had no comments to submit. We also requested that the authors of the eight studies of the research tax credit that we reviewed provide comments on our evaluation of their studies. The following summarizes the comments of the six authors who responded to our request. All of the authors we interviewed agreed that the publicly available data contain measurement errors that may affect their estimates of the credit’s effectiveness. However, two of the authors said that they believed that their estimates would not change significantly if tax return data were used. They said that either the data problem was minor or that statistical methods used to correct the measurement error reasonably addressed the problem. Two authors also said that they believed that their elasticity estimates would not change significantly but noted that predicting what would happen to the estimates when better data are used is difficult. Two authors agreed with our assessment of the importance of the potential inaccuracies from using COMPUSTAT data. As explained more fully in appendix I, we have concluded that COMPUSTAT data are not a suitable proxy for tax return data when analyzing the credit. Although the authors agree that COMPUSTAT data are not the best data, they disagree among themselves about the importance of this issue. We acknowledge that statistical methods can be used to help address this issue of measurement error, but the success of these methods is difficult to assess. We conclude that, because the most appropriate data were not used in these studies, uncertainty remains about the responsiveness of spending to the credit. The methodological limitations that we identified were not addressed in the comments of all the authors because they were not relevant to every study. The authors who did comment disagreed about the importance of the methodological limitations. One author who addressed the importance of correctly incorporating the features of the tax code said she believed that some of the studies’ estimates of the effect of the credit were overestimated because the method of estimation excluded tax preferences available for investments other than research. Another author commented that the sensitivity of the estimates to assumptions about taxpayer expectations accounted for the difference in estimates across the studies. However, two authors who agreed with our identification of the methodological limitations in their work did not believe that the limitations had a significant effect on their estimates. Finally, the authors who commented agreed that analyzing the credit at the firm level rather than at the industry level produces more accurate estimates. However, one author said that he did not believe that his industry level estimates would change significantly if they were based on analysis at the firm level. As explained in appendix I, we found that estimates reported in the studies varied significantly when authors employed different assumptions about the data and taxpayer behavior. This sensitivity of the estimates to authors’ assumptions leads us to conclude that much uncertainty remains about the effect of the credit on research spending. We are sending copies of this report to pertinent congressional committees, the Secretary of the Treasury, KPMG Peat Marwick, the individual authors, and other interested parties. Copies will be made available to others upon request. The major contributors to this report are listed in appendix II. If you have any questions, please call me on (202) 512-9044. We classified the studies of the effectiveness of the research tax credit according to the level of aggregation at which the data are analyzed and the method used to measure the incentive provided by the credit. The studies analyze the credit using firm level data or using data aggregated to the industry level. The incentive provided by the credit is measured by a categorical or “dummy” variable, or by a variable measuring the “tax price” of research and development (R&D). The categorical variable measures the change in R&D spending due to the presence or absence of the tax credit or to the ability of firms to use the credit, while the tax price variable measures the change in spending due to the effect of tax policy on the cost of R&D. We reviewed the six studies cited by KPMG Peat Marwick in their report.We also reviewed two recent studies of the credit’s effectiveness that were not cited by KPMG Peat Marwick. The following summarizes the studies and presents our evaluation of them. Martin Neil Baily and Robert Z. Lawrence use National Science Foundation (NSF) data to examine the effect of the credit for 1981 through 1985 in their 1987 study, and for 1981 through 1989 in their 1992 study. The 1987 study analyses the credit using a dummy variable that indicates the years in which the credit was in effect, while the 1992 study uses a variable that reflects changes in the credit’s incentive due to changes in the tax law. Both studies produce essentially the same finding: the percentage increase in R&D spending in response to each percentage decrease in the price of R&D—the price elasticity of R&D—is approximately equal to one. Using this elasticity, Baily and Lawrence estimate that the credit generated about two dollars of R&D for each dollar of tax revenue forgone. Theofanis P. Mamuneas and M. Ishaq Nadiri use industry level data for 1956 through 1988, chiefly drawn from the Bureau of Labor Statistics and NSF. Their method is to construct a rental price variable for R&D capital that reflects the research tax credit and the provisions for the immediate expensing of research expenditures. To construct this variable, the authors acknowledge that they assume that the firms in their industries have sufficient tax liability to claim the credit, that their spending exceeds the base amount, and that spending is less than twice the base amount. Their estimates of price elasticities range from –1.0 for the three aggregate industries of textiles and apparel; lumber, wood products, and furniture; and other manufacturing to –0.94 for scientific instruments. On the basis of these elasticities, they calculate that the average additional research spending stimulated per dollar of revenue cost was about 95 cents for the period 1981 to 1988. James R. Hines’ study uses firm level data from COMPUSTAT for 1984 through 1989. His method is to construct a tax price variable that measures how the costs of R&D are affected by the rules for allocating R&D expenses between U.S. and foreign sources under section 1.861-8 of U.S. Treasury regulations. His tax price does not include the research tax credit or other R&D related features of the tax code. Hines’ preferred estimates of the R&D price elasticity range from –1.2 to –1.6. However, when he increases his sample size to include firms previously excluded due to merger activity, these elasticity estimates drop to a range of –0.5 to –0.6. Also, the elasticities decrease to –0.5 to –0.9 when Hines changes his assumptions about how firms allocate their research expenses. Hines does not apply these elasticities to the credit or calculate how much spending is induced by the credit. Bronwyn H. Hall uses firm level data from COMPUSTAT for 1977 through 1991. Her tax price variable measures how the research tax credit and expensing provisions affect the cost of R&D. Hall estimates a short-run price elasticity of R&D of –1.5 and a long-run price elasticity of –2.7. However, she advises that the long run elasticity be viewed with caution, as it is likely to be “quite imprecise.” Hall estimates that the additional spending induced by the credit in the short run was $2 billion per year, while the tax revenue cost was about $1 billion per year. Philip Berger’s study uses firm level data from COMPUSTAT for 1975 through 1989. He measures the effect of the credit using a dummy variable that indicates the years in which a firm is able to use the credit, i.e., the firm has a positive tax liability in the current or preceding 3 years. Berger uses the results of this analysis to estimate that the credit induced $2.70 billion of additional spending per year from 1982 through 1985. He compares this yearly increase to a yearly revenue cost of $1.55 billion to conclude that additional spending per dollar of forgone revenue was $1.74 during 1982 through 1985. Although Berger does not calculate the amount of spending per dollar of forgone revenue for years after 1985, his study shows that the credit was less effective in later years. C. W. Swenson’s study uses firm level data from COMPUSTAT for 1975 through 1988. He also uses a dummy variable that indicates the years in which a firm is able to use the credit. However, the ability to use the credit in his study depends not only on current tax status but also on future tax status and the firms’ planned R&D spending. Swenson estimates that total additional spending induced by the credit was $2.08 billion during 1981 through 1985. Swenson does not compare this estimate to the revenue cost. Janet W. Tillinger’s study uses firm level data drawn chiefly from COMPUSTAT for 1980 through 1985. She measures the effect of the credit using a dummy variable that indicates the years in which firms have research spending that exceeds the base amount. Tillinger uses the results of this analysis to estimate that the credit induced about 19 cents of increased spending per dollar of forgone revenue for 1981 through 1985, which she notes is at the lower end of the estimates from our 1989 study. Tillinger also finds that the effectiveness of the credit varies by the type of firm. When the firms are classified according to the opportunity costs of alternatives to R&D investment like the payment of dividends, she finds that the additional spending ranges from 8 cents to 42 cents per dollar of forgone revenue. The studies reviewed above provide mixed evidence for claims about the amount of spending induced by the credit per dollar of forgone revenue. Of the six studies cited by KPMG Peat Marwick, three studies (the two by Baily and Lawrence, and Hall’s study) support the claim that each dollar of tax revenue stimulated about two dollars of additional research spending. Hines’ study reports a price elasticity of research spending that, if applied to the research tax credit, is likely to be consistent with the finding that additional spending exceeds the revenue cost. Two studies cited by KPMG Peat Marwick, however, may not support the claim that induced research spending exceeds the revenue cost of the credit. Swenson’s study estimates that the credit induced additional spending of $2.08 billion from 1981 through 1985. He notes that his estimate is “comparable to . . . GAO estimates of $1 billion to $2.9 billion for the same period.” Swenson states that he does not calculate a bang-per-buck measure because he does not have access to the taxpayer data necessary to make this calculation. However, Swenson states that his estimate of additional spending is not likely to support the claim that the spending stimulated by the credit exceeded its revenue cost. Berger’s study estimates that additional spending exceeded revenue cost in the period 1982 through 1985, but the study may not support this claim in the years after 1985. Berger does not calculate a bang-per-buck measure for years after 1985. However, his study does show that the credit was less effective in these years and that the credit was not a statistically significant determinant of R&D spending in the years after 1986. The two studies that were not cited by KPMG Peat Marwick do not support the claim that induced spending exceeded the revenue cost of the credit. The Mamuneas and Nadiri study estimates that the credit stimulated additional spending that was slightly less than the revenue cost during 1981 through 1988, while the Tillinger study estimates that additional spending was significantly less than revenue cost during 1981 through 1985. Most of the studies we reviewed use more sophisticated statistical methods and more years of data than prior studies. For example, most of the recent studies use methods that attempt to distinguish the credit from other factors that influence research spending like market size and the availability of investment funds. Some studies also include the influence of taxpayers’ expectations about factors like the future tax status of firms when determining the effect of the credit on current spending. Nevertheless, despite these advantages over prior studies, these studies have data and methodological limitations that are significant enough to lead us to conclude that much uncertainty remains about the true responsiveness of research spending to tax incentives. None of the studies use the best data for assessing the effect of the credit. They all use publicly available COMPUSTAT or NSF data, which are not the most appropriate data for this purpose. The incentive provided by the credit depends on companies’ ability to earn credits by having qualified research spending that exceeds the base amount, and to claim credits by having tax liabilities. Information on qualified research spending and tax liabilities can be most accurately determined from confidential IRS data. The publicly available data will not be as accurate because they use definitions of research spending and tax liabilities that are different from IRS. These tax return data were unavailable to these researchers. In her study, Hall recognizes the limitations of publicly available data and attempts to correct the errors in her measurements. However, it is difficult to determine how successful her efforts are without repeating her analysis using the tax return data. In any case, the estimates of all the studies that we reviewed would be more reliable if they were based on IRS data. The tax price variables and the dummy variables used in the studies to capture the incentive provided by the credit depend on companies’ ability to earn credits and claim them against their tax liabilities. COMPUSTAT and NSF data do not accurately reflect credits earned and claimed. The ability to earn credits depends on the relationship of qualified research spending to the base amount. COMPUSTAT and NSF data do not accurately reflect this relationship because both data sources include spending that does not qualify for the credit. Most notably, spending reported by COMPUSTAT includes spending overseas that would not be qualified research spending. In our 1989 report, we compared COMPUSTAT data with tax return data and concluded that COMPUSTAT data are not a suitable proxy for tax return data when analyzing the credit. For example, when we compared the growth rate of COMPUSTAT research spending with qualified research spending for a sample of firms contained in both the COMPUSTAT database and IRS files, we found that the rates varied considerably over the period 1981 through 1985. Qualified spending grew 1.46 times as fast as COMPUSTAT spending in the 1980 to 1981 period, but only 0.72 times as fast in the 1983 to 1984 period. The relationship between spending and the base using COMPUSTAT may not accurately reflect the relationship using tax data, and, therefore, both tax price variables and dummy variables are likely to be inaccurate. The ability to claim credits depends on the tax status of the firms. COMPUSTAT contains information on taxable income and loss carryforwards, but studies have shown that COMPUSTAT does not always accurately or consistently reflect IRS data. Furthermore, COMPUSTAT data contain no information on the general business credit, which limits the ability of companies to claim the credit. Again, because both the tax price variables and the dummy variables depend on the ability of firms to claim the credit, we conclude that they will be measured inaccurately when based on COMPUSTAT data. The reliability of the Baily and Lawrence studies and the Mamuneas and Nadiri study is also limited by the level of aggregation at which the data are analyzed. Their analyses of the credit at the industry level are unlikely to produce very precise measures of the credit’s effect. Their analyses do not reflect the different incentives that companies face and the different responses to these incentives. Industries will include firms that earn no credit because their spending is less than the base, firms that cannot claim the credit because they have no tax liability, and firms subject to the 50-percent base limitation. A measure that assigns the same incentive to all these firms will not capture these differences and is not likely to yield precise or reliable estimates of the credit’s effect. The reliability of the studies that we reviewed is also limited by the methods used to measure the incentive provided by the credit. The studies use measures of the tax incentive that do not incorporate important interactions of the research tax credit with other features of the tax code. For example, Hines studies the effect of the section 1.861-8 allocation rules on research spending but does not analyze the effect of other features of the tax code such as the research tax credit. Hall, on the other hand, analyzes the research tax credit but does not incorporate the section 1.861-8 allocation rules in her study. Hall believes that including the rules in her analysis would not make “an enormous difference” because the firms subject to the rules probably represent only a small part of her sample. However, she does say that including the rules would make her estimates more precise. Hines states that it is “difficult to know for sure” the effect on his estimates of including interactions with other features of the code. The estimates in some of these studies are also uncertain because they are sensitive to assumptions made about the data and taxpayer behavior. Hines’ estimate of the effect of tax policy on spending is reduced by half when he includes more firms in his sample or changes his assumptions about how companies allocate R&D expenses. Hall notes that estimation at the firm level involving investments like R&D is difficult and sensitive to assumptions made when specifying the models. This sensitivity of the results is also illustrated by the three studies using dummy variables where differences in the approach to modeling taxpayer behavior and measuring the effect of the credit yield very different estimates. Although some of the studies attempt to measure the degree of this sensitivity and correct for it, the success of these efforts is difficult to assess. The authors of these studies themselves, in many cases, advise that their results be used with caution and recognize that their estimates would benefit from further research. For example, when describing her estimates of the spending induced by the credit, Hall states that “it needs to be kept firmly in mind that my tax estimates are not likely to be as good as those constructed using IRS data.” She also mentions, in the 1992 version of her paper, that her analysis “needs more investigation for robustness over time and industry.” When discussing the limitations imposed by not including interactions with other aspects of the tax code, Hines notes that his results should be used with caution because of these “restrictive assumptions built into the estimated R&D responses to tax changes.” The current version of the credit has not been studied extensively, and little is known about the actual incentives provided by the current credit. The research tax credit was fundamentally restructured in 1989. Hall’s study, which spans the years 1977 through 1991, is the only study we reviewed that covers any tax years after the credit was changed. However, her data contain only 2 years—1990 and 1991—under the revised credit structure. Hall notes that her estimate of additional spending for these years amounts to about 10 percent of the total R&D and that this “amount is almost too large to be credible . . . and deserves further investigation as more data become available.” She indicated that her estimates of additional spending may be less reliable because she did not have data on the tax status of firms after 1991 that were needed to measure the incentive provided by the revised credit. James Wozny, Assistant Director, Tax Policy and Administration Issues Kevin Daly, Senior Economist Anthony Assia, 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 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed eight studies of the research tax credit, focusing on the: (1) adequacy of the studies' data and methods to determine the amount of research spending stimulated per dollar of foregone tax revenue; and (2) other factors that determine the credit's value to society. GAO found that: (1) four studies supported the claim that, during the 1980s, the research credit stimulated research spending that exceeded its revenue cost, but the other four studies did not support the claim or were inconclusive; (2) all of the studies had significant data and methodological limitations that made it difficult to evaluate industry's true responsiveness to the research tax credit; (3) the studies did not use tax return data to determine the credit's incentive because the authors did not qualify for access to such data; (4) publicly available data were not a suitable substitute for the tax return data because public sources used different definitions of taxable income and research spending; (5) the studies' analytical methods, such as use of industry aggregates and failure to incorporate important tax code interactions, made their findings imprecise and uncertain; (6) there was little research on the latest design of the credit to determine its effect on incentives and costs; (7) the studies' evidence was not adequate to conclude that a dollar of research tax credit would stimulate a dollar of additional short-term research spending or about two dollars of additional long-term research spending; and (8) to measure the credit's true impact, the studies would need to assess the research's net benefit to society, resource costs of research, and administrative, compliance, and efficiency costs of funding the credit. |
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For the purposes of this report, an air-rail connection refers to a connection between an airport terminal and an intercity passenger rail station (in other contexts, an air-rail connection may refer to a connection between an airport terminal and an intracity rail station that serves other forms of local rail, such as commuter rail or a subway system). An air-rail connection facilitates mobility between a rail station and an airport terminal through a variety of modes and methods, such as an airport shuttle, local transit connection, automated people mover or guideway car, or by walking. Depending on the extent of the connectivity, intercity passenger rail can perform three main roles for air passengers. First, intercity passenger rail may serve as a short-distance connection to the nearest local airport from a metropolitan area along a more extensive intercity rail corridor. Second, intercity passenger rail may serve as a competitive alternative to air travel. For example, for distances less than 500 miles, our prior work has shown that intercity passenger rail, particularly high-speed rail, offers some potential advantages over air travel, including reduced times for security screening and baggage checks. Third, intercity passenger rail can serve as part of an integrated intercity transportation solution with air travel, where the passenger travels significant distances using both modes. For these types of air- rail connections, travel may be further integrated by code-sharing, which refers to the practice of airlines applying their names and selling tickets to rail service operated by other organizations, such as Amtrak. Amtrak provides intercity passenger service to 46 states and the District of Columbia, operating over a 22,000-mile network, mainly using track owned by freight railroads. Amtrak owns about 655 miles of rail lines, primarily on the Northeast Corridor between Boston, Massachusetts, and Washington, D.C. Most of Amtrak’s passengers travel within the Northeast Corridor or over relatively short-distances, though Amtrak also operates a number of long distance routes across the country. The speed of service varies across the country. For example, according to Amtrak, its Heartland Flyer service connecting Oklahoma City, Oklahoma, and Fort Worth, Texas, averages about 50 miles per hour (mph) over the 206- mile corridor while its Acela Express higher-speed service averages less than 80 mph throughout the Northeast Corridor (reaching top speeds up to 150 mph). While Amtrak’s Acela Express service is currently the fastest intercity passenger rail service in the United States, California has begun developing a 520-mile high-speed rail line designed to operate at speeds up to 220 mph. Transportation projects at airports are typically initiated and developed by local transportation agencies, including some combination of state departments of transportation, local planning bodies, and other local agencies. While roles may vary, one or more state and local transportation agency will generally take the lead in project development and implementation. Airports typically are also heavily involved with developing intermodal capabilities on airport property. This is especially true if the project involves construction of a major intermodal facility. For example, the Miami International Airport, working in cooperation with the Florida Department of Transportation, has been one of the leaders in the development of the Miami Intermodal Center, which will provide on-site access to Amtrak, multiple other rail systems, local transit services, and a rental car center through the use of an automated people mover. Airlines also play a role in developing intermodal projects at airports. Use and lease agreements between airlines and airports are a major revenue source for most large airports, and because of this financial arrangement, airlines may have influence in or participate in airport decision making. The ability of airlines to participate in decision making depends on the specific airport and the structure of the lease agreements between the airport and airlines serving that airport. Amtrak generally becomes involved in the planning process at airports when a state or local government proposes a project that could potentially affect its intercity passenger rail service. An automated people mover is a guided transit mode with fully automated operation, featuring vehicles that operate on “guideways” with exclusive right-of-way, such as an automated monorail system. development. Additionally, FAA’s 2012 reauthorization legislation directs the Secretary of Transportation to encourage airport planners to consider passenger convenience, airport ground access, and access to airport facilities during the development of intermodal connections on airport property. Similarly, the Passenger Rail Investment and Improvement Act of 2008 (PRIIA) authorized development of high-speed intercity passenger rail corridors and the American Recovery and Reinvestment Act of 2009 (Recovery Act) appropriated $8 billion to fund development of these corridors and intercity passenger-rail projects. In June 2009, the Federal Railroad Administration (FRA) established the High-Speed Intercity Passenger Rail (HSIPR) program that provides discretionary grants for high-speed or intercity passenger rail projects. In allocating funds, PRIIA directed FRA to give greater consideration to projects that, among other things, encourage intermodal connectivity among train stations, airports, subways, transit, and other forms of transportation. However, federal policy for surface transportation, aviation, and passenger rail is established through separate legislation. For example, the planning and funding for highway and transit projects are addressed under the Moving Ahead for Progress in the 21st Century Act,planning and funding of U.S. airports is addressed under the FAA Modernization and Reform Act of 2012, and the planning and funding for intercity passenger rail is addressed under PRIIA. While the federal government does not provide funding specifically for air- rail connections, it has established a number of other funding mechanisms that can be used to enhance elements of air-rail connectivity. (See app. III.) Most federal funding for transportation projects is provided through grant programs through the individual specific modal administration and reserved for improvements specific to that mode. For example, most direct federal financial support for airport capital projects has been provided through grants from FAA’s Airport Improvement Program (AIP). While AIP grants may be used to fund intermodal projects, an airport’s use of its funds is generally restricted to an airport project that is owned or operated by the airport sponsor and that is directly and substantially related to the air transportation of passengers or property. Airports have funded portions of light rail and transit (such as subway or bus) using AIP funds at airports meeting these restrictions. Funding for intercity passenger rail has been provided in the form of operating and capital subsidies to Amtrak, as well as the HSIPR grant program. Federal oversight of air-rail projects is primarily divided across DOT’s respective modal administrations, though DOT has established some practices to coordinate oversight of intermodal projects. For example, for an air-rail connection project, the aviation component is overseen by FAA, while the rail component is overseen by FRA. As another example, according to DOT, its Research and Innovative Technology Administration (RITA) works closely with DOT’s modal administrations to improve intermodal cooperation, solve transportation challenges that cut across modal boundaries, and remove barriers to intermodal projects In addition to these efforts, in 2012 through a variety of research efforts. DOT established a working group consisting of representatives from each modal administration to track intermodal initiatives and projects. The goal of the working group is to provide non-monetary resources such as recommendations of policies to promote intermodal transportation projects, including air-rail connectivity projects. RITA is responsible for coordinating, facilitating, and reviewing DOT’s programs and activities to identify research duplication and opportunities for joint efforts and to ensure that research, development, and technology activities are meeting intended goals. European Commission has periodically published a common transportation policy in response to increased ground and air congestion, as well as concerns about the dependence on oil and the level of carbon emissions resulting from the current transportation system. A key component of the European Commission’s transportation policy is improving the connections between air and rail, thereby transforming competition between those modes into complementary service using high-speed train connections located at European airports. The current European Commission transportation policy, adopted in 2011, aims to connect all 37 core airports to the rail network, preferably through high- speed rail, and shift a majority of medium-distance passenger transportation (which the European Commission defines as under 300 kilometers or 186 miles) to the passenger rail network by 2050. Beyond these policy differences, our prior work has also noted that differences related to population density, geography, and private automobile use have contributed to differences in the development and use of air-rail connections in Europe compared to the United States. This prior work has highlighted the greater population density of European cities and that downtowns are major destination points for passengers as key differences that affect the use of intermodal systems. While some U.S. cities have population densities comparable to European cities, in general, U.S. cities are more decentralized. Furthermore, distances between many major cities in the United States are generally greater than in Europe, which can affect the ability of intercity passenger rail to be competitive with air travel, depending on price and the speed of service. In addition, private automobile use has affected air-rail connections. Specifically, the rate of car ownership is generally higher in the United States compared to Europe, while at the same time, retail gasoline prices in the United States are much lower than in Europe because of substantially lower taxes. Furthermore, in the United States, surface transportation policy has primarily focused on developing and improving highways, while the transportation policy of European countries have placed a greater comparative emphasis on the development of intercity passenger rail and public transportation. Accordingly, people traveling to airports in the United States are more likely than in Europe to drive and park their cars at the airports, which could reduce the demand for (as well as the benefits of) intercity passenger rail connections at U.S. airports. Beyond Europe and the United States, the integration of air travel and intercity passenger rail varies. For example, in Japan, air service and high-speed intercity passenger rail compete and do not complement each other as in Europe. The uniqueness of Japan’s transportation system stems from the fact that two-thirds of its population, or almost 100 million people, live in a narrow, densely populated corridor. Furthermore, Japan has nearly 5,600 miles of private tollways, which makes intercity travel by car expensive. In China, the Shanghai Railway Bureau and China Eastern Airlines commenced operations of air-rail combined services in May 2012 to and from Shanghai Hongqiao International Airport, marking China’s first air-rail combined service. The service allows passengers to transfer between domestic or international air services and train operations with a single ticket. Most major U.S. airports have some degree of physical proximity to intercity passenger rail stations; however, few are collocated with rail stations. Specifically, our analysis found that 42 of the 60 large and medium hub airports in the contiguous United States are located within 10 miles of an Amtrak station; 21 of the 42 airports are within 5 miles of a station. (See fig. 1.) Newark Liberty International Airport and Bob Hope (Burbank) Airport are the only airports where passengers can access the Amtrak stations via an automated people mover (Newark) or by walking (Burbank). Airline passengers at Miami International Airport will be able to connect to Amtrak via an automated people mover upon completion of the Miami Central Station in 2014. Amtrak officials noted that, in some locations, it provides service that may operate in close proximity to an airport, but may not have an Amtrak station near that airport. Passengers at the nation’s other major airports have to rely on another transportation mode such as shuttle, taxi, or transit (intracity rail, subway, or bus) to connect to an Amtrak station and some passengers must make multiple connections. For example, passengers at Baltimore/Washington International Thurgood Marshall (BWI) and Milwaukee’s General Mitchell International can take a free airport shuttle to and from Amtrak stations, while passengers choosing to take public transportation to access Amtrak from Norman Y. Mineta San Jose International Airport would have to take both a free shuttle and light rail. However, some officials we interviewed told us that passengers are less willing to consider intermodal travel as the number of modes needed to complete a single trip increases. Stakeholders at many of the airports we visited have placed a greater emphasis on intracity connectivity (or connections within a local metropolitan region) to the airport through local rail or other transit, as opposed to connectivity through intercity passenger rail. While a local transit system may provide a connection between an airport and intercity passenger rail, such a connection is generally not the primary goal. For example, at Dallas/Fort Worth International Airport, officials are working with the Dallas Area Rapid Transit agency to provide an intracity rail connection to the airport from downtown Dallas by 2014. Officials noted that an intracity rail connection was preferable to connectivity through Amtrak because of the limited frequency of service provided by Amtrak in the region, among other factors. When the extension is completed, airport passengers would be able to connect to the Amtrak station located in downtown Dallas through the intracity rail connection. Similarly, officials at Norman Y. Mineta San Jose International Airport in California noted that policymakers should focus on connecting intracity rail to their airport, rather than intercity passenger rail, in part, because the San Jose airport is not a hub airport and most of its customers reside in the surrounding San Francisco Bay area. Amtrak and state transportation agencies are considering projects to expand connectivity with airports. Amtrak’s strategic plan states that it will increase connectivity with airports in key markets and has established a strategic goal to increase the number of air-rail connections in the Northeast Corridor from two to five by 2015. However, Amtrak officials we spoke with stated that they do not believe Amtrak will achieve this goal because of limited available funding for intercity passenger rail. Some states, such as California, Illinois, and Texas, are looking at options to enhance air-rail connectivity by developing high-speed rail connections at nearby large and medium hub airports. For example, in addition to Illinois’ development of high-speed rail between Chicago and St. Louis, several options for possible future opportunities for improving Amtrak passengers’ connectivity to Chicago O’Hare International Airport have been proposed. Studies and data, while limited, suggest that relatively few passengers and airport employees use the limited air-rail connections available to travel to and from U.S. airports. Ground access studies have shown that intercity passenger rail is rarely used to connect to airports compared to other modes of transportation. For example, a 2012 study stated that Amtrak accounted for 3 percent of ground access mode share at Newark Liberty International; 2 percent at BWI, and less than 1 percent at Bob Hope Airport. By comparison, another study observed that at some European airports with direct air-rail connections, long-distance intercity passenger rail accounts for 20 to 25 percent of the ground access mode share.for public transportation options to airports is limited, as the vast majority of passengers still use personal automobiles to access the airport. The only current code-sharing agreement for air and rail travel in the United States is at Newark Liberty International Airport, though code- sharing has been implemented or explored at other airports. The code- sharing agreement between United Airlines and Amtrak allows passengers to make reservations with United Airlines for both air and rail travel, and Amtrak provides the connecting service on its trains between Philadelphia, Pennsylvania; Wilmington, Delaware; Stamford or New Haven, Connecticut, and to anywhere United Airlines flies from Newark Liberty International Airport. According to Amtrak data, about 24,000 passengers a year take Amtrak to Newark to connect to United Airlines flights, with 90 percent of those passengers originating from Philadelphia. However, United Airlines representatives pointed out that most passengers at the Newark Liberty International Airport rail station—which Amtrak estimated at over 120,000 passengers in fiscal year 2012—are not traveling through the code-share agreement. No additional code share agreements are currently planned between Amtrak and other airlines we contacted. Representatives from the airlines and Amtrak told us that code-sharing agreements are generally most effective when the rail station is located at the airport and within a high-traffic rail corridor, which is the case with Newark Liberty International Airport and the Northeast Corridor. As previously noted, few rail stations are collocated with a major airport. Both airline and Amtrak officials indicate that for code-share agreements, airlines require frequent rail service with minimum passenger transfer time between modes. Amtrak officials stated that they provide that frequency of service in very few markets, generally located on Amtrak’s Northeast Corridor serving highly populated metropolitan areas. We found that air-rail connectivity has the potential to provide a range of mobility, economic, and environmental benefits. In our discussions with stakeholders, including state departments of transportation, local transportation-planning organizations, and airlines; our review of academic literature; and the expert opinions obtained from our survey, we found that a general consensus exists that air-rail connectivity can provide a range of mobility benefits for travelers; however, we found less agreement exists on the importance and extent of other types of benefits, including economic and environmental benefits. Table 1 shows the benefits most frequently cited as “very important” by the experts, five of which focus on mobility benefits. However, our review suggests that the particular benefits for a given project are generally site-specific, and depend on the particular characteristics of the rail operators, the airports, and underlying regional characteristics. As a result, the benefits we identified through our work are not generalizable to all air-rail connections. Air-rail connections can potentially provide mobility benefits, such as increased options for passengers connecting to the airport, and improved convenience for airport and airline customers. Specifically, over half of the experts responding to our survey agreed that increasing passenger convenience and travel options were “very important” benefits of air-rail connectivity, and airport representatives cited both benefits as driving factors for intermodal projects at a number of our site visits. For example, representatives at Miami International Airport noted that in the 1980s a lack of ground transportation options, including connectivity to rail, had reduced passenger traffic at the airport. Beginning in 2001, the Florida Department of Transportation began to construct an intermodal center, which will provide passenger access to the airport through multiple ground transportation modes, including intercounty and intercity passenger rail. According to airport representatives, directly connecting Amtrak service to the airport will provide an additional option to passengers connecting to the airport and encourage passengers to be more willing to try other non-automotive forms of transportation. Construction of the new Amtrak terminal (Miami Central Station) began in 2011, and representatives anticipate the terminal will be completed in 2014. (See fig. 2.) Furthermore, air-rail connections can provide airport access to commuter trains in addition to intercity trains operated by Amtrak, as many of the Amtrak stations located near airports are served by both types of services. In addition, rail connectivity to airports has the potential to improve the passenger experience traveling to the airport. In particular, half of the experts (22 of 41) rated increased reliability of travel to the airport, and nearly half (18 of 40) rated reductions in the travel time to and from the airport as very important benefits of air-rail connections. Representatives from the airlines and airports we interviewed noted that their employees might also similarly benefit from an air-rail connection, specifically by providing increased options to and from the airport and improved convenience for airport and airline employees. However, representatives from one airline cautioned that the extent of any benefits would depend upon the cost of the air-rail connection and how such a connection was funded. Air-rail connections also have the potential to provide economic benefits for some transportation operators, such as an increased customer base. We found that some of the experts (16 of 40) participating in our survey and a majority of the stakeholders at six of our eight site visits highlighted the potential for intercity rail to access populations outside of the major metropolitan area served by a large or medium hub airport. Specifically, the experts and stakeholders noted that an air-rail connection may increase an airport’s or airline’s passenger base by attracting additional passengers from outside an airport’s local market, thus potentially generating additional revenue for airports and airlines in that metropolitan area. Some studies suggest that the existence of an air-rail connection affects a passenger’s choice of airport in areas where multiple options exist. In particular, a recent study of passengers using Amtrak to connect to General Mitchell International Airport in Milwaukee found that approximately one-third of passengers reported that they would have used one of the two Chicago area airports if the Amtrak-Mitchell Airport connection was not available. In addition, Amtrak service can also complement existing rail connections made by commuter rail, offering additional frequencies between points served by the commuter trains. However, where transit already offers a connection between a city center and airport, stakeholders at two of our eight site visits noted that an intercity passenger rail connection to the airport may potentially compete with transit service in the same area, thus limiting any increase in airport or airline customers and benefits from enhanced connectivity. In addition, air-rail connectivity could allow for the substitution of rail service for short-haul flights, freeing up capacity for long-haul flights and reducing airport and airspace congestion, though the importance of this benefit varies depending on the airport and the rail service’s operating characteristics. Specifically, nearly half of the experts (19 of 41) in our survey and stakeholders at three of our eight site visits noted that the potential replacement of short-haul flights by rail was a “very important” potential benefit of air-rail connectivity. Our prior work has found that intercity passenger rail, particularly high-speed rail, could serve as a substitute for air service for distances of up to 500 miles. Our previous work on intercity passenger rail has found that for rail transportation to capture the market share necessary to reduce air travel congestion, the distance between cities must be short enough to make rail travel times competitive with air travel times (at comparable costs and levels of comfort). In practice this has been observed to a great extent in the Northeast Corridor, where a number of major urban areas are located within close proximity and where there are significant constraints on the capacity within the air transportation system. For example, Amtrak’s share of the air-rail market for trips between Washington, D.C., and New York City has increased from 37 percent to 75 percent since the introduction of the higher speed Acela Express service in 2000. However, studies of air-rail connections in other countries suggest that the complete abandonment of air service in response to the introduction of rail service serving the same markets is rare. Furthermore, this benefit may be limited given that most airports in the United States are not currently capacity-constrained, though we have previously reported that FAA projects that a number of airports will be significantly capacity-constrained and thus congested within the next 15 years. For example, officials from Chicago O’Hare International Airport stated that because their airport is not capacity-constrained, the benefits from a direct connection with Amtrak would be limited. Amtrak officials noted that they are exploring options to connect to Chicago O’Hare International Airport, but noted that it was premature to speculate on the benefits of such a connection, particularly given Amtrak’s ongoing efforts to upgrade track speeds to major cities from Chicago. Over one-third of the experts participating in our survey rated environmental benefits, including reduced carbon emissions (17 of 41), and reduced energy use (15 of 40), as “very important” benefits of air-rail connectivity. For the European Commission, enhancing air-rail connectivity has been embraced as part of its strategy to reduce greenhouse gases, including carbon emissions, by 60 percent by 2050 while improving mobility. However, academic studies vary on the extent to which environmental benefits can be achieved from increased air-rail connectivity. For example, energy savings from high-speed rail connectivity may depend, in part, on the extent that passengers use rail to connect to the airport rather than other automotive transportation. Studies have also suggested that the substitution of long-distance flights for short-haul flights that have been replaced by rail service could potentially increase carbon emissions. Expanding the current intercity passenger rail network and connecting it to airports would be expensive. However, the costs of facilitating connections between intercity passenger rail stations and airports could vary significantly, depending in part on the complexity and scope of the project. (See table 2.) Air-rail connectivity efforts may be as simple as providing shuttle bus service between the Amtrak station and the airport terminal or as complex as relocating the intercity passenger rail station closer to the airport and integrating it into a multimodal transportation center. For example, BWI Airport operates a free passenger shuttle between the nearby Amtrak station and the airport terminal, at a cost of $2 million per year. In addition to the shuttle service, the Maryland Transit Administration has used $9 million from the HSIPR grant program to make BWI Airport Amtrak station improvements, including planning for track and rail station upgrades. In contrast, the development of the Miami Intermodal Center—which includes construction of a rail station collocating Amtrak, commuter rail, and heavy rail transit access at Miami International Airport, a rental car facility, and an automated people mover—is estimated to cost approximately $2 billion. Depending upon the scope of new infrastructure, project costs may include constructing stations, structures, signal systems, power systems, and maintenance facilities; relocating utilities; and obtaining rights-of-way, among other things. In addition to infrastructure costs, on-going operation and maintenance costs can be high for states and local transportation agencies. For example, airport officials estimate that the automated people mover system that connects Newark Liberty International Airport and the nearby Amtrak station costs $26 million per year to operate and maintain. Furthermore, PRIIA requires that operating and capital costs be allocated among the states and Amtrak in connection with the operation of certain Amtrak routes. Absorbing such costs could be challenging for states and localities as they continue to face near-term and long-term fiscal challenges resulting from increasing gaps between revenue and expenditures. In addition to the direct financial costs of constructing, operating, and maintaining air-rail connections, economic costs may arise due to impacts on other transportation modes. For example, representatives from the Association of American Railroads noted that there is limited additional capacity on the freight rail lines shared between Amtrak and the freight railroads. Accordingly, these representatives stated that any additional intercity passenger traffic initiated to enhance air-rail connectivity on existing freight rail lines could increase the cost and reduce the timeliness of freight shipped on these lines. In such an event, Amtrak and the freight railroads may have to revisit agreements over the usage of the freight rail lines, which can be a lengthy and costly process for all stakeholders. Alternatively, Amtrak or other intercity passenger rail service operators may need to acquire additional right-of-way and construct additional tracks to accommodate increased connectivity between airports and intercity passenger rail, which, as discussed previously, could increase the cost of providing air-rail connectivity. Similarly, representatives from two of the four airlines we interviewed stated that developing intercity passenger rail service that provides an alternative to air travel could affect their profitability. As with many large capital projects, committing financial resources for air- rail projects may also impose opportunity costs as a result of delaying or deferring other projects or initiatives. Specifically, the financial cost of air- rail connectivity projects could affect the ability of governmental entities to pursue other types of transportation projects, particularly in the current fiscal environment. For example, one airline representative we interviewed noted that air travel is in direct competition for resources with other modes of transportation and suggested that any federal funds provided to enhance air-rail connectivity could come at the expense of funding for other programs, including the Next Generation Air Transportation System (NextGen) air traffic control modernization initiative. Given the high potential costs of air-rail connections, it is likely that only a limited number of places could demonstrate potential benefits high enough to justify improved air-rail connectivity investments. For example, if air passengers could access a nationwide rail network directly at an airport, some passengers might travel to that airport from other cities by train rather than on highways or short-haul flights, which might reduce highway or airport and aviation congestion. However, the demand for such service is likely to be low except in a few highly congested travel corridors, such as the Northeast Corridor, where the distances are short enough to make rail travel times competitive with air travel times. At airports that do not have substantial highway or airport congestion, such benefits would not be realized. There might still be some emission and energy benefits, but since the number of travelers likely to use these facilities at such airports is limited, these benefits will be limited as well. Amtrak officials noted that costs and benefits are relative to the scope and complexity of each air-rail connectivity option. For example, they noted that providing an air-rail connection that serves both intercity and local commuter rail, such as those provided by many of Amtrak’s airport- adjacent stations, can provide benefits that might not be justified if the station was served only by intercity rail. Furthermore, Amtrak officials noted that exploring air-rail integration early during the planning and development of an airport can help reduce the overall cost of developing air-rail connectivity, while still achieving substantial mobility benefits. Based on input from our expert survey; discussions with stakeholders, including state departments of transportation, local transportation planning organizations, airports, and airlines; and our review of academic literature, we identified five categories of factors that can greatly affect air- rail connectivity, including the degree of leadership and collaboration among stakeholders, resource availability, the extent of passenger demand for air-rail connectivity, the ease of the air-rail connection, and the passenger rail service operating characteristics. (See table 3.) The degree of leadership and the extent of stakeholder collaboration across air-rail projects can affect project development. Specifically, almost half of the experts (18 of 40) rated the lack of leadership as greatly hindering air-rail connections. Stakeholders we interviewed during our site visits told us that when there is an absence of leadership, stakeholders are unlikely to assume roles outside of their typical responsibilities and interests, a limitation that makes project development more difficult. Conversely, leadership that helps build bridges across stakeholder groups can help develop a shared vision and foster collaboration, thereby facilitating project development. However, we found there is limited federal leadership for air-rail projects, and no modal administration has a primary responsibility to oversee air- rail projects, as responsibilities for transportation projects are segmented by mode. Furthermore, according to an academic study and stakeholders we interviewed, the United States is lacking a national policy framework and vision to guide investment in the needed infrastructure to develop air- rail connections. For example, FRA’s High-Speed Rail Strategic Plan does not address connectivity between airports and intercity passenger rail. In addition, while DOT’s 2012-2016 strategic plan broadly discusses connectivity between airports and intercity passenger rail, DOT has not established any specific goals for air-rail connectivity.with our previous work that concluded that the absence of specific This is consistent national goals to develop intermodal capabilities at airports is a significant barrier to developing air-rail connections. For example, half of the experts (20 of 40) rated integration of air-rail connections into an overall, multi-modal transportation plan or strategy as an approach that would greatly facilitate air-rail connectivity in the United States. In addition, officials we interviewed and over half of the experts (23 of 39) said that communication, collaboration, and consensus among stakeholders such as airlines; rail operators; airport management; and local, state, and federal government officials could greatly facilitate air-rail connectivity. Resource availability, including funding, right-of-way, and access to existing infrastructure can greatly affect the development of air-rail connectivity. As previously noted, the costs of linking existing intercity passenger rail infrastructure and airports can be significant, depending in part on the complexity and scope of the project. Slightly over half of the experts (21 of 40) rated the financial cost of a project as greatly hindering project development, while nearly three-fourths (29 of 40) rated availability of funding as greatly facilitating project development. In addition, about two-fifths of the experts (16 of 39) rated the level of funding for intercity passenger rail as a very important factor contributing to differences in air-rail connectivity development and use between the United States and Europe. We found a number of barriers exist to securing funding for air-rail connectivity projects. For example, transportation officials and stakeholders we interviewed told us that the limitations on use of funds from federal grants and airport revenue collected from passenger facility charges are significant barriers. Furthermore, as noted previously in this report, the federal government does not provide funding dedicated to the development or operation of air-rail connections. If the trend of decreasing federal transportation funding over the past three decades continues, air-rail project sponsors may need to increasingly rely on state funds for air-rail connection projects. In addition, our prior work also identified challenges of funding intercity passenger rail projects. The federal government has recently begun to pursue investment in high- speed passenger rail through the FRA’s HSIPR grant program, and to date has obligated about $9.9 billion for 150 high-speed and intercity passenger rail projects from funds appropriated in fiscal years 2009 and 2010—with more than one-third of the amount obligated designated for the high-speed rail project in California. While this funding will allow many projects to begin construction, it is not sufficient to complete them. Furthermore, Congress has not appropriated any funding for the HSIPR program since fiscal year 2010. The availability of other resources can also greatly affect the development of air-rail connectivity projects. Three-fifths of the experts (24 of 40) rated the lack of availability of land or physical space for direct air-rail projects, including the lack of existing intercity passenger rail infrastructure (e.g., tracks and stations) and rights of way, as factors that greatly influence the development of air-rail connections. Passenger demand for air-rail connectivity has a significant role in developing and using such connections. Approximately half of the experts rated passenger volume and demand as a factor that can either greatly facilitate (if sufficient) (21 of 39) or hinder (if lacking) (20 of 40) air-rail connectivity projects. However, as mentioned previously in this report, there is limited data on the demand for intercity passenger rail. Furthermore, it is often difficult to estimate ridership demand. As we have previously reported, limited data and information, especially early in a project before specific service characteristics are known, make developing reliable ridership demand forecasts difficult. Research on ridership forecasts for rail infrastructure projects around the world have shown that ridership forecasts are often overestimated. Furthermore, there are no industry standard or established criteria for developing or evaluating intercity passenger and high-speed rail ridership forecasts. Over three-quarters of the experts (31 of 40) rated close proximity between the airport terminals and rail stations as greatly facilitating air-rail connectivity. Connections that are easy to use and provide direct connection between the airport terminal and the rail station can greatly affect the development of air-rail connectivity. Officials we interviewed noted that air-rail connections should be designed to meet the needs of airport and intercity passenger users. Accordingly, they underscored that connections should be designed to make the experience as easy and seamless as possible for the traveler. Similarly, over half of the experts (21 of 39) rated the availability of information, including signage, about a connection as greatly facilitating air-rail connectivity. We found 20 of the 60 major airports in the contiguous United States included information about Amtrak on their respective websites, and 14 of the 20 airports provided specific instructions on how passengers could connect to or from Amtrak. Nearly two-thirds of the experts (26 of 40) and many of the stakeholders at our site visits cited frequency and reliability of rail service as factors that greatly influence air-rail connectivity. Stakeholders we interviewed noted that for the air-rail connection to be viable, the passenger rail operator needs to provide frequent service to multiple locations beyond the airport. The frequency of Amtrak service is highly variable across the nation. Similarly, a number of stakeholders we spoke with noted that the reliability of Amtrak service, specifically its on-time performance, affects the use of intercity passenger rail for travel, both between cities and to and from the airport. In addition, over half of the experts (25 of 40) rated the availability of high-speed intercity passenger rail service to connect to an airport as greatly facilitating an air-rail connectivity project. However, representatives from three of the four airlines we interviewed viewed high- speed rail as a potential competitor in diverting passengers away from, as opposed to feeding into, the airport. Experts participating in our survey suggested five key areas where implementing strategies could help improve air-rail connectivity: vision, coordinated planning, funding, infrastructure, and awareness and marketing of connections. We asked these experts to identify potential strategies, and then rate these strategies in terms of both their importance and their feasibility. Some of the strategies that experts rated as more important were also seen as less feasible. (See table 4.) In discussing these strategies with other stakeholders and reviewing academic studies, we found that a number of strategies were inter- related. For example, some of the strategies that experts suggested to improve connectivity, such as increasing connections with other transportation modes, could be related to the implementation of other strategies, such as providing additional funding for air-rail connections. Experts stated additional study of the demand for air-rail connectivity, as well as lessons learned in other countries, could help Amtrak and DOT clarify needs and develop priorities within their existing goals related to enhancing connectivity. Connectivity across modes has been emphasized broadly by DOT and Amtrak, though there has been limited emphasis placed by either for connectivity between airports and intercity passenger rail. For example, in its 2012-2016 strategic plan, DOT’s goal of encouraging livable communities emphasizes connectivity across modes, and identifies connectivity between intercity passenger rail and transit and continued investment in the intercity passenger rail network as means to achieve that goal. DOT’s strategic plan also notes that DOT will continue to work with Amtrak, states, freight railroads, airports, and other key stakeholders to ensure intercity passenger rail is effectively integrated into the national transportation system, though the department has not established any specific goals for air-rail connectivity. Similarly, DOT’s most recent update to its national rail plan, published in September 2010, encourages the integration of policies and investments across modes, including air transportation, to provide convenient options for accessing the passenger rail network, but does not establish specific goals or timelines for increasing air-rail connectivity. Amtrak’s strategic plan has set a goal of connecting to three additional airports in the Northeast Corridor by 2015 as part of its efforts to increase intercity passenger rail connectivity with other travel modes in key markets, but Amtrak officials we spoke with stated that they do not believe Amtrak will achieve this goal because of limited available funding for intercity passenger rail. Should DOT, Amtrak, or Congress choose to develop a more comprehensive approach to air-rail connectivity, experts we surveyed identified further study of passenger preferences and demand as one of the most important and most feasible steps policymakers could take to improve air-rail connections. For example, half of the experts (20 of 40) rated additional study of ridership preferences across all modes as very important to informing the federal government’s air-rail strategy. As previously noted, limited data on passenger preferences and demand for air-rail connectivity exists. For example, one expert emphasized that because passenger demand for air-rail connectivity varies across the country, additional study of passenger preferences at the local level could help identify approaches tailored to the specific needs of the area, noting that there is no “one size fits all” approach to air-rail connectivity. Furthermore, 24 of 40 experts rated studying lessons learned and policy responses from other countries as “very important” toward improving understanding of air-rail connectivity issues, though as previously discussed, air-rail connectivity approaches vary widely outside the United States. Experts in our survey and stakeholders at seven of our eight site visits highlighted the importance of coordinated transportation planning between airports and intercity passenger rail, which could help stakeholders develop multimodal solutions and facilitate problem solving. Amtrak officials noted that if airports, Amtrak, and other transportation stakeholders begin to plan for integration early, the costs of connecting air and rail transportation become part of a larger intermodal strategy and can provide benefits. Accordingly, both Amtrak officials and experts highlighted the importance of planning an intercity passenger rail connection as part of an overall ground access strategy. For example, 17 of 40 experts rated planning air-rail connections to the airport during the initial establishment of intercity passenger rail service as very important. Amtrak officials noted that planning for intercity rail connections at airports during the initial development of the airport can help minimize the incremental cost of making a connection while providing substantial benefits from air-rail connectivity. However, in many locations, particularly in the Northeast Corridor, the rail network was developed decades before the airport. In addition, such an approach may not be feasible, as federal funding and oversight is segmented by mode, a segmentation that can lead to competition, rather than collaboration for funding. Furthermore, collaboration across stakeholder groups can be a time-intensive process and may not necessarily change the willingness of stakeholders to collaborate. Experts we surveyed and stakeholders at six of our eight site visits we interviewed highlighted the importance of securing funding for air-rail connectivity projects. Because of the often substantial cost of the physical infrastructure to support air-rail connections, stakeholders at four of our eight site visits noted that the federal government may have to provide most of the funding to make development possible. Over half of the experts in our survey (22 of 41) as well as other stakeholders at five of our eight site visits suggested that dedicated funding for air-rail connections could help increase the number of connections between airports and intercity passenger rail. Alternatively, nearly half (17 of 41) of the experts in our survey suggested that increased funding for intercity passenger rail is a very important strategy related to increasing Amtrak’s ability to connect to airports. However, the current fiscal environment presents challenges to increasing federal funding for discretionary programs though some existing grant and loan programs—such as the HSIPR, Transportation Investment Generating Economic Recovery (TIGER), and Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) programs—have some flexibility to fund air-rail connections if such a connection is a state or local priority. As previously noted, additional funding for air-rail connections could require tradeoffs with other transportation projects. With limited existing funds available for air- rail projects, two stakeholders we interviewed suggested that the federal government should focus on a few air-rail projects of national significance, rather than a number of smaller projects throughout the entire nation. Similarly, one stakeholder suggested that the federal government provide money for a few projects to demonstrate the potential benefits of air-rail connectivity, before moving forward on a nationwide program. Stakeholders at four of our eight site visits also suggested that providing additional flexibility in permitted expenditures among existing federal programs could help improve airport connectivity via rail. In particular, they suggested changes to the airport passenger facility charge authority as well as to the AIP grant program. Among the funding strategies evaluated in our expert survey, experts generally rated the strategy of relaxing the restrictions on passenger facility charges among the most feasible strategies. Airport operators may currently use funds collected from air passengers through passenger facility charges to fund rail access at airports, if the project is owned by the airport, located on airport property, and used exclusively by airport passengers and employees. However, easing these restrictions on use of passenger facility charges faces obstacles. Specifically, use of passenger facility charge revenues is limited by law to airport-related projects. Such a change would require legislative action by the Congress, and changes to the passenger facility charges program have been opposed by the airline industry. For example, representatives from one airline we spoke with stated that the airline was fundamentally opposed to using funds collected through passenger facility charges to pay for airport and intercity passenger rail connections because, in their view, the federal government should not tax airline passengers to fund other transportation modes. Stakeholders at three of the eight airports we spoke with suggested that Congress could allow additional flexibility in the use of funds from transportation grant programs, including the AIP program, which is funded through a variety of aviation excise taxes. While AIP grants may currently be used to fund projects promoting air-rail connectivity on the airport property, like the passenger facility charges, program funds may only be used to fund airport-related projects. Again, however, airlines we spoke with opposed easing existing limitations on the use of AIP grants for airport projects that may benefit non-aviation passengers, and any change to the AIP program to broaden the use of these grants would require congressional action. Furthermore, as previously noted, the commitment of financial resources for air-rail projects may also impose opportunity costs as a result of canceling or delaying other projects or initiatives that could be funded by these federal programs. Experts in our survey suggested that increasing the size and operation of the existing intercity passenger rail network could help encourage the development and use of intercity passenger rail to access airports. Specifically, 23 of 39 experts cited the size and the extent of the intercity passenger rail network as a very important factor resulting in differences between air-rail connections in the United States and Europe. Accordingly, over two-thirds of the experts in our survey (27 of 40) suggested that developing rail connections to transit and other forms of public transportation could help encourage the use of rail to the airport, and over half of the experts (22 of 40) stated that additional connections to city centers and urban attractions are very important strategies to consider. DOT has taken some steps to increase the intercity passenger rail network, most notably through the HSIPR grant program, which, FRA officials noted, placed emphasis on using funds available for intercity passenger rail infrastructure to establish and enhance connections between major metropolitan areas. Additionally, stakeholders we interviewed at six of our eight sites noted that increasing the frequency of intercity passenger service in existing corridors could encourage greater use of rail to connect to the airport. For example, one stakeholder noted that passengers are much less likely to use rail if departure times are hours apart, as opposed to minutes. However, even in corridors that have existing intercity passenger rail service, increasing the frequency of service can be challenging due to both the cost and, as previously discussed, the shared usage of the infrastructure with the freight railroads. Furthermore, as discussed previously, stakeholders we spoke with stated that there is limited demand for public transportation options to connect to the airport, and thus it is unclear whether increasing the frequency of service will increase passenger use of intercity rail service to connect to airports. While building the infrastructure to support new air-rail connections can be expensive and time-intensive, our work identified a few low cost options that could help increase passenger awareness, and thus usage, of existing air-rail connections. For example, Amtrak station operators and airport officials could take steps to increase awareness of existing connections between the two modes, using additional or more prominently placed signage and information kiosks. For example, at the BWI Airport Amtrak Station, signs and information direct customers exiting the station platform to the bus shuttle service connecting the two modes. (See fig. 3.) Similarly, in Burbank, officials stated that the use of signage highlighting the walking path between the Burbank rail station and the airport has helped, in part, to make the connection between the two modes easier for passengers to use. These officials also noted that even with signage, an air-rail connection often required frequent and reliable service from an intercity passenger rail operator. As another option, Amtrak could highlight the connections to the airport from each station on its website, thus providing an additional source of information to travelers beyond what is available at the airport or rail station. We provided a draft of this product to DOT and Amtrak for comment. DOT and Amtrak provided technical comments on the draft, which we incorporated as appropriate. DOT and Amtrak did not have any comments on the e-supplement. We are sending copies of this report to the Secretary of Transportation, the President of Amtrak, and the appropriate congressional committees. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you 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 V. This report addressed the following objectives: (1) the nature and scope of existing air-rail connectivity in the United States; (2) the benefits and costs of developing air-rail connectivity; (3) the factors that facilitate and hinder the development and use of air-rail connectivity; and (4) potential strategies, including lessons learned from other countries, that may help inform deliberations regarding air-rail connectivity policy. This report focused on air-rail connections between an airport terminal and an intercity passenger rail station. In other contexts, an air-rail connection may refer to a connection between an airport terminal and an intracity rail station that serves other forms of local rail, such as commuter rail or a subway system. To address our objectives, we obtained and analyzed information from a variety of sources. We reviewed and synthesized information from our body of work and relevant academic literature on intermodal transportation, air-rail connectivity, and air-rail code share agreements in the United States and internationally. We reviewed citations identified through a search of databases containing peer-reviewed articles, government reports, and “gray literature,” including Transport Research International Documentation, Social SciSearch, and WorldCat. Publications were limited to the years 2004 through 2012. After an initial review of citations, 48 articles were selected for further review. To collect information on the articles, we developed a data collection instrument to gather information on the articles’ scope and purpose, methods, findings, and their limitations, and additional areas for follow-up, including a review of the bibliography to determine the completeness of our literature search. To apply this data collection instrument, one analyst reviewed each article and recorded information in the data collection instrument. A second analyst then reviewed each completed data collection instrument to verify the accuracy of the information recorded. We summarized the findings and limitations of the articles based on the completed data collection instruments, as well as areas for additional research identified in the articles. In addition, we also reviewed federal laws related to air and intercity passenger transportation and strategic plans from Amtrak and the Department of Transportation (DOT). We interviewed officials from DOT and Amtrak, transportation experts, and representatives from U.S. airlines and industry associations to obtain their perspectives on air-rail connectivity issues. We reviewed completed, ongoing, and future air-rail connectivity efforts at eight airports in the United States, and interviewed a variety of stakeholders at each site, including airport authorities, state and local transportation agencies, local transportation planning organizations, and air and rail industry associations. (See table 5.) These airports were selected to include airports that have recently planned, constructed, or completed an air-rail project and are dispersed in various regions of the country. Our findings at these sites were selected as part of a judgmental, non-probability sample of air-rail connectivity efforts at airports, and cannot be generalized to all airports. We also analyzed Amtrak’s distance and connectivity to the 28 large and 32 medium hub airports located in the contiguous United States based on the 2011 Federal Aviation Administration’s Air Carrier Activity Information System database. We limited our analysis to these 60 airports because they accounted for approximately 86 percent of U.S. passenger enplanements for calendar year 2011. We determined the linear distance for each of the 60 airports and the nearest Amtrak station based on information from the Bureau of Transportation Statistics and the National Transportation Atlas Database for 2012. Based on the use of both as widely accepted federal statistical data sources, we determined these data to be generally reliable for our purpose, which was to provide context on existing air-rail connectivity. Linear distance is the distance measured between two points using their latitude and longitude. This may understate the distance a passenger may have to travel because it does not account for actual travel routes (e.g., a route that crosses a bridge or avoids buildings or other obstacles along the passenger’s route). The actual distance that a passenger may travel also depends on the selected transportation mode, local roads, or route selected. We used the linear distance calculations to determine the number of airports with an Amtrak station within 5, 10, 20, and over 20 miles. (See app. IV.) To determine the modal connectivity between airport and Amtrak stations, we systematically reviewed the airport websites’ ground transportation page and Amtrak System Timetable for Winter/Spring 2013 for information on how passengers can access Amtrak to and from the airports. To obtain additional insight on issues related to air-rail connectivity, we collaborated with the National Academy of Sciences to identify 25 experts from the aviation and rail industries, Amtrak, state and local governments, academia, and the private sector. These experts were selected based on their knowledge of one or more of the following topic areas: intermodalism, airlines and the air travel industry, airport operations, the rail industry, and passenger travel. We identified 17 additional experts in these fields through a review of academic literature, our previous work, and interviews with stakeholders. (See app. II for a list of these experts.) We conducted a web-based survey in which we asked these 42 experts for their views on the benefits of air-rail connectivity, factors that facilitate and hinder the development and use of air-rail connectivity, differences between air-rail connectivity in the United States and Europe, and strategies that could improve air-rail connectivity. We employed a modified version of the Delphi method to organize and gather these experts’ opinions. Experts were sent an email invitation to complete the survey on a GAO web server using a unique username and password. The survey was conducted in two stages. The first stage of the survey— which ran from January 16, 2013, to February 19, 2013—asked the experts to respond to five open-ended questions about various aspects of air-rail connectivity based on our study objectives. To encourage participation by our experts, we stated that responses would not be individually identifiable and that results would generally be provided in summary form. We received a 95 percent (40 of 42) response rate for the first stage of the survey. After the experts completed the open-ended questions, we performed a content analysis of the responses to identify the most important issues raised by our experts. Two members of our team independently categorized experts’ responses to each of the questions. Any disagreements were discussed until consensus was reached. We analyzed the responses provided by the experts and developed close-ended questions for the second stage of the survey where we asked each expert to evaluate the ideas and other information that came from the first part of the survey. Because this was not a sample survey, it had no sampling errors. However, the practical difficulties of conducting any survey can introduce non-sampling errors, such as difficulties interpreting a particular question, which can introduce unwanted variability into the survey results. We took steps to minimize non-sampling errors by pre-testing the questionnaire with 5 experts. We conducted pretests to help ensure that the questions were clear and unbiased, and that the questionnaire did not place an undue burden on respondents. An independent reviewer within GAO also reviewed a draft of the questionnaire prior to its administration. We made appropriate revisions to the content and format of the second survey questionnaire based on the pretests and independent review. The second stage of the survey was administered on the Internet from March 25, 2013, to May 15, 2013. To increase the response rate, we followed up with emails and personal phone calls to the experts to encourage participation in our survey. We received responses from 41 of 42 experts, resulting in a 98 percent response rate. The information and perspectives that we obtained from the expert survey may not be generalized to all experts that have an interest or knowledge of air-rail connectivity issues. The full survey and responses are available at GAO-13-692SP. We provided a draft of this report to Matthew A. Coogan, director of the New England Transportation Institute for review and comment, based on his expertise on air-rail connectivity issues similar to those in our report. Mr. Coogan was selected based on his extensive past and on-going research on similar topics related to air-rail connectivity issues in the United States. He provided technical comments, which we incorporated as appropriate. We conducted this performance audit from August 2012 to August 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. Affiliation Resource Systems Group, Inc. LeighFisher, Inc. Appendix III: Examples of Potential Federal Financing and Funding Sources for Air-Rail Projects Description Provides grants to airports for planning and developing projects through the Federal Aviation Administration (FAA). The program is funded, in part, by aviation user excise taxes, which are deposited into the Airport and Airway Trust Fund. In terms of promoting air-rail connections, these funds may be used for projects that are on airport property or right-of-way owned or controlled by the airport, airport owned, and exclusively serves airport traffic. In fiscal year 2013, this program was funded at $3.1 billion. For fiscal year 2011, $400 million in unobligated funds were rescinded. Authorizes commercial service airports to charge airline passengers a boarding charge of up to $4.50 to be collected by the airlines, after obtaining FAA approval. The fees are used by the airports to fund FAA approved projects that are on airport property, airport-owned, and exclusively serve airport traffic. These projects must enhance the safety, security, or capacity of air travel; reduce the impact of aviation noise; or increase air carrier competition. In calendar year 2012, $2.8 billion in fees were collected under this program. Example of use for air-rail projects GAO found no example of its use for air-rail projects. Provides direct loans and loan guarantees to railroads, state and local governments and Amtrak, among other entities, to finance the development of railroad infrastructure, including the development of new intermodal or railroad facilities. The program, administered by FRA, is authorized to provide up to $35 billion in loans or loan guarantees for eligible projects. GAO found no example of its use for air-rail projects. Provides discretionary grants through DOT, awarded on a competitive basis, to fund merit-based transportation projects expected to have a significant impact on the nation, a metropolitan area, or a region. Each project is multi-modal, multi-jurisdictional, or otherwise challenging to fund through existing programs. Eligible projects include capital investments in roads, highways, bridges, or transit; passenger and freight rail; and port infrastructure; as well as bicycle and pedestrian- related improvements. In fiscal year 2013, this program was funded at $474 million. GAO found no example of its use for air-rail projects. Description Provides federal credit assistance for surface transportation projects jointly through the Federal Highway Administration, Federal Transit Administration, and FRA. Project sponsors may include public, private, state, or local entities. Projects eligible for credit assistance include intercity passenger rail facilities and vehicles, such as those owned by Amtrak, as well as projects otherwise eligible for federal assistance through existing surface transportation programs. In fiscal year 2013, this program was funded at $750 million. Example of use for air-rail projects Miami Intermodal Center at Miami International Airport In fiscal year 2013, approximately $3.4 billion was made available for obligation for the AIP program. On May 1, 2013, the Reducing Flight Delays Act of 2013 was enacted. It authorized the Secretary of Transportation to transfer an amount, not to exceed $253 million, from the AIP program to the FAA operations account that the Secretary of Transportation determines to be necessary to prevent reduced operations and staffing of the FAA during fiscal year 2013. Pub. L. No. 113-9, 127 Stat. 443. 23 U.S.C. §§ 601-609. More than 5 miles to 10 miles (21 airports) In addition to the contact listed above, Teresa Spisak (Assistant Director), Matt Voit, Rosa Leung, Paul Aussendorf, Leia Dickerson, Patrick Dudley, Lorraine Ettaro, Jessica Evans, Kathleen Gilhooly, Delwen Jones, Richard Jorgenson, Jill Lacey, John Mingus, and Josh Ormond made major contributions to this product. | Increasing passenger travel has led to growing congestion in the nation's air transportation system, and projections suggest that this trend is likely to continue. The integration of air and intercity passenger rail service, which is provided in the United States by Amtrak, has been suggested by some transportation experts as a strategy to increase mobility and reduce congestion in the United States. The FAA Modernization and Reform Act of 2012 mandated that GAO review issues related to air-rail connectivity. This report discusses (1) the nature and scope of air-rail connectivity, (2) the benefits and costs of air-rail connectivity, (3) factors affecting the development and use of air-rail connectivity, and (4) potential strategies to improve air-rail connectivity. GAO reviewed laws, strategic plans, and academic studies. GAO analyzed data to determine distances between Amtrak stations and large and medium hub airports and interviewed officials from DOT, and representatives from Amtrak, the airlines, and aviation and rail industry associations. GAO interviewed stakeholders at eight large and medium hub airports, which were selected based on geographic location and extent of connectivity with Amtrak. In addition, GAO surveyed experts from the aviation industry, rail industry, state and local governments, academia and the private sector about air-rail connectivity issues. The survey and results can be found at GAO-13-692SP . GAO is not making recommendations in this report. DOT and Amtrak provided technical comments, which were incorporated as appropriate. Most major U.S. airports have some degree of physical proximity to intercity passenger rail stations, though only 2 airports are currently collocated with intercity rail stations. Specifically, 42 of the nation's 60 large and medium hub airports are located within 10 miles of Amtrak stations; 21 of the 42 airports are within 5 miles of Amtrak stations. At the 2 collocated airports, passengers can access Amtrak either via an automated people mover (Newark Liberty International Airport) or by walking (Bob Hope Burbank Airport). At some airports, such as Baltimore/Washington International Thurgood Marshall Airport, passengers can take a direct shuttle between the airport and the nearby Amtrak station, while at other airports, connections to Amtrak can be made through other modes of transportation. Studies and data, while limited, suggest that relatively few passengers in the United States use intercity rail to travel to and from the airport or through more integrated travel such as code-sharing agreements, whereby airlines sell tickets for Amtrak's service. The only existing air-rail code-sharing agreement in the United States is at Newark Airport. Amtrak and states are considering projects to expand intercity rail connectivity with airports, including as part of the construction of high-speed rail in California. Air-rail connectivity may provide a range of mobility, economic, and environmental benefits, though the financial costs of building these connections could be substantial. Specifically, based on discussions with industry stakeholders, input from surveyed experts, and a review of academic literature, GAO found a general consensus that air-rail connectivity can provide a range of mobility benefits for travelers, though less agreement existed on the importance and extent of economic and environmental benefits. However, achieving these benefits could require significant trade-offs, because the costs of expanding the existing intercity passenger rail network and constructing viable connections can be significant. Given these costs, based on GAO's work, there are currently limited locations where benefits are high enough to justify funding to improve air-rail connectivity. Air-rail connectivity remains limited in the United States, according to experts, as a result of institutional and financial factors, among other things. In particular, the limited nature of the existing intercity passenger rail network, including the frequency of service and connectivity to other transportation modes, remains an obstacle to developing and using air-rail connections. Securing funding for air-rail projects also remains a barrier. While funds from some federal grant programs can be used to help facilitate air-rail connections, there is no single funding source for air-rail projects. There are strategies to improve air-rail connectivity, but adopting them involves trade-offs. Experts generally focused on, among other things, leadership, funding, and infrastructure improvements, though the effectiveness of these strategies may depend on a project's local characteristics. There has been little emphasis on air-rail connectivity by either the Department of Transportation (DOT) or Amtrak. Furthermore, experts noted that some of the strategies could be particularly challenging or costly to implement, such as in locations where the rail network was developed decades before airports. For example, increasing intercity passenger rail's frequency could improve air-rail connectivity but could also be expensive. |
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Amtrak was established by the Rail Passenger Service Act of 1970, after the nation’s railroads found passenger service unprofitable. It operates a 22,000-mile passenger rail system over 43 routes. (See fig. 1.) Amtrak owns 650 miles of track, primarily in the Northeast Corridor, which runs between Boston, Massachusetts, and Washington, D.C. It operates the remainder of its routes over tracks owned by freight railroads and pays these railroads for this access. From fiscal year 1971 through 2002, the federal government provided Amtrak with about $25 billion in federal operating and capital assistance, or an average of $807 million annually (in nominal dollars). Amtrak’s financial condition has been deteriorating and, in 2001, it experienced its largest net loss (revenues less expenses) ever of about $1 billion. In fiscal year 2001, only one of Amtrak’s 43 routes made enough revenue to cover its operating costs—the Metroliner/Acela Express service on the Northeast Corridor ($51 million). The other 42 routes had operating losses ranging from about $600,000 on the Vermonter (service between Washington, D.C., and Vermont) to $71.5 million on the Northeast Direct (generally service between Virginia and Massachusetts). (See app. I for the financial performance of all Amtrak routes.) Amtrak has changed its general approach to route and service actions over time, from attempting to improve its financial performance by cutting service to attempting to achieve the same result by increasing service. For example, in 1995, Amtrak eliminated 9 routes, truncated 3 routes, and changed the frequency of service on 17 routes. These actions were intended to cut costs by about $200 million while retaining 90 percent of revenues and 85 percent of passengers. Amtrak said the presumption was that passengers would use other trains to meet their travel needs, allowing it to retain most of its ridership and revenue. Although initially the route cutting actions had some financial success, subsequent financial results were below expectations because (1) management did not cut costs as planned, (2) less-than-daily service caused less efficient equipment usage and other unforeseen problems, and (3) passengers were no longer adjusting their travel plans to fit Amtrak’s new less-than-daily schedules. In 1998, Amtrak switched its strategy to increase revenues by expanding service. It used a market-based approach to identify the market for intercity passenger rail service. To do so, it used market research and computer-based models to determine the potential ridership, revenue, and costs of proposed route and service actions. According to Amtrak, this approach constituted a significant improvement in its route evaluation process because it represented the first comprehensive analysis of Amtrak’s route system, and the first attempt to apply rigorous financial analyses and modeling techniques to the design of Amtrak’s national network. The Network Growth Strategy was the first product of the market-based network analysis project that Amtrak initiated in October 1998 to address route evaluation deficiencies. The intent of the market-based network analysis was to (1) develop the financial tools that Amtrak needed to perform reliable and objective analyses of route and service changes; (2) help Amtrak achieve operational self-sufficiency by December 2002 by identifying route and service changes that, if implemented expeditiously, would produce positive financial impacts before the statutory deadline; and (3) express Amtrak’s vision of how its national network could be enhanced and improved. In December 1999, Amtrak’s board of directors adopted the Network Growth Strategy as part of Amtrak’s strategic business plan. The strategy consisted of 15 planned route and service actions, the majority involving the expansion of service. (See app. III.) Amtrak predicated the growth strategy on the acquisition of significant new revenue from hauling mail and express cargo and estimated that it would result in $65.6 million in net revenue through fiscal year 2002. In February 2000, Amtrak announced to Congress that it was going to implement the 15 routes in the Network Growth Strategy. Amtrak has been unsuccessful in implementing its Network Growth Strategy. About 2 years after announcing the Network Growth Strategy, Amtrak has cancelled 9 of the 15 planned route actions without implementing them. Amtrak implemented three route actions, although it cancelled one of these in September 2001. Finally, Amtrak plans to proceed with 3 other route actions, although their implementation will be at least 1 or 2 years later than originally planned. (See table 1.) According to Amtrak, the capital funds for one of the projects in planning (Silver Service restructuring in Florida) were frozen on February 1, 2002, in a company-wide effort to reduce use of cash. (In all, Amtrak cancelled nine routes without implementing them. Some routes were cancelled for more than one reason.) Amtrak told us that it cancelled six of the Network Growth Strategy routes before they were implemented, in part, because it overestimated expected increases to mail and express revenue under the Network Growth Strategy. Amtrak estimated that this expected increase would improve Amtrak’s bottom line by $65.6 million through fiscal year 2002. Specifically, it estimated that mail and express revenues would exceed costs by $68.2 million, offsetting a loss of $2.6 million from expanded passenger operations. Most of the revenue increase was expected to come from new express business. This expanded mail and express traffic did not materialize and Amtrak’s revised plans have reduced expected Network Growth Strategy-associated mail and express revenue by about half—from $271 million to $139 million (a $132 million reduction). Amtrak said that there were several reasons why this overestimation occurred. The current president of Amtrak’s mail and express unit told us that Amtrak expected to substantially expand its route system to generate this revenue and to begin running longer trains mostly filled with express traffic. However, he said that at the time Amtrak made its mail and express revenue estimates, it gave little thought to whether such an expansion was feasible—that is, whether Amtrak could likely capture this business or whether freight railroads that own the tracks would agree to Amtrak’s expansion plans. According to Amtrak, it did not have a rigorous approach to estimating expected express business. Amtrak officials told us that, until recently, Amtrak estimated express revenue largely on the basis of an analysis of a database of commodities being shipped nationally. Amtrak estimated the portion of this business that it thought it could obtain. An Amtrak official said that it now focuses more on determining existing customers’ shipping needs, assessing these needs in light of current economic trends, and evaluating Amtrak’s ability to meet these needs given existing train capacity. Finally, Amtrak officials told us that express shippers were reluctant to enter into contracts for service that did not yet exist. Amtrak officials also told us that the company did not know route-by-route costs for its mail and express program when it announced its Network Growth Strategy. This is because Amtrak has never separately identified these costs. Rather, it has integrated these costs into the overall financial results of its intercity strategic business unit. Knowing these costs was important because Amtrak expected that the expansion of mail and express service would produce the revenue needed to make its route expansion profitable. Not until 2000 did Amtrak begin efforts to separately identify mail and express costs and develop separate mail and express financial information. According to Amtrak, in October 2001, it began producing separate profit and loss statements for its mail and express business. However, an Amtrak official said the corporation still has a long way to go in producing reliable mail and express financial information and in understanding the true cost of this business. Amtrak could not implement its Network Growth Strategy unless it reached agreement with freight railroads over funding for capital improvements (such as upgrading tracks and signals to improve safety and support higher-speed passenger operation) and access to freight railroads’ track. Quick agreement was necessary because Amtrak wanted to implement the new routes and services to help it reach operational self- sufficiency by December 2002. Amtrak encountered substantial difficulties in gaining freight railroad agreement to allow Amtrak to expand service over freight railroad tracks. This difficulty in reaching agreement contributed, in part, to Amtrak canceling six of its planned routes. Amtrak planned to operate the 15 Network Growth Strategy routes over freight railroad tracks, including the transportation of mail and express as authorized by law. However, Amtrak was largely unable to gain freight railroads’ agreement. Such agreement was critical to the implementation of Amtrak’s strategy. Freight railroads are required by law to allow Amtrak to operate over their tracks and to give Amtrak’s trains priority over their own. In addition, freight railroads are required to charge Amtrak the incremental cost—rather than the full cost—associated with the use of their tracks. These amounts are negotiated by Amtrak and the freight railroads. Federal law also gives Amtrak the authority to carry mail and offer express service. These mandates result in an ongoing tension between Amtrak and freight railroads for several reasons. One reason is that accommodating passenger trains affects freight railroads’ ability to serve their customers and earn a profit. Second, accidents involving passenger trains may create liability issues for freight railroads. Third, freight railroads believe that they are not fully compensated for providing this service. Finally, Amtrak’s express business may compete with freight railroads’ business and Amtrak may be able to offer lower rates than freight railroads, everything else being equal, because Amtrak only has to pay freight railroads the incremental, rather than the full cost, of operating on freight railroad tracks. According to Amtrak, for some proposed actions, such as increasing service to daily frequency, reaching agreement with freight railroads is not difficult because the freight railroads’ infrastructure can support additional trains and the host freight railroad may already be used to having Amtrak operate along certain routes. In other cases—such as where substantial capital improvements are needed or where service is to be initiated over tracks that are operating at or near capacity, reaching an agreement might be more difficult, especially where Amtrak expects freight railroads to pay for some or all of the improvements. Amtrak officials told us that they met with senior freight railroad officials in November and December 1999—before its board of directors approved the Network Growth Strategy—to tell them of Amtrak’s plan for expanded service. Amtrak officials stated that freight railroads did not then express opposition to proposed expanded routes and services. According to Amtrak, these were high-level discussions at the president/chief executive officer level, during which the railroad executives agreed to entertain more specific proposals. According to Amtrak, it met again with officials from each railroad, generally in January or February 2000, to outline specific route proposals. According to an Amtrak official, Amtrak discussed the proposed route and/or service actions and sought freight railroads’ overall reaction to the proposals. He said that, in some cases, freight railroads identified issues such as the need to upgrade track. However, generally freight railroads said that they needed to further analyze the proposals to determine their likely effect, with more detailed discussions to be held at later dates. Freight railroad officials told us that the initial and subsequent meetings focused primarily on the concept of providing new services rather than identifying whether there might be aspects of the proposals that would be easy or difficult to resolve. While Amtrak recognized that capital improvements would be needed on freight railroads’ tracks to implement eight Network Growth Strategy routes, it did not include capital investment requirements or the source of these funds in its route evaluations until after it had decided to implement the action. An Amtrak official said that considering capital investment requirements any earlier would not be useful since, if capital costs were factored in, route proposals would appear to be unprofitable and not be considered further. As a result, Amtrak limited its analysis to whether revenues are expected to exceed operating costs. Amtrak followed this approach despite the fact that some route actions cannot be implemented—and its operating losses reduced—unless capital is available. It was not until after Amtrak decided to implement the Network Growth Strategy in December 1999 and announced it to Congress that it began to develop an understanding of the capital investments needed to implement the route and service actions and other implementation issues critical to gaining freight railroad agreement. For example, it was not until spring 2000 that Amtrak learned from the Union Pacific Railroad that it might cost about $40 million to implement the Crescent Star (service between Meridian, Mississippi, and Dallas/Fort Worth, Texas). A Union Pacific official told us that his railroad was not willing to share the costs of this investment with Amtrak, nor was it willing to help Amtrak finance it over time. He said that capital investment had not been discussed with his railroad prior to this time. Freight railroads were also concerned about having a competitor on their tracks. All four of the freight railroads we contacted that would have been affected by the Network Growth Strategy generally acknowledged Amtrak’s statutory authority to operate mail and express business. However, all expressed concern about Amtrak’s becoming a competitor for their freight business. This concern was heightened by Amtrak’s plans to begin running large numbers of express cars on their trains as it expanded its mail and express business. This concern contributed to Amtrak’s decision to cancel the Skyline service. A Norfolk Southern official said his company did not want Amtrak to solicit business on this route that was similar to its own freight business. Other freight railroads we contacted were similarly wary of Amtrak’s plans to use its route and service expansion to increase express business that could potentially compete with their own. In addition, Amtrak did not identify potential operational problems that could be encountered, such as whether capacity constraints would be important. A good illustration is Amtrak’s planned Crescent Star service. This service, planned for implementation in summer 2000 over Union Pacific Railroad and Norfolk Southern lines, has not yet come to fruition. According to a Union Pacific official, the company could not reach agreement with Amtrak, in part, because the planned routing would have worsened congestion on the line. In addition, a Norfolk Southern official told us that the rail infrastructure in Meridian would not support passenger train switching operations without serious interference with freight trains. As a result of these operational problems and because of funding problems, the routing of this still-to-be-implemented service has since shifted to another railroad. The proposed Twilight Limited faced similar problems. According to CSX Transportation officials, this service could have encountered significant line capacity and scheduling problems west of Albany, New York. Finally, a Union Pacific official told us that the Aztec Eagle (service from San Antonio to Laredo, Texas) could have created capacity problems because it would have utilized Union Pacific’s primary route to Mexico. Amtrak officials agreed that routing of the Crescent Star was shifted to another railroad because of disagreements with Union Pacific. An Amtrak official said Union Pacific was initially receptive to proposed route and service actions but turned negative when plans became more specific. Amtrak officials also agreed infrastructure improvements were necessary in Meridian, Mississippi, but believed these were not insurmountable problems. Amtrak officials also did not believe there would be significant problems with the Twilight Limited because the proposed service was to replace existing trains in both New York and Michigan. In other instances, Amtrak was not able to reach agreement with freight railroads on compensation for track access, especially for trains with additional express traffic. Freight railroads often receive additional compensation for handling Amtrak trains over a certain length and/or for cars carrying express business. Issues of compensation contributed to the cancellation of at least one route action—the Skyline. This route— establishing service between Chicago and New York City via Pennsylvania—involved Norfolk Southern. Norfolk Southern officials said they were willing to work with Amtrak on establishing this service and had even reached agreement with Amtrak about the operating arrangements for this train. (The train was to be handled similarly to a regular freight train, including operating at 60 miles per hour—a speed closer to freight train speed.) However, Norfolk Southern largely attributed the demise of this route action to the inability to reach agreement with Amtrak over the compensation to be paid for track access and additional express business. Amtrak’s Network Growth Strategy has been unsuccessful because it overestimated (1) revenues expected from new mail and express service and (2) its ability to reach agreement with freight railroads over capital funding and other implementation issues. Amtrak said that it has improved it revenue estimation process. However, reaching agreement with freight railroads will always be a major challenge when Amtrak attempts to expand its business in areas that are operating at or near capacity, when the expansion appears to pose competition for freight railroads, or when freight railroads are expected to make capital investments to help implement the routes. We believe that, in any future major route and service expansions predicated on improving Amtrak’s financial condition, Amtrak’s decisionmaking process needs to more explicitly reveal the risks associated with successful implementation. We recommend that, for any future major route and service proposals, the president of Amtrak disclose to Amtrak’s board of directors any significant risks that could impair the successful implementation of the planned actions and its plans to ameliorate those risks. These potential risks include the expected ability to obtain capital funding and reach agreement with freight railroads to operate over their tracks. We provided a draft of this report to Amtrak and to the Department of Transportation for their review and comment. Amtrak disagreed with the conclusions we reached about the benefits that might have been achieved through discussing its strategy with its key partners more substantively before—rather than after—deciding to expand its operations over freight railroad tracks. Amtrak provided its comments during a meeting with the acting vice president for government affairs and others and in a subsequent letter. (See app. VI.) The department generally agreed with the report’s conclusions via an e-mail message. In commenting on a draft of this report, Amtrak agreed with our presentation of the reasons that it overestimated mail and express revenue. Amtrak also stated that a major theme of our report was that Amtrak should have delayed in communicating with Congress the route and service changes proposed in February 2000 to allow time for additional analysis and negotiations with freight railroads. By so doing Amtrak would have proposed considerably fewer new services and would have been more successful in implementing its proposals. We are not suggesting that Amtrak should have delayed announcing the Network Growth Strategy. Rather, our work clearly illustrates the need for Amtrak to perform due diligence to understand the likely positions of key stakeholders—whose cooperation is essential to successful route and service expansion—before, rather than after, committing itself to implementing them. However, we believe that Amtrak’s not examining more closely the capital improvements needed to implement their route proposals and whether freight railroads would likely agree to them were significant flaws in Amtrak’s strategy. We agree with Amtrak’s characterization of our opinion that, if it had a better understanding of the concerns of key stakeholders, it might not have proposed all of the resulting route actions. We would have viewed a decision to implement fewer or different route actions each with a greater likelihood of being successfully implemented, rather than a larger number of speculative proposals, as sound business judgment because it would have increased the likelihood that Amtrak could have realized operating profits and moved closer to the goal of reaching operational self-sufficiency. During our work, we received conflicting information about Amtrak’s early interaction with freight railroads. As a result of our meeting with Amtrak, we discussed this topic again with freight railroads and Amtrak and revised this report to better show this early interaction. Amtrak also stated that (1) it needed to act quickly to reach operational self-sufficiency within 3 years, (2) the purpose of the Network Growth Strategy was to implement route and service changes that would more than cover their operating costs and therefore contribute to achieving operational self-sufficiency, and (3) not every route and service change requires lengthy negotiations. Regarding Amtrak’s first point, we agree that there was immense pressure on Amtrak to become operationally self- sufficient. However, we believe that this pressure made it even more important for Amtrak to conduct the due diligence needed before it decided to move ahead. Without an understanding of the likelihood that freight railroads would be receptive to Amtrak’s plans and that Amtrak could find the capital funds needed to implement these changes, Amtrak had little basis to expect that the route and service proposals it made could actually be implemented expeditiously so as to help reduce Amtrak’s need for federal operating subsidies. Amtrak appeared to tacitly acknowledge the necessity of doing so, at least where capital funding is an issue, when it stated in its comments: “he growing capacity constraints on many key lines mean that freight railroads can, not infrequently, demand large infusions of capital from passenger train operators to accommodate additional trains.” Regarding Amtrak’s second point, we agree that Amtrak’s goal was to implement routes in which revenues exceeded operating costs. It was not our intention to suggest that Amtrak should have only decided to implement routes that covered their capital costs too. We have revised our recommendation to remove such an impression. Regarding Amtrak’s third point, we agree that some proposed route and service changes may be implemented easily and have revised our recommendation to more explicitly recognize this condition. In our meeting with Amtrak officials, Amtrak disagreed with the statement in our draft report that it had poor information on interconnectivity (revenues from passengers taking more than one train to reach their final destinations). Although this comment conflicts with statements made by Amtrak during our work, we acknowledge that Amtrak did have data on interconnectivity at the time it was performing its market-based network analysis. Accordingly, we have deleted references to interconnectivity in this report. Finally, Amtrak believes that we did not sufficiently recognize the market- based analysis framework was a significant step forward in Amtrak’s ability to analyze the market potential for its services. We agree that the market-based approach was a significant step forward for Amtrak. However, the approach’s usefulness was ultimately undermined by Amtrak’s reliance on speculative data on expected express business and unrealized assumptions that the route and service changes could be implemented quickly and easily. We have added information to this report to better portray the differences between the market-based analysis framework and Amtrak’s previous approach. We also made a number of other revisions throughout this report to better portray the extent of Amtrak’s interactions with freight railroads and where limits to the interaction led to implementation problems. We also made changes, where appropriate, to this report based on our meeting with Amtrak. The associate administrator for railroad development at the Federal Railroad Administration within the Department of Transportation stated that the department agreed that Amtrak needs better information on which to base its route and service actions. In particular, the department agreed with our fundamental conclusions that (1) Amtrak needs to undertake earlier negotiation over access-related issues for new services and (2) until recently, Amtrak senior management incorrectly assumed that it had credible information on mail and express revenues and, in particular, costs. Our work focused on route and service actions that Amtrak considered under its market-based approach and Network Growth Strategy. To understand the market-based approach and the Network Growth Strategy, including its approach to estimating mail and express revenues and collaborating with freight railroads, we reviewed documents describing the market-based approach, how it works, and the models used for financial evaluation. We also reviewed studies done by others to identify potential limitations to the market-based approach and discussed these limitations with Amtrak and Department of Transportation officials. We did not independently evaluate the market-based approach or its models. As part of our work, we identified route and service actions Amtrak has taken since 1995 and the current status of the Network Growth Strategy. Finally, we discussed Network Growth Strategy route and service actions with officials from Amtrak, four major railroads that would have been affected had the Network Growth Strategy been fully implemented (the Burlington Northern and Santa Fe Railway Company; CSX Transportation, Inc.; the Norfolk Southern Corporation; and the Union Pacific Railroad Company), and the state of Florida. We conducted our work from July 2001 to April 2002 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its comments earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to congressional committees with responsibilities for intercity passenger rail issues; the acting president of Amtrak; the secretary of transportation; the administrator, Federal Railroad Administration; and the director, Office of Management and Budget. We will also make copies available to others upon request. This report will also be available on our home page at http://www.gao.gov. If you or your staff have any questions about this report, please contact either James Ratzenberger at [email protected] or me at [email protected]. Alternatively, we may be reached at (202) 512-2834. Key contributors to this report were Helen Desaulniers, Richard Jorgenson, Sara Moessbauer, James Ratzenberger, and Edward Warner. The financial performance of Amtrak routes ranged from an operating profit of $51.3 million on the Metroliner/Acela Express to an operating loss of $71.5 million on the Northeast Direct. Now part of Acela regional service. Now part of Cascades service. This service is shown separately so as to not distort route and service actions affecting the Boston- Washington, D.C., spine of the Northeast Direct route. The following are the planned route and service actions included in the Network Growth Strategy announced by Amtrak in February 2000. Amtrak officials told us that route and service decisions primarily focus on whether the increased operating revenues from an action are expected to exceed the direct costs. Increased revenues can arise from adding passengers on the route, adding passengers on the route who can then transfer to other routes and vice versa (called interconnectivity) and from hauling mail and express. While Amtrak recognizes early in its planning process that it will incur costs for capital expenditures (e.g., to acquire equipment and facilities and to finance needed track and signal improvements) and, to a lesser extent, state financial support, it typically does not address these needs until after it has decided to implement a route or service action. Ideas for route and service actions are either generated internally or from those outside Amtrak seeking additional service. To provide a quick assessment of an idea’s reasonability, Amtrak informally examines issues such as the number and type of equipment (e.g., cars and locomotives) that might be needed, where the train might stop, and possible train schedules. If a proposal appears promising, Amtrak begins a more formal evaluation process. First, it estimates potential ridership, from which it derives passenger-related revenue estimates. To do so, Amtrak uses one of two models, depending on whether the action involves a long-distance route or a shorter-distance route serving a transportation corridor (such as that between Washington, D.C., and New York City). Of the two models, only the model for transportation corridors can assess the potential market share that a proposed route action will attract from among a corridor’s various transportation modes. For example, this model can estimate the impact of a shift from rail ridership to automobile usage prompted by a decline in gas prices. The ridership projections are, in turn, used to estimate a route’s passenger-related unit costs and operating costs. An Amtrak official said that cost estimates often increase later in the evaluation process as more amenities are added to a proposed service as a means to attract more riders. After it completes its initial assessments, Amtrak uses its market-based approach to model the expected financial impact of the route or service action. It models the proposed route and service action individually and as part of the whole route network. In some cases, Amtrak will model several variations of a proposed route action to see if one is more financially viable than others. Amtrak also estimates potential mail and express revenues associated with proposed route actions. Mail revenue estimates are largely based on contracts Amtrak has with the U.S. Postal Service, discussions with U.S. Postal Service officials, and U.S. Postal Service projections. Estimating express revenue is somewhat more difficult. According to Amtrak, until recently, it estimated express revenue largely on the basis of an analysis of a database of commodities being shipped nationally. Amtrak estimated the portion of this business that it thought it could obtain. An Amtrak official said that it now focuses more on determining existing customers’ shipping needs, assessing these needs in light of current economic trends, and evaluating Amtrak’s ability to meet these needs given existing train capacity. Amtrak relies on its mail and express unit to estimate mail and express costs. However, Amtrak officials told us identifying these costs has been difficult since Amtrak did not formerly identify these costs separately but rather incorporated them into other business units. Amtrak currently has a project under way to identify the specific costs of its mail and express business. When Amtrak management wants to proceed with a route action, it either seeks the approval of its board of directors or directs the affected business unit to implement the action. Amtrak policy requires board approval to initiate service on new routes or to discontinue service on routes. Amtrak said its strategic business units have the authority to make minor changes in the schedules and frequencies of their train service. Amtrak officials told us that the company also considers the cost of capital improvements that may be associated with route actions, the fees that freight railroads will charge for access to their tracks, and the likelihood states might be interested in financially supporting the routes. While Amtrak told us that it recognizes early in its planning process that capital costs may be incurred for routes other than its Northeast Corridor, it does not formally consider these costs under the market-based approach until after it decides to implement a route or service change. Amtrak officials said that they do not consider these costs earlier because Amtrak’s lack of investment capital would preclude further consideration of such proposals. Amtrak’s capital funds most often come from federal assistance and from freight railroads and states that might agree to contribute funds. Amtrak estimates track access payments based on operating agreements with freight railroads, or in the case of railroads it has not dealt with before, it is assumed access fees will not vary significantly from national averages. Obtaining state financial support for routes generally varies depending on the length of the route. An Amtrak official said the corporation aggressively pursues state support on short-distance, commuter-like routes. In fact, he said states often approach Amtrak about initiating or expanding this type of service on their own. However, on longer distance routes that go through many states, most states are not interested in providing financial support and Amtrak must assume the financial responsibility itself. In 2001, states provided financial support for 18 of Amtrak’s 43 routes. This support ranged from about $200,000 on the Ethan Allen Express route (service between New York and Vermont) to about $21 million on the Pacific Surfliner (service within California). The market-based framework includes a set of models used to predict changes in ridership, revenues, and costs likely to result from a planned restructuring of Amtrak’s route system or a variation in service levels on existing routes. A series of demand models estimate ridership and passenger-related revenues in response to variation in the stations served by each route, train departure frequencies or schedules, travel times, and fare structures. Then a series of financial models translate operating statistics that are based on the type of equipment and level of operations (e.g., level of onboard staffing) required into operating expenses. For high- speed rail scenarios, a capital cost model estimates the capital that is likely to be required (e.g., upgrade to track and additional rolling stock) to make changes in service. Amtrak uses separate models to estimate ridership and revenue for short- distance intercity routes (regional networks where frequent, higher-speed services are planned, called “corridors”) and long-distance intercity routes (typically at least 500 miles long). For short-distance intercity routes, the market-based approach includes a model specifically for the Northeast Corridor (Boston-Washington), as well as a generic model to predict ridership and revenue in corridors located in other regions. Each of the corridor models is designed to be a mode-split model. That is, these models predict the share of travel likely to take place by automobile, air, and rail, based on the projected level of total traffic for each market. Amtrak typically estimates total traffic between two areas on the basis of expected demographic and economic growth in the areas making up the corridor. Then it estimates the market shares for each mode on the basis of the costs of travelling by each mode and the level of service it provides in the corridor (departure frequency and total travel time). Finally, it uses the estimated ridership with the assumed fare structures to estimate the passenger-related revenue that would result from a proposed route. The long-distance demand model consists of two components. The first component predicts the total number of rail passengers traveling between each station-pair and the second component predicts the class of service (mainly sleeper versus coach). The ridership estimate is based on such factors as population and employment in the surrounding areas. Unlike the corridor demand models, this is not a mode-split model, but rather a direct rail model. As such, the model does not directly assess the amount of total traffic in the market or the amount of traffic that may be captured by alternative modes. Instead, it employs historic data from a sample of markets to assess the relationships between rail ridership levels and such factors as population, employment, travel time, and level of rail service. Amtrak then uses these estimated associations to estimate the level of rail traffic in a new market. After projecting the rail ridership, Amtrak uses the second component to estimate what fraction of passengers will choose each of four classes of service, based on such factors as frequency and timing of trains and the fares charged for each service level. Finally, Amtrak uses the projected levels of ridership and class of service to estimate the passenger-related revenue that would result from a proposed route. The market-based approach includes operating and, in the case of high- speed rail scenarios, capital cost models, to estimate the likely impact on Amtrak’s expenses from planned changes to its network. These models translate operating statistics into operating or “direct” expenses. The operating statistics are developed based on ridership patterns, schedule, train makeup, and staffing data for an individual route into estimates of the equipment fleet and train crew requirements, as well as the number of monthly train-miles. The operating model applies detailed unit cost to predict the changes in operating expenses for the route. The capital cost model estimates the capital investments necessary to upgrade existing track or construct new rights-of-way for routes in which Amtrak is considering improving travel times, increasing frequency, or introducing new services. The model also estimates costs for acquiring new rolling stock and other equipment as necessary. The requirements for alternative levels of service were developed from engineering studies of facility and equipment requirements necessary to upgrade a sample of route segments. The model also makes use of data on unit cost factors required for upgrading facilities and equipment. These data are based on past experience with upgrades in several markets. Using the estimated facility and/or equipment needs and the data on unit costs, the model calculates an estimate of required capital. According to Amtrak, this model is currently applied only to high-speed rail corridors. It is not used to determine potential capital costs on non-high-speed rail corridors. The following is our evaluation of aspects of Amtrak’s comments on our draft report. 1. We agree with Amtrak’s statement that a Senate committee report directed it to report on its conclusions regarding route and service changes before Amtrak issued its fiscal year 2000 strategic business plan. However, nothing in the Senate report required Amtrak to issue its strategic business plan by a certain date or earlier than it would have done otherwise. As such, the Senate report language did not create the sense of urgency that Amtrak implies. 2. Amtrak questioned our including a list of route profits and losses in appendix I of the draft report because the route profitability system used to generate these results does not produce accurate information for making route decisions. We are not suggesting that the route profitability statistics should have been used in making Network Growth Strategy decisions. We are also not suggesting that they should be used, by themselves, in making future route decisions. Other metrics should also be employed. However, the fact that Amtrak loses money on nearly every single route that it operates (for example, 20 of Amtrak’s 43 routes lost more than $20 million in 2001, even after including state support) was the basis for Amtrak deciding to contract routes in 1995 and expand them in 1998. As such, this route profitability information is contextually important in Amtrak’s quest to improve its financial condition. 3. Amtrak interpreted our conclusion on the need for early consultation with freight railroads before it announced its Network Growth Strategy to mean that we were advocating that it should have “engaged in lengthy ‘consultations’ with each of the affected 16 freight railroads” and conducted “expensive and time consuming studies of the physical characteristics of each line, and of the number, type, and schedules of the trains that operate over it.” We did not intend such an interpretation. We agree with Amtrak that some proposed route and service changes might be expected to be easier to implement than others—such as ones that could be expected to have little effect on freight railroads. We also agree with Amtrak that there is no model for how and on what timetable such issues should be resolved. We do not prescribe a level of specificity for these discussions, specific expected outcomes, or uniformity. We believe that discussions with freight railroads should be tailored to the complexity, expected difficulty, and risk associated with each proposed action. As discussed previously, we revised our recommendation to make it more useful to Amtrak. 4. Amtrak stated that “in many cases was able to implement significant route and service changes fairly quickly” and cited two examples. In reality, Amtrak has implemented only 3 of the 15 planned route and service actions. 5. Amtrak states that our draft report implied that it had no reason to expect Norfolk Southern would agree to the operation of the Skyline service. Amtrak disagreed with our draft report because it had implemented a similar service (an extension of the Pennsylvanian) over the same route about a year before the Network Growth Strategy was issued. Any implication about the potential success or failure in implementing the Skyline service was inadvertent. We have revised our report to state that Norfolk Southern was willing to work with Amtrak to establish this service and had reached agreement on how the train was to be handled. The report states that Amtrak largely cancelled this proposal because it and Norfolk Southern could not agree on compensation for Amtrak’s use of Norfolk Southern’s tracks. 6. Amtrak disagreed with the example we used to illustrate what occurs when early discussions with freight railroads do not occur. Amtrak stated that its Network Growth Strategy contemplated using either Union Pacific or Kansas City Southern tracks and Amtrak approached both railroads and that its decision to re-route the Crescent Star from Union Pacific Railroad to Kansas City Southern tracks represents a prudent business decision rather than a flaw in its decisionmaking. We agree that the Network Growth Strategy provided flexibility in routing and that deciding to re-route the Crescent Star might have been a prudent business decision. However, Amtrak did not learn until spring 2000 that (1) significant capital improvements were required to implement the service, (2) Union Pacific was not willing to share the capital investment costs needed to use this line, and (3) an alternative routing would be required. Since Amtrak planned to implement the Crescent Star in summer 2000, just a few months after it announced the Network Growth Strategy, having early knowledge of significant potential roadblocks would have been useful to Amtrak—for example, either in attempting to ameliorate the roadblocks or deciding earlier to concentrate on the alternative Kansas City Southern route. As Amtrak stated in its comments, it needed to implement the Network Growth Strategy quickly to help reduce its need for operating subsidies. 7. Amtrak commented that (1) the infrastructure investment required to add one or two train frequencies to a rail line is not easily quantifiable and (2) there are other ways to reach agreements to undertake capital projects other than by allocating costs between parties (e.g., the freight railroad might agree to bear the cost of the project if Amtrak agrees to something else). We agree with Amtrak’s statement. However, a recurring theme for Amtrak has been its dearth of capital to improve its service. We believe that it would have been prudent for Amtrak to factor into its decisionmaking the fact that capital issues, for some proposed routes, were crucial to Amtrak’s being able to implement the Network Growth Strategy, particularly as it recognized in its comments that “…freight railroads can, not infrequently, demand large infusions of capital from passenger train operators to accommodate additional trains.” 8. Amtrak states that our discussion of capital funding is out of context because the purpose of the Network Growth Strategy was to identify routes for which revenues would exceed operating costs. Amtrak stated that if a potential route or service change met this test then it made sense to pursue it, even if it was likely to require capital support. We agree with Amtrak that it made sense to pursue routes that were contemplated to make an operating profit even if capital investment would be needed to implement them. We did not intend to suggest that Amtrak should have pursued only route and service expansions that were likely to cover both operating and capital costs. Rather, we believe that, for some routes, capital investment was an important prerequisite to Amtrak being able to implement the routes quickly so that it could obtain the operating profits. 9. Amtrak commented that some Network Growth Strategy negotiations with freight railroads were stalemated not on the issue of implementation, but on price. We have revised our report to recognize this. 10. Amtrak criticized our suggestion that it should have had preliminary discussions with freight railroads over capital funding issues, saying that it is a poor negotiating technique to approach a freight railroad by telling it how much capital Amtrak is willing to contribute, because this figure sets a floor for Amtrak’s contribution. We agree that there are delicate business issues arising from Amtrak’s attempts to get freight railroads to allow it to expand operations over freight railroad- owned tracks and that different route and service proposals can raise different and sometimes complex issues. We are not suggesting that Amtrak “give away the store” in these discussions by disclosing in advance how much capital support it might be willing to contribute to the freight railroads. However, as discussed in the report, we believe that it would have been prudent to determine freight railroads’ expectations before deciding to implement the plan because freight railroads’ cooperation was imperative to the success of the Network Growth Strategy. Without an understanding of whether freight railroads’ expectations were similar to Amtrak’s—and the expected ease or difficulty in meshing these expectations—Amtrak had little basis to expect that the route and service proposals it made could actually be implemented expeditiously so that they could help reduce Amtrak’s operating losses. 11. On several bases Amtrak disagreed with our discussion of gaining an early understanding of whether states, such as Florida, might or might not be willing to provide the capital funds that Amtrak expected them to contribute. Because the focus of our work was Amtrak’s interaction with freight railroads, we have deleted references to the capital support that Amtrak expected from states such as Florida. 12. Amtrak stated that the Network Growth Strategy was not just “…an action plan based on rigorous financial analysis. It was a vision of how Amtrak’s national network could be reshaped so as to extend its reach and reduce operating losses…” . Amtrak suggested that we faulted it for pursuing an innovative approach and because it did not achieve “all its vision.” We are not criticizing Amtrak for pursuing a route expansion strategy. Rather, our report focuses on the aspects that might have made the vision more successful than it was, although perhaps at a more modest level than Amtrak originally envisioned. Amtrak’s Network Growth Strategy ultimately failed because the route system expanded marginally and Amtrak was not able to reduce its operating losses to the extent planned. In our opinion, an important contributor to this failure was Amtrak’s inattention to potential implementation problems before it announced a strategy. Attention to potential implementation problems was crucial because, as Amtrak stated, it needed to have the routes implemented quickly so as to reap the financial benefits that would result in a reduction of operating losses. We believe that the recommendation we offer, if adequately implemented, could help Amtrak be more successful in any future route expansion efforts. | In light of its continuing financial deterioration and its stated goal of eliminating federal operating assistance by December 2002, Amtrak undertook several steps to improve its financial condition, including changing in its routes and services. Amtrak has been unsuccessful in implementing its Network Growth Strategy to shift its route and service plans for new routes and expanded services on the freight tracks over which it operates. Two years after announcing the new strategy, Amtrak has only implemented three routes, one of which was later canceled. Amtrak still plans to implement the remaining three routes, although later than planned. Increased mail and express revenues were the cornerstone of the new strategy. However, Amtrak overestimated the mail and express revenue expected. According to Amtrak, this overestimation occurred because (1) it had no empirical basis for its revenue estimates and (2) express shippers were reluctant to enter into contracts for service that did not yet exist. Six of the planned route actions were canceled because Amtrak overestimated the revenues associated with them. Amtrak was unable to reach agreement with freight railroads because they were concerned about (1) Amtrak's plans to operate additional trains in already congested areas, (2) Amtrak's plans to carry express merchandise that might compete with their own business, and (3) compensation that Amtrak would pay for use of their tracks. |
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DOD’s current policy calls for each military service to determine its requirements and acquire sufficient war reserve materiel for the execution of current wartime scenarios and to be able to sustain these operations until being re-supplied. Thus, in developing their plans, the services must consider the availability of spare parts in their peacetime operating stocks, their war reserve spare parts inventories, and from the industrial base, and then estimate what additional materiel they need to buy. The Army’s industrial base and stationing strategies and DOD’s regulations reflect the importance of the industrial base in supporting wartime operations and require the services to rely on the industrial base to the maximum extent possible. In addition, the Army is required to maintain a viable capability to monitor and assess the health of the industrial base and identify potential risks. The U.S. Army Materiel Command is responsible for determining the Army’s requirements for war reserve spare parts, as well as the Army’s estimate of what private industry can be expected to provide during wartime, in order to derive the war reserve spare parts shortfall. It receives technical expertise from the Army Materiel Systems Analysis Agency in determining its war reserve requirements and an estimate of what can be expected from private industry. The Command’s major subordinate commands are responsible for purchasing specific types of materiel, such as aviation, tank, automotive, and communications parts, and they have a limited number of industrial base specialists who can be assigned to provide data for assessments. Figure 1 illustrates the steps that the Army follows to determine its war reserve shortfall. To plan how much war reserve materiel it needs to buy, the Army develops estimates of when spare parts will be available from the industrial base during wartime so that it can determine how much war reserve materiel it needs to buy and put into its war reserve inventory. In preparing its estimates, the Army first calculates the total amount of war materiel that it needs to support current wartime scenarios. Specifically, it calculates its requirements by using a computer model that considers several factors, such as spare parts usage and breakage rates. Next, it determines the amount of peacetime and war reserve inventories that are available to meet that requirement. The Army then applies the amount it estimates the industrial base can be expected to provide during wartime. The remaining amount is considered the total spare parts shortfall. The total shortfall can then be divided into the amount for which Congress has authorized funding, any amounts budgeted for future years, and an additional amount the Army has not yet requested from Congress. As table 2 shows, in preparation for its fiscal year 2003 budget submission to Congress (part of the fiscal year 2003-2007 out-of-cycle Program Objective Memorandum), the Army calculated that it required $3.30 billion for its wartime spare parts. Of this amount, it estimated that $1.93 billion worth of spare parts would be available from peacetime and war reserve inventories. Another $0.13 billion expected to be available from private industry was applied. The resulting total spare parts shortfall was $1.24 billion. Of this amount, the Army has been funded $0.11 billion for fiscal years 2000-2002 and expects to request $0.47 billion in fiscal years 2003-2007. Overall the Army reports a total spare parts shortfall of approximately $0.66 billion. The Army’s approach for assessing wartime spare parts industrial base capability still does not use current data from industry. Rather, the Army’s assessments of industry’s capability to produce spare parts in wartime depend on historical data and lead-time factors that the Army develops itself. Without current data on industry’s capability, assessments could be unreliable, resulting in reduced readiness due to critical spare parts shortfalls in wartime or inflated and costly war reserve spare parts inventories in peacetime. Moreover, the Army’s budget requests to Congress for war reserve spare parts risk being inaccurate. In the past, the Army collected data directly from private industry through paper questionnaires to industry representatives that were up to 22 pages long. It stopped this practice primarily because of the poor response rates. According to Army Materiel Command officials, industry representatives said they saw no apparent direct benefit from filling in the lengthy questionnaires and, moreover, felt they should be compensated for their time and effort. We were told that command officials themselves do not believe that collecting current data from industry is cost-effective. Now, rather than collecting current data from private industry, the Army uses data that it acquired several years ago from private industry to create lead-time factors for estimating its wartime industrial base capability. These factors are based on out-of-date industry data. Furthermore they were developed from a limited range of spare part items but were applied to all parts needed for war. For example, in developing its fiscal year 2003 budget submission to Congress, the Army used a formula with wartime lead-time factors that were derived from estimated accelerated peacetime administrative lead times and production lead times. These accelerated lead-time factors of 85 and 61 percent, respectively, were based on data obtained prior to 1998 for specific items, such as howitzers, that were managed by the Army Tank and Automotive Command’s Rock Island facility. According to an Army document, this method of calculating lead times fails to account for variations that exist from item to item and can lead to unrealistic industrial base capability estimates. For example, a 1998 Army study found that 44 of 86 parts assumed to be supported by industry could not be and that 176 of 218 parts that were assumed not to be supported by the industrial base were. Partly in response to the recommendation in our prior report, the Army has several initiatives underway to improve its industrial base capability assessments, but these initiatives continue to focus on historical, rather than current industry data. In one initiative, the Army is developing a new approach to calculate its wartime spare parts requirements, in part, from data collected from private industry during 1998. In another, the Army Materiel Command has designed a tool—called the Industrial Base Hub— that brings together in one Web-based automated system a broad range of existing industrial base data. The data consist of war reserve requirements, producer capabilities, contract awards and actions, contractor businesses, and commercial businesses and finances. The Industrial Base Hub relies on historical data rather than on current data from industry. In a third initiative, the Army Materiel Systems Analysis Agency has proposed periodically collecting data on production lead times for the 100 costliest spare parts, which account for 70 percent of the total dollar value of the entire wartime spare parts requirement. The Army Materiel Systems Analysis Agency believes that collecting current data periodically from the private manufacturers of the top 100 costliest spare parts could be a reasonable way to get a cost-effective, reliable industrial base offset estimate. The Army could improve the reliability of its industrial base assessments by considering several key attributes present in DLA’s industrial base assessment program. These include the collection of up-to-date industry data, the timely analysis of data to develop current and reliable industrial base assessments, and the use of analytical data to create management strategies aimed at reducing spare parts costs and the risk of shortfalls. To improve its management of spare parts for the services, and thus reduce costs and inventory, DLA re-engineered its industrial base capability assessment program. DLA’s assessment program, called the Worldwide Web Industrial Capabilities Assessment Program, was started in the fall of 1999. It consists of a data collection tool and an analytical tool, which is used to create management strategies. (See appendix I for a more detailed description.) The data collection tool provides the capability to gather new and updated information directly from private companies via the Internet. Company representatives voluntarily respond to a series of on-line survey questions that, depending on how answered, are self- tailored to that company to simplify and speed up the survey process. Private companies provide information on what spare part items they can provide (or are willing to provide); what quantities they can produce; how long it will take to produce them under different scenarios (e.g., normal or crisis conditions); and what potential bottlenecks (e.g., availability of certain materials, or equipment constraints) exist that could limit the production of certain spare parts. DLA validates this information as part of its assessment process before acting on the information. The program’s analytical tool provides analysts with immediate access to the automated data collected from industry. This provides the capability to develop timely and reliable assessments of industry’s ability to provide various spare parts in peacetime as well as wartime. In addition, it provides the capability to use the analytical data to identify actual or potential parts availability problems (e.g., items with unusually long lead times or items that are involved in bottlenecks) and, based on this information, to create a management strategy for resolving these problems, for example, by changing its acquisitions procedures or targeting investments in material and technology resources to reduce production lead times. Although DLA’s industrial base assessment program is relatively new, it provides a number of examples that illustrate the effectiveness of collecting current data directly from the industrial base. Table 3 shows the impact on production lead time when it is based on up-to-date industry data. For example, clamp couplings for tanks, aircraft, and aircraft engines have a production lead time of 35 days during a crisis (surge) situation rather than a lead time of 156 days (lead time of record) previously estimated by DLA for normal, or peacetime, situations. This more reliable information could result in greater economy in purchasing decisions. For example, private industry says it can provide a resilient mount within 70 days during a crisis rather than in the 163 days that DLA previously estimated. The war reserve requirement for this item occurs during the first 3 months of a war. The reduction in production lead time from 163 to 70 days means that the third month could be covered with a savings of $4,810 by not buying the items. Likewise, the war reserve requirement for the centrifugal fan spreads over the first 6 months of a war with the bulk occurring during the last 3 months. The lead-time reduction from 109 days to 56 days means that months 2-6 could be covered with a savings of $62,560 by not buying the items. Additional benefits from the assessment program stem from evaluating currently collected and analyzed information to identify potential problems with production and create various management strategies to resolve them. For example, by identifying an unusually long lead time for a cesium lamp and examining the reasons for this, DLA was able to ultimately reduce the lamp’s lead time of 360 days to only 30 days. The lamp is used on several types of Navy, Marine Corps, and Air Force aircraft in electronic counter measure systems to defeat infrared missiles. The lamp cartridge, which is a critical element used in these systems, is made of exotic materials and operates at extreme temperatures and power levels. An industrial capabilities assessment concluded that the lead time of record for this item was 360 days. Negotiations with the vendor, however, reduced this to 300 days. The lead time of 300 days is due to the use of highly technical processes and several long-lead-time materials in its production. Because of the unique nature of the cesium lamp, additional measures were needed to reduce the lead time further. As part of a targeted investment, DLA awarded a contract to preposition and rotate long-lead materials and partially finished components, resulting in a further 270-day reduction in lead time to 30 days. As a result, DLA is spending $530,000 for this investment, compared with the $1.1 million it would cost to purchase and store an equivalent amount of finished product to meet war reserve requirements, saving approximately $600,000. The Army’s approach for assessing wartime spare parts industrial base capability can be improved. A comparative analysis of DLA’s program to the Army’s approach shows opportunities to improve, specifically in the areas of data collection, data analysis, and management strategies. Table 4 compares the DLA and Army industrial base assessment approaches for the three key attributes. By focusing on the above attributes, DLA’s industrial base capability assessment program has become an improved, simplified, time-saving process for companies to provide current production capability data. For example, the process uses a streamlined Internet based data collection tool that industry representatives say is an improvement over the old paper process. Also DLA uses follow-up letters and phone calls to encourage use of the online data collection tool. Companies can then participate with DLA in creating management strategies to reduce lead times, which can reduce required war reserve inventories. Industrial base capability assessments designed to have current data such as DLA’s create opportunities for sound decision making regarding the planning for and purchase of Army war reserve spare parts. The Army’s approach to industrial base capability assessments lacks key attributes that include the collection of current industry data, the analysis of that data and the creation of management strategies for improving wartime spare parts availability. Out-of-date data could result in reduced readiness and inflated or understated war reserve spare parts funding requests within budget submissions to Congress. Without a process that provides such analysis, the Army cannot identify long lead times and create management strategies to reduce lead times and thus the amount of inventory needed. In order to improve the Army’s readiness for wartime operations, achieve greater economy in purchasing decisions, and provide Congress with accurate budget submissions for war reserve spare parts, we recommend that the Secretary of Defense direct the Secretary of the Army to have the Commander of Army Material Command take the following actions to expand or change its current process consistent with the attributes in this report: establish an overarching industrial base capability assessment process that considers the attributes in this report; develop a method to efficiently collect current industrial base capability data directly from industry itself; create analytical tools that identify potential production capability problems such as those due to surge in wartime spare parts demand; and create management strategies for resolving spare parts availability problems, for example, by changing acquisition procedures or by targeting investments in material and technology resources to reduce production lead times. DOD partially concurred with the overall findings and recommendations. However, it nonconcurred with specific points in several of our recommendations relating to the need to improve the capability of the Army’s approach to assessing industrial base capabilities. Our evaluation of the Department’s specific comments on each recommendation follows. DOD agreed with the overall point of our first recommendation that it establish an overarching industrial base assessment process relying on the most accurate information available. However, it did not concur that the Army should change its current process to be consistent with attributes of the DLA program. It stated that the Army’s current system already applies many of these attributes and must have the flexibility to do so in its own manner consistent with its specific requirements and resources. As we reported, our analysis shows the Army’s program does not have all the key attributes such as collecting current industrial base capability data from industry. Furthermore, we considered the Army’s need for flexibility in managing and executing its program when developing our recommendation by stating that the Army should be consistent with—not necessarily mirror the attributes of DLA’s program. Therefore, we continue to believe our recommendation is appropriate. DOD agreed with the underlying premise of our second recommendation that the most accurate data lead to the most accurate estimates. However, it stated that we provided no evidence that more current data would result in a more accurate forecast of industry’s capability to provide parts for war. As pointed out in our report, DLA provided examples of how it could save money by using current data it collected from industry, such as over $62,000 on the centrifugal fan. Furthermore, we noted that a study done by the Army in 1998 showed that data collected at that time about actual industrial base capability significantly disagreed with the Army’s estimated industrial base capability. The department also did not agree to a comprehensive data collection effort because keeping more current data does not warrant additional resources and stated that it will direct the Army examine the feasibility of attempting to proactively collect production data for a limited number of items. We recognized the potential for such an initiative in our report and stated that the Army Materiel Systems Analysis Agency believes that periodically collecting current data on the top 100 costliest spare parts could be a reasonable approach. Although this is a good first step, a comprehensive effort to collect current industrial base capability data directly from industry is basic to the recommendation’s underlying premise and is a best practice. Therefore we continue to believe that our recommendation has merit. DOD concurred with the point of our third recommendation that there is a need to identify potential production capability problems such as those resulting from a wartime surge in demand for spare parts. However, it did not agree that the Army does not have such a process. While the Army’s approach may have many analytical features, it does not provide specific analyses of production capability. Such analyses contribute to identifying possible production capability problems and could enhance the Army’s management decisions. Therefore, we continue to recommend that the Army create such analytical tools. Furthermore, in response to DOD’s comment about the need to validate survey data on production capability before taking action, we added information to our report stating that DLA does validate its industry surveys as part of its process. With regard to our fourth recommendation, DOD concurred with the concept that management strategies are needed to resolve spare parts availability problems. But, it disagreed with the implication that the Army has no such strategies. While the Army does have some processes at the individual command level that identify and address spare parts availability problems, we did not find an overarching process to create management strategies designed to reduce lead times and inventories. Therefore, we continue to believe that our recommendation is appropriate. To determine whether the Army is using current industrial base data for assessing wartime spare parts industrial base capability, we interviewed Army officials responsible for war reserve spare parts planning, requirements development, and estimation of industrial base capability in the Office of the Army Deputy Chief of Staff for Logistics in Washington, District of Columbia; the Army Materiel Command in Alexandria, Virginia; the Army Aviation and Missile Command at Redstone Arsenal, Alabama; and the Army Materiel Systems Analysis Agency at Aberdeen Proving Grounds, Maryland. To determine whether opportunities exist to improve the reliability of the Army’s industrial base capabilities assessments, we compared the Army’s approach to key attributes of the DLA’s program by interviewing DLA officials in the Supplier Assessment and Capability Division at Fort Belvoir, Virginia, and the Defense Supply Centers in Richmond, Virginia, and Columbus, Ohio, that are responsible for an industrial base data collection and analysis activity using information from private industry to improve spare parts management. We also reviewed the processes used by the Army and DLA to assess industrial base capability. We performed our review between October 2001 and May 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense and the Secretary of the Army. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me on (202) 512-8412 if you or your staff has any questions concerning this report. The Defense Logistics Agency’s (DLA) industrial base assessment program operates within the Supplier Assessment and Capability Division in the Acquisition Management and Logistics Policy Directorate. Among the division’s objectives are: (1) to provide information tools to assess the capabilities of suppliers and (2) to identify potential readiness shortfalls and mitigate them through various business practices such as investing in long-lead materials and by taking advantage of manufacturing commonalities. To achieve these objectives, the division has developed a variety of tools to assess the supplier base in each of its major product categories— weapon systems and hardware, construction, medical supplies, subsistence items, and clothing and textiles. Using these tools, DLA is able to evaluate suppliers’ capabilities to provide items in both peacetime and wartime, to take actions to mitigate quantifiable risks, and to examine broad industrial base issues and trends, using statistically valid information. The tools allow assessments to be made by individual item or grouped by items, product family, sector or subsector, weapon system or platform, or supplier. One of these tools, the Worldwide Web Industrial Capabilities Assessment Program, was designed for assessing supplier resources available to the Defense Department. The program is an automated, interactive, Web- based program that allows the gathering of information from industrial suppliers and the use of this data to assess the industrial sector’s capabilities for supplying various items. It also enables information to be analyzed in a wide variety of formats in order to identify strategies directed toward reducing costs and providing wartime readiness. Developed in 1997, the Worldwide Web Industrial Capabilities Assessment Program replaced the old data collection process, which relied on mass mailings of lengthy (up to 22 pages), cumbersome questionnaires that suppliers had to fill out by hand. The response rate from industry was typically too low to allow any statistically relevant analysis. In addition, the narrative answers to key questions were incompatible with computer analysis, and thus the information that industry provided could not be acted upon. The development of the program changed both the way information is collected from industrial suppliers and the way that information is used to conduct industrial base assessments and analyses. The data collection tool was built specifically for industrial base assessments. It resides on a Web site that can be easily accessed by industry representatives. It uses an interactive survey format to collect information directly from a company about its ability to supply certain items. A company’s representative checks in and fills out, or updates, a survey questionnaire for each item or group of items that is supplied. Depending on how a user answers a question, the questionnaire automatically adjusts itself to remain as short as possible but still collect the essential information that is needed for analysis. The survey information is saved in a permanent database, which eliminates the need for a company to reenter information when it is updated. The program identifies each item by the supplier’s own part number grouped by an industry standard classification code. This simplifies input of information for multiple items that might use the same production line or equipment. It requests a wide range of information about the industry’s ability to supply an item, including high and low estimates of production time, capacity, potential constraints and bottlenecks, and inventory on- hand. See table 5 for a list of the data fields. While the data collection tool interfaces with industry via the Web to gather data, the analytical tool, also Web-based, is a centralized tool that is available to all approved personnel regardless of location. The analytical tool allows analysts to assess what is needed in the way of industrial items and what the industrial base is capable of providing. It does this by combining the current information supplied by industry with existing DLA legacy data (e.g., item purchase histories, and previous item shortfalls). Analysts can use this integrated database to examine information at various levels (e.g., individual item, family groups, sector and subsector, weapon system and platform, or supplier) and to graphically depict this information in a range of formats and export the data to external files for further complex analysis. They can create statistically valid samples of discrete data to analyze. With this information, they are able to identify acquisition strategies that take advantage of similar manufacturing processes and affect changes in peacetime buying practices as a low-cost way of providing wartime readiness. Key contributors to this report were Richard Payne, Paul Gvoth, Leslie Gregor, Douglas Mills, and Nancy Benco. | The Army's approach to assessing wartime spare parts industrial base capability does not use current data from industry. Instead, the Army uses historical parts procurement data because its prior efforts to collect current data from industry were not successful due to poor response rates. GAO identified a program in the Defense Logistics Agency (DLA) that has several attributes reflecting sound management practices for reliable industrial base capability assessments. Although DLA's program is in its early stages of implementation, DLA has been able to successfully collect current data directly from private industry on thousands of parts. Further, DLA is analyzing that data to identify actual or potential parts availability problems. |
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Today, the Library is at an important crossroads in its long history. Its efficiency, effectiveness, and continued relevance may depend on its ability to address key issues about its future mission. The Library’s mission and activities have continued to grow since its creation in 1800, and the growth of its mission has been matched or exceeded by the growth of its collections. Booz-Allen found that the Library’s staff, management structure, and resources are in danger of being overwhelmed by this growth. Booz-Allen identified three alternative missions that could be considered to shape the Library’s future. The three missions can be used to characterize the potential scope of activity and the customers the Library might serve: (1) Congress; (2) Congress and the nation; and (3) Congress, the nation, and the world community of libraries, publishers, and scholars. The current Library mission and activities fall somewhere between the latter two alternatives. Under the first mission alternative, the Library would refocus its functions on the original role of serving Congress. Collections would be limited to broadly defined congressional and federal government needs, and Congressional Research Service-provided information would continue to support legislative functions. There would be no national library, and leadership of the information/library community would be missing unless assumed by other organizations. Booz-Allen concluded that the Library would require significantly fewer staff and financial resources to carry out this mission. The second mission alternative would emphasize the Library’s national role, and current activities of a global nature would be deemphasized. The national library role would be formally acknowledged, and the Library’s leadership and partnering roles would be strengthened. This mission would require increased interaction with national constituencies. Booz-Allen concluded that the Library would require somewhat fewer staff and financial resources to carry out this mission. Under the third mission alternative, the Library would continue and perhaps broaden its activities to serve the worldwide communities of libraries, publishers, and scholars. Collections would expand substantially with accompanying translation and processing consequences. Booz-Allen concluded that this expanded mission would require increased staff and financial resources. After determining whom the Library will serve, the next step should be to decide how the Library will serve them. Booz-Allen identified two role options: (1) independent archive/knowledge developer and (2) information/knowledge broker. Within the role of independent archive/knowledge developer, the Library would continue to develop and manage collections independently in Library and other government facilities. Traditional, original cataloging and research or development functions would be performed primarily by Library components and staff. Library collections and facility requirements would continue to expand based on collection strategy and policy. Traditional areas of Library expertise, such as acquisitions, cataloging, and preservation, would continue to grow in importance and would drive future staffing and resource requirements. Within the role of information/knowledge broker, the Library’s principal role would change from being a custodian of collections with an independent operational role to that of a comprehensive broker or referral agency. The Library would initiate collaborative and cooperative relationships with other libraries and consortia. It would use information technology to tell inquirers which library in the nation or the world has the specific information. Under this scenario, the Library’s collections would be selectively retained and/or transferred to other institutions with arrangements for appropriate preservation. Other institutions would need to demonstrate their willingness and capability to participate in such a system. Booz-Allen assessed each of these mission and role options and discussed them during focus groups with Library management, congressional staff, external customers, and others. Many focus group participants perceived a need to systematically limit and consolidate the Library’s global role. On the basis of these discussions as well as its other findings from the overall management review of the Library, Booz-Allen recommended that the Library’s mission be focused within the Congress/nation alternative, and planning should begin toward a future mission of serving Congress and performing the role of a national information/knowledge broker. should include a thorough consideration of the appropriate role of technology in supporting the Library’s operation. Third, the Library should initiate and guide this examination and debate. And fourth, at the end of the process, the mission of the Library should be affirmed by Congress, and resources should be provided at a level that would enable the Library to effectively fulfill the chosen mission. Regardless of what Congress ultimately affirms regarding the future mission of the Library, Booz-Allen also identified a number of management and operational issues that should be addressed. Booz-Allen reported that the Library’s management processes could be more effective. First, it concluded that the Library should institute a more comprehensive planning and program execution process that provides for better integration of key management elements, such as strategic and operational planning, budget development, program execution, performance measurement, and evaluation. Second, Booz-Allen noted that the Library should improve the capability to make decisions and solve problems that cut across organizational lines primarily by clarifying roles, responsibilities, and accountability. Third, it pointed out that the Library should reengineer its support services, particularly in the areas of information resource management, facilities, security, and human resources, to improve the capability of its infrastructure to support the mission. Additionally, Booz-Allen noted that the Library does not manage its operations from a process management approach but instead uses a functional approach. For example, the Library has different groups to acquire, catalog, preserve, and service each collection. Under this functional approach, the Library is not in a good position to routinely consider such factors as current arrearage status or requirements for preservation, cataloging, and storage when coordinating and planning for acquisitions of large collections. These factors could be considered more effectively under a process management approach, because one group would perform these functions for each collection. This approach also would permit the information technology function to support one Library-wide infrastructure rather than its current duplicative and poorly integrated systems. One major benefit of using a process management approach and integrated information technology infrastructure is that it provides a better understanding of how to control, manage, and improve how the organization delivers its products and services. Booz-Allen made a number of specific recommendations targeted directly at improving the Library’s management and operational processes. It emphasized that three organization-related recommendations are key to the Library’s overall success in improving its management and operations. Booz-Allen recommended that the Library clarify the role of the Deputy Librarian to serve as the Library’s Chief Operating Officer and vest the individual occupying that position with Library-wide operational decisionmaking authority; elevate the Chief Financial Officer’s position to focus greater attention on improving the Library’s financial systems and controls; and establish a Chief Information Officer position to provide leadership in technology across the organization, which should help the Library function more effectively in the electronic information age. The effective allocation and use of human and financial resources are paramount to support the day-to-day activities of the Library. However, Booz-Allen found that a variety of weaknesses hamper the Library’s ability to maintain the intellectual capital of its workforce and that the Library has opportunities for increasing revenue. Booz-Allen made several recommendations to improve the Library’s ability to deal with these important issues. The success of the Library’s mission depends heavily on its human resources. Whether the mission is to serve Congress, the nation, or the world, its ultimate achievement rests with the quality of the Library staff. However, Booz-Allen found that the human resource function at the Library has some significant problems that may hamper the Library’s ability to maintain its intellectual capital. First, the Library does not have a coordinated training program. Second, human resources’ personnel and processes are not equipped to handle changes to recruitment, training, or selection requirements that may result from technology, changes to the Library’s mission, or staff turnover. Third, the human resources services unit is not able to strategically plan for workload and staffing requirements because of its poor coordination among the Library service units. Fourth, ongoing problems in communications between managers and the unions inhibit their ability to plan together for future directions of the Library. Finally, the personnel management operations, particularly competitive selection and training, inhibit the Library’s ability to bring on new staff members and get them trained quickly. Currently, it takes about 6 months to recruit and hire new employees. Booz-Allen recognized that improving the Library’s operations would require additional funding. Thus, as part of its review, Booz-Allen looked for opportunities through which the Library could generate revenue to help offset the costs of improvements. It found that opportunities to significantly increase revenues exist in the copyright registration and cataloging areas. By fully recovering copyright registration costs, Booz-Allen estimated that the Library could receive additional revenue annually ranging from $12-$29 million, depending on different assumptions. The potential revenue to be generated from charging publishers a fee for cataloging could be about $7.5 million annually. Booz-Allen recognized that these additional potential revenue opportunities must be reviewed in light of past efforts to increase revenues and the Library’s mission. For example, Congress decided in 1948 and 1989 not to recover full cost of copyright registration, and the perception in the library community is that cataloging is at the heart of what the Library does and forms an integral part of its mission. Consequently, both of these revenue opportunities need to be considered as part of reexamining the Library’s mission with a view towards better balancing its mission and available resources. In order for the Library to have success with the implementation of any revenue opportunities, an appropriate support structure will be required. Therefore, Booz-Allen suggested that the Library needs to develop a legislative strategy that will provide it with the financial mechanisms and authority needed to implement new fee-based services. To date, Congress has not provided the Library with legislation authorizing fee-based services and all the different financial mechanisms needed to pursue a range of fee-based service opportunities. and services that are not consistent with a newly established mission. Booz-Allen interviews and focus groups identified the following Library products and services as possible candidates for reduction: selected special collections acquisitions, foreign acquisitions, selected English language acquisitions, original cataloging, exhibits, displays, and performances. As a part of the review of the Library’s management, Price Waterhouse (1) audited the Library’s fiscal year 1995 consolidated statement of financial position, (2) examined assertions made by Library management concerning the effectiveness of internal controls over financial reporting, (3) reviewed compliance with selected laws and regulations, and (4) examined assertions made by Library management concerning the safeguarding of the Library’s collection. This was the first financial statement audit of the Library since our audit of the Library’s fiscal year 1988 financial statements. Price Waterhouse found that the Library had mixed results in implementing GAO’s recommendations made in its 1991 report. The Library made improvements including resolution of significant compliance and control problems in the Federal Library and Information Network (FEDLINK) program and implementation of a new financial management system in fiscal year 1995. Price Waterhouse also found that the Library established accounting policies and procedures to address many of the problems we found in our audit of the Library’s 1988 financial statements. However, the Library had not supplemented that system with the processes necessary to generate complete, auditable financial statements. For example, the Library’s new system had not been configured to generate the detailed trial balances necessary for an audit, and the system did not track significant account balances, including property and equipment and advances from others. Further, the Library did not record significant accounting entries, including those converting balances from the old system, in sufficient detail to permit effective audit analysis of the accounts. Price Waterhouse stated that this latter deficiency, coupled with the lack of comparable prior year information and audited opening balances, precluded it from auditing the Library’s fiscal year 1995 operating statement. “. . . except for the effects of such adjustments, if any, as might have been determined to be necessary had (Price Waterhouse) been able to examine evidence regarding property and equipment balances, the Consolidated Statement of Financial Position presents fairly, in all material respects, the Library’s financial position as of September 30, 1995, in conformity with the basis of accounting described in Note 1 to the Consolidated Statement of Financial Position.” Price Waterhouse concluded that the Library’s financial internal controls in place as of September 30, 1995, were not effective in safeguarding assets from material loss and in ensuring that there were no material misstatements in the Consolidated Statement of Financial Position. In addition to the material weaknesses over property and equipment that led Price Waterhouse to qualify its opinion on the Consolidated Statement of Financial Position, Price Waterhouse reported that the Library had material weaknesses in its financial reporting preparation process, reconciliations of cash accounts with the Department of the Treasury and of various general ledger balances with those in subsidiary records, and information technology security practices over its computer operations. Price Waterhouse concluded that the Library’s internal controls in place on September 30, 1995, were effective in ensuring material compliance with relevant laws and regulations. However, Price Waterhouse reported that the Library continued to accumulate surpluses in certain gift funds that it operates as revolving funds, even though the Library does not have the statutory authority to do so. GAO previously reported this noncompliance in its audit of the Library’s 1988 financial statements. GAO recommended that the Library obtain the statutory authority necessary to continue operating the revolving gift funds but it has not received such authority. Also, Price Waterhouse found one instance where the Library violated 2 U.S.C. 158a, which prohibits the Library from investing or reinvesting a gift of securities offered to the Library until acceptance of the gift has been approved by the Joint Committee on the Library. The Library believes this was an isolated error and is holding the proceeds pending approval by the committee. financial report preparation process, reconciliations of accounting records, accounting for property and equipment, computer security practices, enhancing information that is provided to management, financial services staffing, controls over the general ledger and reporting system, internal self-assessment of internal controls, computer operations disaster recovery plan, controls over cash handling and check processing, and trust fund accounting. Price Waterhouse concluded that the Library’s management lacked reasonable assurance that the Library’s internal control structure over safeguarding of collection assets against unauthorized acquisition, use, or disposition was generally effective as of September 30, 1995. Price Waterhouse found that the Library has not completed a comprehensive risk assessment and collection security plan to identify the risks to the collection, the proposed or established control activities to address the risks, the required information management needs to carry out its responsibilities, and the methods by which management could monitor the effectiveness of control procedures. Price Waterhouse concluded that without these practices and procedures, Library managers do not have reasonable assurance that the risk of unanticipated loss (theft, mutilation, destruction, or misplacement) of materials with significant market value, cultural or historical importance, or with significant information content is reduced to an acceptable level. Booz-Allen had similar findings in its review of how the Library managed security. procedures to periodically inventory key items in the collection; when staff are precluded from bringing personal items into storage areas; when it has reduced the number of non-emergency exits in the collections areas of the Library’s buildings; when it has regular reporting, tracking, and follow-up of missing materials; when it has a coordinated approach to access by its own maintenance personnel and those of the Architect of the Capitol; and when it has sufficient surveillance cameras in areas where high-value materials are stored. Environmental risks would be effectively controlled when the Library has determined that high-value, irreplaceable items have been protected from possible fire and water damage and that its preservation program is targeting and treating its highest priority items in a timely fashion. Although the Library has been striving to improve the safeguarding of its collection since 1991, the findings of Price Waterhouse and Booz-Allen confirm that the Library continues to have a number of significant weaknesses in safeguarding the collection materials that the Library relies upon to serve Congress and the nation. Mr. Chairman, that concludes the overall summary of the review of the management of the Library of Congress. We would be pleased to answer any questions that you or other 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 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed two independent management and financial reviews of the Library of Congress. GAO noted that: (1) the management review found that the Library's mission needed to be reassessed because its enormous growth threatens to overwhelm its staff, structure, and resources; (2) alternative missions include service to Congress exclusively, Congress and the nation, or Congress, the nation, and the world community; (3) the first two mission options would require fewer staff and resources, but the third mission would require staff and funding increases; (4) after determining its mission, the Library's service role options include being an independent archive-knowledge developer or an information-knowledge broker; (5) the review recommended that the Library focus on the Congress-nation mission alternative and become a national information-knowledge broker; (6) the review also recommended that the Library improve its human and financial resources management and operational processes; (7) the financial review found that the Library had mixed results in implementing previous GAO recommendations and certain financial management weaknesses remain; (8) except for property and equipment accounts, the Library's financial statements presented fairly, in all material respects, its financial position as of September 30, 1995; (9) the Library's internal controls were not effective in safeguarding assets, ensuring that material misstatements did not occur, and ensuring that gifts complied with applicable laws and regulations; and (10) the review made several recommendations for safeguarding assets and improving accounting processes. |
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FPS was established in 1971 as the uniformed protection force of GSA government-occupied facilities. The mission of FPS is to render federal properties safe and secure for federal employees, officials, and visitors in a professional and cost-effective manner by deploying a highly trained and multi-disciplined police force. FPS was originally located within GSA’s Public Buildings Service (PBS). As part of PBS, FPS was responsible for providing law enforcement and security services to GSA’s tenants and the public at federal buildings nationwide. The Homeland Security Act of 2002 established DHS to prevent and mitigate the damage from terrorist attacks within the United States, which includes terrorism directed at federal facilities. Under the act, FPS was transferred from the GSA to DHS. DHS later placed it within ICE. The President’s fiscal year 2010 budget requested the transfer of FPS from ICE to NPPD. Language in the budget request stated that FPS responsibilities, such as providing physical security and policing of federal buildings, establishing building security policy, and ensuring compliance, are outside the scope of ICE’s immigration and customs enforcement mission and are better aligned with NPPD’s mission. The transfer of FPS to NPPD became effective when the fiscal year 2010 DHS appropriations act was signed into law on October 28, 2009. Figure 1 shows FPS’s move within DHS from ICE to NPPD. To accomplish its mission, in 2011 FPS has a total budget authority of about $1 billion, currently employs 1,225 federal staff, and about 13,000 contract guard staff to secure over 9,000 GSA owned or leased facilities. FPS conducts law enforcement activities as well as risk assessments to reduce facility vulnerability to criminal and terrorist threats and helps to ensure that facilities are secure and occupants are safe. For the transition, FPS, NPPD, ICE, and DHS headquarters components formed a Senior Working Group, co-chaired by the Senior Counselor to the Under Secretary of NPPD, the ICE Deputy Assistant Secretary for Management, and the FPS Director. DHS developed a transition plan, the August 2009 FPS-NPPD Transition Plan, which describes DHS’s overall transition planning process and milestones for completing the transition, among other things. The plan shifted FPS’s mission and responsibility for all of its mission-support functions, with the exception of financial accounting services and firearms and tactical training, from ICE to NPPD or other DHS components. While FPS has its own law enforcement personnel to perform its mission responsibilities, it does not perform all of its mission-support functions such as payroll, travel services, and contracting. For this reason, FPS has traditionally relied on GSA and ICE to carry out these functions. For example, while under GSA, FPS’s contracting functions were handled by the contracting component of GSA’s Public Buildings Service, and under ICE, by its Office of Acquisition. The transition plan noted that most transition tasks would be completed by October 2010. In addition, the transition plan noted staff-level working groups were formed that consisted of subject matter experts from each of the agencies, FPS, NPPD, and ICE, to plan in detail the transfer of FPS’s mission and each mission-support function. The working groups were tasked with planning, tracking issues related to the FPS transition, and reporting progress on the transition. Initially, 16 working groups were formed to carry out the transition in 18 mission-support functions, as reflected in figure 2. According to the transition plan, until the transition is complete, ICE is to continue to provide necessary management and operational services through continued agreements in support of FPS or until individual MOAs, MOUs, or SLAs are concluded with NPPD and other DHS headquarters components. For example, for fiscal year 2010, FPS and NPPD signed 12 SLAs with ICE, covering services such as training and development, security management, and IT services, 1 MOA for legal services, and 1 MOU for financial services. These agreements were meant to ensure that there were no lapses in services while mission-support functions were being transferred to either NPPD or DHS headquarters components. In October 2009, FPS’s facility protection mission transferred and its reporting channels were shifted from ICE to NPPD. The Under Secretary of NPPD—through delegation from the Secretary of Homeland Security— assumed operational control of FPS and its mission from ICE with the enactment of the fiscal year 2010 DHS appropriations act. Similarly, the Under Secretary delegated the authority and responsibility to the Director of FPS to continue FPS’s physical security and law enforcement services mission, consistent with the law enforcement authority for the protection of federal property. Upon its transition to NPPD, FPS became a component within the directorate. Figure 3 shows the location of FPS within NPPD’s organizational structure. According to FPS headquarters and regional officials we interviewed, the transition of FPS’s mission from ICE to NPPD occurred without degradation to the mission, and there has been minimal, if any, disruption to FPS’s field operations. Moreover, the regional officials said that the transition has not had an impact on the way FPS performs its mission on a daily basis. FPS officials stated that FPS continued to lead DHS’s security and law enforcement services at more than 9,000 GSA facilities nationwide, and its operational activities, such as conducting facility security assessments, conducting criminal investigations, and responding to critical incidents, continued uninterrupted during and after the transition. Since taking operational control of FPS in October 2009, NPPD and other DHS components have assumed responsibility for 13 of 18 FPS mission- support functions, but the transfer of the remaining 5 mission-support functions from ICE to NPPD or other DHS components has been delayed. In August 2009, DHS reported to Congress that the transition would be completed by October 2010 and estimated it would cost $14.6 million. However, DHS now reports that the transfer of 4 functions will not be completed until the end of fiscal year 2011 or start of fiscal year 2012 and one of these functions will not be transferred until October 2012. For the delayed functions, ICE continues to provide mission support to FPS, and new or revised SLAs were developed to articulate the continuing time frames and services that ICE would provide to FPS. The 18 mission- support functions and their transfer status are presented in table 1. According to DHS officials responsible for executing the FPS transition, the transfer of the 5 mission-support functions will take longer than originally reported to Congress due to a number of factors, including unanticipated costs associated with building the infrastructure within NPPD and other DHS components to support areas such as IT services. As reflected in table 2, the delays in the transition schedule for the delayed mission-support functions range from almost 1 to 2 years. DHS officials explained that the transfer of four mission-support functions— business continuity and emergency preparedness, personnel security, facilities, and Equal Employment Opportunity (EEO)—are on track to transfer by the end of fiscal year 2011 or start of fiscal year 2012. Specifically, DHS officials explained the following All activities for the transfer of business continuity and emergency preparedness have been completed but are waiting on NPPD to complete the building of a continuity of operations site, which according to NPPD officials, will be complete by October 2011. NPPD has moved a Senior Executive Service (SES)-level director into position, and is in the process of establishing an Office of Compliance and Security, which will provide compliance investigations, program review, personnel security, interior physical security, information security, and special security program services throughout NPPD. According to the Acting Director of the Office of Compliance and Security, the goal is to establish this office by October 2011. NPPD has hired three of the five positions that were created to support FPS facilities management. These personnel, according to the officials, are working with ICE to transfer projects and all of them are expected to transfer by the end of fiscal year 2011. The only activity required for the transfer of EEO services is to hire staff needed to support FPS within NPPD, which should be completed by the end of fiscal year 2011. While DHS has successfully transferred FPS’s mission and the majority of its mission-support functions, deficiencies in the transition schedule for the transfer of IT services could limit DHS’s ability to ensure the timely transition of this important function. DHS’s transition plan called for working groups to develop comprehensive project management plans (i.e., detailed schedules) with detailed tasks and end dates for the individual mission-support functions to ensure critical path activities were identified, managed, and resourced. DHS did not develop these schedules for all the mission-support functions since, according to DHS officials, in some cases the transfer of a function was relatively easy and did not need a schedule, such as public affairs and legislative affairs. However, the transfer of FPS’s nationwide IT infrastructure and field support is more complex. Because of the complexity of transferring IT services, DHS developed a detailed schedule to manage the transfer of IT services, as called for in the transition plan. As we have previously reported, the success of fielding any program depends in part on having a reliable schedule that defines, among other things, when work activities will occur, how long they will take, and how they are related to one another. As such, the schedule not only provides a road map for systematic execution of a program, but also provides a means by which to gauge progress, identify and address potential problems, and promote accountability. Among other things, best practices and related federal guidance cited in our cost estimation guide call for a program schedule to be program-wide in scope, meaning that it should include the integrated breakdown of the work to be performed, and expressly identify and define relationships and dependencies among work elements and the constraints affecting the start and completion of work elements. Table 3 presents a summary of best practices we have identified for applying a schedule as part of program management. Our analysis of the IT schedule found that it did not reflect our best practices for scheduling, as seen in table 4. We shared the results of our analysis with responsible DHS IT transition officials, who stated that they have taken note of the deficiencies and are taking steps to improve the schedule using the scheduling practices. According to these officials, they plan to work closely with staff in another NPPD component agency with the expertise necessary to improve the IT transition schedule. Nevertheless, if the schedule does not fully and accurately reflect the project, it will not serve as an appropriate basis for analysis and may result in unreliable completion dates, time extension requests, and delays. With regard to the transfer of the IT services function, it would be difficult for DHS to accurately predict the completion date for the IT transition without a more reliable schedule. Moreover, completing projects within projected time frames helps ensure agencies do not incur additional costs, which is especially important in a fiscally constrained environment. Ultimately, incorporating scheduling best practices into the IT transition schedule could help DHS better manage the completion of the transition and help provide reasonable assurance that the transfer is complete within its projected timeframe. According to best practices for cost estimates, in addition to a reliable schedule, a reliable cost estimate is critical to the success of any program. A reliable cost 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. Such an estimate is important for any agency, but especially an agency like FPS that is solely fee funded and has faced projected shortfalls in fee collections to cover operational costs. Federal financial accounting standards state that reliable information on the costs of federal programs and activities is crucial for effective management of government operations and recommend that full costs of programs or activities be reported so that decision makers have information necessary to make informed decisions on resources for programs, activities, and outputs, and to help ensure that they get expected and efficient results. Drawing from federal cost-estimating organizations and industry, our cost estimation best practices list four characteristics of a high-quality and reliable cost estimate that management can use for making informed decisions—comprehensive, well-documented, accurate, and credible. In July 2008, the DHS Under Secretary for Management signed a memorandum stating DHS will standardize its cost-estimating process by using the best practices we identified. To implement the FPS transition, DHS, in 2009, estimated it would cost $14.6 million to complete the transition of FPS from ICE to NPPD. DHS’s estimate provided for costs into three categories—personnel, financial management, and IT services. In 2011, the department revised the estimate for each of the three categories, which totaled $18.5 million. At the time of our review, FPS had spent about $1.9 million of its operating revenue for transition-related expenses. Table 5 reflects estimated and actual costs for personnel, financial management services, and IT services associated with the FPS transition. DHS has successfully transferred the majority of mission-support functions, which includes oversight of financial management services, and, according to DHS officials, is on track to hire most of the remaining new personnel by the beginning of fiscal year 2012 to provide services previously provided by ICE. However, DHS has not yet transferred IT services and does not expect to complete the transfer until October 2012. Having a reliable and valid cost estimate is important for enabling managers to make informed decisions and facilitate tracking progress against estimates to effectively manage the transfer of IT services. While DHS committed to using GAO’s best practices in preparing cost estimates in July 2008, our analysis of the cost estimate for the transfer of IT services found that it only partially met one of the four characteristics of a reliable cost estimate and minimally met the other three, as table 6 illustrates. DHS officials stated that there are no plans to revise the IT transition estimate. According to DHS officials, rather than revising the estimate, the department plans to report actual costs once the transition is complete. However, incorporating cost estimating best practices into the IT transition cost estimate could provide an improved basis for remaining IT transition investment decisions and could facilitate tracking of actual costs against estimates, both of which are fundamental to effectively managing the transfer of IT services. Since 2007, we have reported that FPS faces significant challenges with protecting federal facilities, and in response, FPS has started to take steps to address some of them. For example, our July 2009 and April 2010 reports on FPS’s contract guard program identified a number of challenges that the agency faces in managing its contract guard program, including ensuring that the 15,000 guards that are responsible for helping to protect federal facilities have the required training and certification to be deployed at a federal facility. In response to our July 2009 report, FPS took a number of immediate actions with respect to contract guard management, including increasing the number of guard inspections it conducts at federal facilities in some metropolitan areas and revising its guard training. Further, in our April 2010 report, we recommended, among other things, that the Secretary of Homeland Security direct the Under Secretary of NPPD and the Director of FPS to develop a mechanism to routinely monitor guards at federal facilities outside metropolitan areas and provide building-specific and scenario-based training and guidance to its contract guards. As of August 2010, FPS was in the process of implementing this recommendation. Additionally, in July 2009 we reported that FPS did not have a strategic human capital plan to guide its current and future workforce planning efforts. Among other things, we recommended that FPS develop and implement a long-term strategic human capital plan that will enable the agency to recruit, develop, and retain a qualified workforce. DHS concurred with our recommendation and is taking action to address it. In June 2008, we reported on FPS’s funding challenges, and the adverse implications its actions taken to address them had on its staff, such as low morale among staff, increased attrition, and the loss of institutional knowledge. We recommended that FPS evaluate whether its use of a fee-based system or alternative funding mechanism was the most appropriate manner to fund the agency. FPS concurred with our recommendation; however, as of May 2011, FPS had not begun such an analysis. Finally, in our 2009 High-Risk Series, and again in 2011, we designated federal real property as a high-risk area, in part, because FPS has made limited progress and continues to face challenges in securing real property. If successfully managed, the transfer of FPS to NPPD could provide DHS the opportunity to better advance progress towards addressing FPS’s challenges. The Under Secretary of NPPD and the former FPS Director, in written statements for the November 2009 congressional hearing on the FPS transfer, noted that the transition to NPPD would better leverage and align infrastructure protection resources and competencies to maximize their value. Further, the transition plan noted that the transfer would improve the mission effectiveness of both FPS and NPPD. According to NPPD officials, the agency has undertaken actions that serve as a foundation for integrating FPS into NPPD. First, NPPD officials explained that efforts undertaken by the senior working group and the staff working groups have served to move the transition forward, and integrate the FPS organization into the larger NPPD structure. These officials explained that FPS has been established as a component within NPPD, thereby aligning FPS’s infrastructure protection mission within NPPD’s critical infrastructure protection mission. As noted in the transition plan, NPPD chairs the operations of the Interagency Security Committee, a group that includes the physical security leads for all major federal agencies and whose key responsibility is the establishment of governmentwide security policies for federal facilities. As further noted in the transition plan, these missions are complementary and mutually supportive, and the alignment resulting from the transfer improves and advances the mission effectiveness of both FPS and NPPD. Second, NPPD officials stated that FPS has begun to develop a new strategic plan to align FPS’s activities and resources to support NPPD mission-related outcomes. Our work has shown that in successful organizations, strategic planning is used to determine and reach agreement on the fundamental results the organization seeks to achieve, the goals and measures it will set to assess programs, and the resources and strategies needed to achieve its goals. Third, NPPD officials noted that NPPD has monthly meetings with FPS to review open GAO recommendations and is assisting FPS in closing out these recommendations. For example, in consultation with NPPD, FPS is developing a human capital strategic plan. A human capital strategic plan, flowing out of a new strategic plan, could help facilitate efforts to address previously identified challenges. Further, as we have previously reported, strategic human capital planning that is integrated with broader organizational strategic planning is critical to ensuring agencies have the talent they need for future challenges. Finally, according to the Senior Counselor to the Under Secretary of NPPD, NPPD has established a Field Force Integration Working Group among a set of five other integration working groups to pursue integration activities across the new and larger NPPD, and across DHS as a whole. In addition, the Senior Counselor noted that the purpose of the group is to examine capabilities and resources from across the NPPD components to gain efficiencies and economies of scale in support of all NPPD field operations. The official further noted that the FPS’s workforce and regional structure is by far the largest and most established of the NPPD components. FPS’s field structure and capabilities will be used as comparative models and resources as NPPD works toward continued integration of its operating entities. While these are encouraging steps, it is too early to tell if these planned actions will help address the challenges we have previously identified. With its critical role in protecting federal facilities against the threat of terrorism and other criminal activity, it is important that FPS’s transfer to NPPD and its related integration are successful. DHS has implemented a number of scheduling and cost estimating best practices in the FPS transition and has successfully transferred 13 of the 18 mission support functions. Nevertheless, DHS could better manage the transfer of the IT services mission-support function, and help inform DHS, NPPD, FPS, and congressional investment decision making. Establishing a reliable schedule and incorporating cost estimation best practices in the estimate for the transfer of IT services could help provide DHS enhanced assurance that this delayed function will be transferred in accordance with its projected time frames. To help ensure that DHS and Congress have reliable, accurate information on the timeframes and costs of transferring FPS from ICE to NPPD, we recommend that the Secretary of Homeland Security direct the Under Secretary for NPPD, in consultation with the Director of FPS and the Director of ICE, to improve the schedule for transferring IT services, in accordance with the transition plan, and to reflect scheduling best practices, and update the IT transition cost estimate, in accordance with cost- estimating best practices. We received written comments on a draft of this report from DHS. DHS concurred with our recommendations and stated that it is currently taking actions to implement them. With respect to improving the schedule for transferring IT services, DHS indicated that NPPD held working sessions with subject matter experts from DHS, ICE, and FPS Chief Information Officer (CIO) teams to capture all transition activities in greater detail and identify areas for implementation of best practices into schedule updates. DHS also noted that NPPD consulted with NPPD/United States Visitor and Immigrant Status Indicator Technology (US-VISIT) and adopted recommendations for schedule improvements, leveraging US-VISIT’s lessons learned toward better alignment with GAO best practices, acquisition of scheduling expertise, and acquisition of specific software tools, among other things. Regarding updating the IT transition cost estimate, DHS noted that NPPD is researching and resolving cost- estimating deficiencies identified in the GAO report in collaboration with the DHS CIO. The department also noted that NPPD plans to identify an alternative network design solution that may reduce transition cost, and will refine the cost estimate after discussing network design discussions with subject matter experts and incorporating cost-estimating best practices. Written comments from DHS are reprinted in appendix II. As agreed with your office, unless you publicly announce the contents of the report, we plan no further distribution for 30 days from the report date. At that time, we will send copies of this report to the Secretary of Homeland Security, the Under Secretary of the National Protection and Programs Directorate, the Director of the Federal Protective Service, the Director of the Immigration and Customs Enforcement, and appropriate congressional committees. In addition, this report will be available at no charge on the GAO web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact 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 report. Key contributors to this report are listed in appendix III. We examined the transition of the Federal Protective Service (FPS) from Immigration and Customs Enforcement (ICE) to the National Protection and Programs Directorate (NPPD). We address the following questions: (1) to what extent has the FPS transition been implemented and what related challenges, if any, did FPS and NPPD face in implementing the transition and (2) to what extent will the transition help address previously identified challenges to protecting federal facilities? To determine the extent to which the FPS transition has been implemented and what challenges, if any, FPS and NPPD faced in implementing the transition, we reviewed documents related to the transition, including the August 2009 FPS-NPPD Transition Plan, all transition plan updates, DHS delegations of authority related to the execution and administration of FPS, and Memorandum of Agreement, Memorandum of Understanding, and all service level agreements signed among FPS, NPPD, and ICE. We interviewed FPS officials directly affected by the transition—including the FPS Deputy Director and Chief of Staff headquartered in Washington, D.C., and in each of 6 of FPS’s 11 regional offices, the Regional Director, Deputy Director for Operations, and Mission Support Chief. We chose these offices on the basis of geographical dispersion. They included: the Northwest/Arctic Region (Federal Way, Washington); the Greater Southwest Region (Grand Prairie, Texas); the Heartland Region (Kansas City, Missouri); the Great Lakes Region (Chicago, Illinois); the National Capital Region (Washington, D.C.); and the New England Region (Boston, Massachusetts). Among other things, we asked questions about their experiences regarding the transition of FPS’s mission and mission- support functions from ICE to NPPD. While the results of these interviews provided examples of FPS officials’ experiences and perspectives, they cannot be generalized beyond those we interviewed because we did not use statistical sampling techniques in selecting the regional offices, headquarters officials, and regional staff. Additionally, we met with members of the transition senior working group, including the NPPD Senior Counselor to the Under Secretary and the FPS Director, as well as interviewed members of all 16 staff-level working groups to discuss the extent to which FPS’s 18 mission-support functions had transferred from ICE to NPPD. The working groups included officials from FPS, NPPD, ICE, and in some groups, DHS headquarters. We compared the FPS information technology (IT) transition schedule, the IT transition cost estimate, and related documents to the practices in our Cost Estimating and Assessment Guide. We focused on the IT mission- support function because it required a significant commitment of resources, oversight, and time by DHS to complete the transition. For the IT transition schedule and the cost estimate, we scored each best practice as either being Not met—DHS provided no evidence that satisfies any of the criterion; Minimally met—DHS provided evidence that satisfies a small portion of the criterion; Partially met—DHS provided evidence that satisfies about half of the criterion; Substantially met—DHS provided evidence that satisfies a large portion of the criterion; and Met— DHS provided complete evidence that satisfies the entire criterion. We provided the results of our schedule and cost analyses to DHS officials and met with them to confirm the results. Based on the interviews and additional documentation provided by DHS officials, we updated the results of our analyses, as needed. We reviewed financial documentation provided by all three components reflecting transition costs such as salaries, benefits, and expenses for new personnel hired to support the FPS transition, financial management services provided by ICE, and IT deployment. To assess the reliability of this documentation, we (1) performed electronic testing for obvious errors in accuracy and completeness; (2) compared the data with other sources of information, such as payroll reports to payroll data, cost data from the ICE Office of Financial Management and documentation from the Intra- Governmental Payment and Collection (IPAC) system; and (3) interviewed agency officials knowledgeable about financial management and budgeting at all three agencies to discuss transition-related expenses incurred at the time of our review, and to identify any data problems. When we found discrepancies (such as data entry errors) we brought them to the officials’ attention and worked with them to correct discrepancies before concluding our analysis. We found the cost data to be sufficiently reliable for the purposes of this review. To determine the extent to which the transition will help address previously identified challenges to protect federal facilities, we reviewed prior GAO reports and testimonies related to FPS’s facility protection efforts, and spoke with NPPD officials about FPS’s ongoing challenges in this regard. We also reviewed and analyzed documentation, such as the transition plan, testimony from key senior leaders in NPPD and FPS provided for a hearing on the FPS transition, FPS’s strategic plan, and NPPD’s strategic activities report. Finally, we interviewed the Senior Counselor to the Under Secretary of NPPD, and FPS Deputy Director for Operations and Chief of Staff, and discussed actions underway or planned to further integrate FPS into NPPD. We conducted this performance audit from October 2010 through July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe 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, Sandra Burrell, Assistant Director, and Valerie Kasindi, Analyst-in-Charge, managed this assignment. Don Kiggins made significant contributions to the work. Gary Mountjoy provided expertise on IT issues and Jack Warner provided expertise on financial management issues. Tracey King provided legal support. Michele Fejfar assisted with design and methodology and Karen Richey provided expertise on cost estimation and scheduling best practices. Katherine Davis provided assistance in report preparation and Robert Robinson developed the report’s graphics. | Events such as the February 2010 attack on the Internal Revenue Service offices in Texas, and the shooting in the lobby of the Nevada federal courthouse, demonstrate the vulnerabilities of federal facilities and the safety of the federal employees who occupy them. The Federal Protective Service (FPS) is the primary agency responsible for the security of over 9,000 federal government facilities across the country. The fiscal year 2010 DHS appropriations act transferred FPS from Immigration and Customs Enforcement (ICE) to the National Protection and Programs Directorate (NPPD), within the Department of Homeland Security (DHS). This report addresses (1) the extent to which the FPS transition has been implemented and any remaining related challenges, and (2) the extent to which the transition will help address previously identified challenges to protecting federal facilities. GAO reviewed the 2009 FPS-NPPD transition plan; agreements between FPS, NPPD, and ICE, and best practices for scheduling and cost estimating; and interviewed DHS officials. Since October 2009, FPS's facility protection mission and 13 of 18 mission-support functions have transferred from ICE to NPPD; however, the transition schedule for the 5 remaining mission-support functions has been delayed. For example, while functions such as human capital and budget formulation have been transferred, information technology (IT) services, business continuity and emergency preparedness, facilities, personnel security, and equal employment opportunity have not. In August 2009, DHS reported to Congress that the transition of these functions would be completed by October 2010. DHS now reports that it plans to complete the transfer of 4 of the 5 remaining mission-support functions by September or October 2011, and estimates that the transfer of IT services will not be complete until October 2012. DHS developed a transition plan to guide the planning and execution of the transfer. Among other things, the plan called for schedules with detailed tasks and end dates to be developed for all mission-support functions to ensure critical path activities were identified, managed, and resourced. DHS also developed a detailed schedule to manage the transfer of IT services, as called for in the transition plan. However, GAO's analysis of the schedule found that it did not reflect GAO's best practices for scheduling such as capturing, sequencing, and assigning resources to all activities necessary to accomplish the work. When a schedule does not accurately reflect the project, it will not serve as an appropriate basis for analysis and may result in unreliable completion dates and delays. As of May 2011, DHS estimated that it would cost $6.2 million to complete the IT transition. GAO's analysis of this cost estimate found it did not meet all the characteristics of a reliable cost estimate. For example, the estimate was not well documented because it was not supported by detailed explanation describing how the estimate was derived and did not include sufficient detail so that GAO could corroborate it. By incorporating cost estimation best practices for the IT transition cost estimate, DHS could enhance the estimate's reliability and better inform decisions about the cost to complete the transition. The transfer of FPS to NPPD could provide DHS the opportunity to better advance progress towards addressing FPS's challenges to protecting federal facilities that have been previously identified by GAO. Since 2007, GAO has reported that FPS faces significant challenges with protecting federal facilities. The transition plan noted that the transfer of FPS to NPPD would improve the mission effectiveness of both agencies. NPPD officials explained that the agency has undertaken actions that serve as a foundation for integrating FPS into NPPD. For example, FPS has begun to develop a new strategic plan to align FPS's activities and resources to support NPPD mission-related outcomes. Additionally, NPPD is assisting FPS in developing a human capital strategic plan, as recommended by GAO in July 2009. These steps are encouraging, but it is too early to tell if these planned actions will help address challenges previously identified by GAO. GAO recommends that DHS improve the schedule for transferring IT services to reflect scheduling best practices, and update the IT transition cost estimate, in accordance with cost-estimating best practices. DHS concurred with GAO's recommendations. |
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FSA provides benefits through various programs of the Farm Security and Rural Investment Act of 2002. Appendix III provides a listing of USDA farm programs and payments made from 1999 through 2005. The three- entity rule applies to certain USDA payments, including direct and counter-cyclical payments; loan deficiency payments and marketing loan gains, under the Marketing Assistance Loan Program; and Conservation Reserve Program payments. Direct and Counter-Cyclical Payments Program provides two types of payments to producers of covered commodity crops, including corn, cotton, rice, soybeans, and wheat. Direct payments (formerly known as production flexibility contract payments) are tied to a fixed payment rate for each commodity crop and do not depend on current production or current market prices. Instead, direct payments are based on the farm’s historical acreage and yields. Counter-cyclical payments provide price- dependent benefits for covered commodities whenever the effective price for the commodity is less than a pre-determined price (called the target price). Counter-cyclical payments are based on a farm’s historical acreage and yields, and are not tied to the current production of the covered commodity. Marketing Assistance Loan Program (formerly known as the Commodity Loan Program) provides benefits to producers of covered commodity crops when market prices are low. Specifically, the federal government accepts harvested crops as collateral for interest-bearing loans (marketing assistance loans) that are due in 9 months. When market prices drop below the loan rate (the loan price per pound or bushel), the government allows farmers to repay the loan at a lower rate and retain ownership of their commodity for eventual sale. The difference between the loan rate and the lower repayment rate is called the marketing assistance loan gain. In lieu of repaying the loan, farmers may forfeit their crops to the government when the loan matures and keep the loan principal. In addition, farmers who do not have marketing assistance loans can receive a benefit when prices are low—the loan deficiency payment— that is equal to the marketing assistance loan gain that the farmer would have received if the farmer had a loan. Finally, farmers can purchase commodity certificates that allow them to redeem their marketing assistance loan at a lower repayment rate and immediately reclaim their commodities under loan. The difference between the loan rate and the lower repayment rate is called the commodity certificate gain. Conservation Reserve Program provides annual rental payments and cost- share assistance to producers to help them safeguard environmentally sensitive land. Producers must contractually agree to retire their land from agricultural purposes and keep it in approved conserving uses for 10 to 15 years. Most farmers receive farm program payments directly from FSA as an individual operator. However, some farmers use legal entities to organize their farming operations to reduce their exposure to financial liabilities or estate taxes or, in some cases, to increase their potential for farm benefits. Some of the more common ways farmers organize their operations include the following: Corporations have a separate legal existence from their owners; that is, the corporation, rather than the owners, is ordinarily responsible for farm business debts and can be sued. As a result, some individuals may incorporate their farm to protect their personal assets. General partnerships are a simple arrangement of two or more partners— individuals or entities—that do business together. Partners are personally liable for their own conduct and for the conduct of those under their direct supervision, as well as for negligence, wrongful acts, and misconduct of other partners and partnership employees. Partners are also personally liable for the partnership’s commercial obligations, such as loans or taxes. Joint ventures are two or more individuals who pool resources and share profits or losses. Joint ventures have no legal existence independent of their owners. Members in a joint venture are personally liable for the farm’s debts. Limited partnerships are an arrangement of two or more partners whose liability for partnership financial obligations is only as great as the amount of their investment. A limited partnership must have at least one general partner who manages the farm business and who is fully liable for partnership financial obligations to be considered eligible for farm program payments. Trusts (irrevocable and revocable) are arrangements generally used in estate planning that provide for the management and distribution of property. A revocable trust is amendable by the grantor during his or her lifetime who may also be the trustee and beneficiary. An irrevocable trust is an arrangement in which the grantor departs with ownership and control of property. Other types of entities that may qualify for farm program payments under payment limitation rules include a limited liability company—a hybrid form of a business entity with the limited liability feature of a corporation and the income tax treatment of a general partnership; a charitable organization; and a state or political subdivision. FSA is responsible for ensuring that recipients meet payment eligibility criteria and do not receive payments that exceed the established limitations. It carries out this responsibility through its headquarters office, 50 state offices, and over 2,300 field offices. IPIA requires the heads of federal agencies to annually review all programs and activities that they administer, identify those that may be susceptible to significant improper payments, and estimate and report on the annual amount of improper payments in those programs and activities. IPIA defines an improper payment as any payment that should not have been made or that was made in an incorrect amount, including any payment to an ineligible recipient. OMB defines significant improper payments as payments in any particular program that exceed both 2.5 percent of total program payments and $10 million annually. If a program’s estimated improper payments exceed $10 million in a year, IPIA and related OMB guidance requires agencies to prepare and implement a plan to reduce improper payments and report actions taken. Agencies are required to report this information, among other things, annually in their Performance and Accountability Reports. Specifically, OMB guidance requires agencies to report on (1) the causes of improper payments and corrective actions, (2) the steps the agency has undertaken to ensure that agency managers are held accountable for reducing and recovering erroneous payments, along with a realistic timetable, and (3) any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing improper payments. In November 2006, we reported that federal agencies, including USDA, need to improve their reporting of improper payments under IPIA by better identifying programs susceptible to improper payments and improving statistical sampling methodologies to estimate improper payments made. While there are legitimate reasons for keeping estates open, we found that FSA field offices do not systematically determine the eligibility of all estates that have been kept open for more than 2 years, as regulations require, and when they do conduct eligibility determinations, the quality of the determinations varies. Without performing annual determinations, an essential management control, FSA cannot identify estates being kept open primarily for the purpose of receiving these payments and be assured that the payments are proper. We identified weaknesses in FSA’s eligibility determinations for 142 of the 181 estates we reviewed. In particular, FSA did not conduct any program eligibility determinations for 73, or 40 percent, of estates that required a determination from 1999 through 2005. Because FSA did not conduct the required determinations, the extent to which estates remained open for reasons other than for obtaining program payments is not known. Sixteen of these 73 estates received more than $200,000 in farm program payments and 4 received more than $500,000 during this period. In addition, 22 of the 73 estates had received no eligibility determinations during the 7-year period we reviewed, and these estates had been open and receiving payments for more than 10 years. In one case, we found that the estate has been open since 1973. The following provides examples of estates that received farm program payments but were not reviewed for eligibility by FSA: A North Dakota estate received farm program payments totaling $741,000 from 1999 through 2003, but FSA did not conduct the required determinations. An Alabama estate received payments totaling $567,000 from 1999 through 2005, but FSA did not conduct the required determinations. In this case, the estate has been open since 1981. Two estates in Georgia, open since 1989 and 1996, respectively, received payments totaling more than $330,000 each, from 1999 through 2005. Neither estate received the required determinations for any of the years we reviewed. An estate in New Mexico, open since 1991, received $320,000 from 1999 through 2005, but it did not receive any of the required determinations. According to FSA field officials, many determinations were either not done or not done thoroughly, in part because of a lack of sufficient personnel and time, as well as competing priorities for carrying out farm programs. However, FSA’s failure to conduct appropriate eligibility determinations means that it has no assurance that it is not making farm program payments to estates that have been kept open primarily to receive these payments. Even when FSA field offices determined estates’ eligibility for continued farm program payments, they did not always do so consistently. For the remaining 108 estates, 39 had eligibility determinations every year that a determination was required, while 69 had determinations at least once between 1999 and 2005, but not with the frequency required by regulations. Table 1 shows the number of years for which estates in our sample were required to have annual eligibility determinations compared with the number of years that FSA actually conducted determinations. The dark shaded numbers highlight the number of estates that received all the required annual eligibility determinations for the years that the estate received farm program payments—a total of 39 estates. As the table shows, the longer an estate was kept open, the fewer determinations it received. For example, only 2 of the 36 estates requiring a determination every year over the 7-year period received all seven required determinations. According to FSA guidelines, an estate should provide evidence that it is still making required reports to the court to be eligible for farm program payments. However, we found that FSA sometimes approved eligibility for payments when the estate had provided insufficient information—that is, information that was either nonexistent or vague. For example, in 20 of the 108 determinations, the minutes of FSA county committee meetings indicated approval of eligibility for payments to estates, but the associated files did not contain any documents that explained why the estate remained active. FSA also approved eligibility on the basis of insufficient explanations for keeping the estate open. In five cases, executors explained that they did not want to close the estate but did not explain why. In a sixth case, documentation stated that the estate was remaining active upon the advice of its lawyers and accountants, but did not explain why. Furthermore, some FSA field offices approved program payments to groups of estates that were kept open after 2 years without any apparent review. In one case in Georgia, minutes of an FSA county committee meeting listed 107 estates as eligible for payments by stating that the county committee approved all estates open over 2 years. Two of the estates on this list of 107 were part of the sample that we reviewed in detail. In addition, another 10 estates in our sample, from nine different FSA field offices, were also approved for payments without any indication that even a cursory review had been conducted. Additionally, the extent to which FSA field offices make eligibility determinations varies from state to state, which suggests that FSA is not consistently implementing its eligibility rules. Overall, FSA field offices in 16 of the 26 states we reviewed made less than one-half of the required determinations of their estates. For example, in Alabama and in Georgia, FSA field offices made only 22 percent and 31 percent of the required determinations for estates, respectively, compared with FSA field offices in Kansas and Texas, which made 62 percent and 87 percent of the required determinations, respectively. Table 2 shows, for the 181 estates in our sample, the variation in FSA’s conduct of eligibility reviews from 1999 through 2005 in states that had five or more estates to examine. Appendix IV shows the extent to which FSA conducted estate eligibility determinations in each state in our review. Under the three-entity rule, individuals receiving program payments may not hold a substantial beneficial interest in more than two entities also receiving payments. However, because a beneficiary of an Arkansas estate we reviewed received farm program payments through the estate in 2005, as well as through three other entities, the beneficiary was able to receive payments beyond what the three-entity rule would have allowed. FSA was unaware of this situation until we brought it to officials’ attention, and FSA has begun taking steps to recover any improper payments. Had FSA conducted any eligibility determinations for this estate during the period, it might have determined that the estate was not eligible for these payments, preventing the beneficiary from receiving what amounted to a payment through a fourth entity. We informed FSA of the problems we uncovered during the course of our review. According to FSA field officials, a lack of sufficient personnel and time, and competing priorities for carrying out farm programs explain, in part, why many determinations were either not conducted or not conducted thoroughly. Nevertheless, officials told us that they would investigate these cases for potential receipt of improper payments and would start collection proceedings if they found improper payments. FSA cannot be assured that millions of dollars in farm program payments it made to thousands of deceased individuals from fiscal years 1999 through 2005 were proper because FSA does not have appropriate management controls, such as computer matching, to verify that it is not making payments to deceased individuals. For example, FSA is not matching recipients listed in its payment database with individuals listed as deceased in the Social Security Administration’s Death Master File. In addition, complex farming operations, such as corporations or general partnerships with embedded entities, make it difficult for FSA to prevent improper payments to deceased individuals. At present, FSA relies on farming operations to advise the agency of any change in the operation, including the death of a member that would affect payments made to the operation. From fiscal years 1999 through 2005, FSA paid $1.1 billion in farm program payments to 172,801 deceased individuals—either as individuals or as members of entities, according to our matching of FSA’s payment databases with the Social Security Administration’s Death Master File. Of the $1.1 billion in farm payments, 40 percent went to individuals who had been dead for 3 or more years, and 19 percent went to individuals who had been dead for 7 or more years. Figure 1 shows the number of years in which FSA made farm program payments after an individual had died and the value of those payments. As the figure shows, for example, FSA provided $210 million in farm program payments to deceased individuals 7 or more years after their date of death. Three cases illustrate how FSA’s lack of management controls can result in improper payments to deceased individuals. In the first case, FSA provided more than $400,000 in farm program payments from 1999 through 2005 to an Illinois farming operation on the basis of the ownership interest of an individual who had died in 1995. According to FSA’s records, the farming operation consisted of about 1,900 cropland acres producing mostly corn and soybeans. It was organized as a corporation with four shareholders, with the deceased individual owning a 40.3-percent interest in the entity. Nonetheless, we found that the deceased individual had resided in Florida. Another member of this farming operation, who resided in Illinois and had signature authority for the operation, updated the operating plan most recently in 2004 but failed to notify FSA of the individual’s death. The farming operation therefore continued to qualify for farm program payments on behalf of the deceased individual. As noted earlier, FSA requires farming operations to certify that they will notify FSA of any change in their operation and to provide true and correct information. According to USDA regulations, failure to do so may result in forfeiture of payments and an assessment of a penalty. FSA recognized this problem in December 2006 when the children of the deceased individual contacted the FSA field office to obtain signature authority for the operation. FSA has begun proceedings to collect the improper payments. In the second case, FSA provided more than $200,000 in farm program payments from 1999 through 2002 to an Indiana farming operation on the basis of the ownership interest of an individual who had died in 1993. According to FSA’s records, the farming operation was a corporation, and the deceased individual held 100-percent ownership interest in the entity. The corporation operated farms in two counties, but upon the death of the individual, the corporation failed to notify the FSA field office in either county of the death. The corporation therefore continued to receive farm program payments on behalf of the deceased individual until 2002, when it filed a new farm operating plan with FSA that no longer included the deceased individual as a member. When we brought this case to the attention of FSA officials, they were unaware that the individual had died in 1993 and acknowledged that FSA provided improper payments to the farming operation from 1993 through 2002. According to agency officials, they intend to take action against the farming operation to recover the improper payments. In the third case, FSA provided about $260,000 in farm program payments from 1999 through 2006 to a corporation on the basis of the ownership interest of an individual who had died in 1993. According to FSA records, the farming operation had 14 shareholders, with the deceased individual holding a 14-percent interest. We found that another member of this farming operation, who had signature authority for the operation, updated the farm’s operating plan in 2004 but failed to notify FSA of the death of this member who we found had resided in a metropolitan area several hundred miles from the farm. The farming operation therefore continued to receive farm program payments on behalf of the deceased individual. FSA was unaware that the individual had died in 1993, but said it would investigate and if improper payments were made it would take action against the farming operation to recover the payments. USDA recognizes that its farm programs have management control weaknesses, making them vulnerable to significant improper payments. In its FY 2006 Performance and Accountability Report to OMB, USDA reported that poor management controls led to improper payments to some farmers, in part because of incorrect or missing paperwork. In addition, as part of its reporting of improper payments information, USDA identified six FSA programs susceptible to significant risk of improper payments with estimated improper payments totaling over $2.8 billion in fiscal year 2006, as shown in table 3. Farm program payments made to deceased individuals indirectly—that is, as members of farming entities—represent a disproportionately high share of post-death payments. Specifically, payments to deceased individuals through entities accounted for $648 million—or 58 percent of the $1.1 billion in payments made to all deceased individuals from 1999 through 2005. However, payments to individuals through entities accounted for $35.6 billion—or 27 percent of the $130 billion in farm program payments FSA provided from 1999 through 2005. Similarly, we identified 39,834 of the 172,801 deceased individuals as receiving farm program payments through entities when we compared FSA’s databases with the Social Security Administration’s Death Master File. The complex nature of some types of farming entities, in particular, corporations and general partnerships, increases the potential for improper payments. For example, a significant portion of farm program payments went to deceased individuals who were members of corporations and general partnerships. Deceased individuals identified as members of corporations and general partnerships received nearly three- quarters of the $648 million that went to deceased individuals in all entities. The remaining one-quarter of payments went to deceased individuals of other types of entities, including estates, joint ventures, limited partnerships, and trusts. With regard to the number of deceased individuals who received farm program payments through entities, they were most often members of corporations and general partnerships. Specifically, of the 39,834 deceased individuals who received farm program payments through entities, about 57 percent were listed in FSA’s databases as members of corporations or general partnerships. Table 4 shows the number and percent of farm program payments FSA made to deceased individuals through entities from 1999 through 2005. As we reported in 2004, some farming operations may reorganize to overcome payment limits to maximize their program benefits. Large farming operations are often structured as corporations or general partnerships with other entities embedded within these entities. Deceased individuals are sometimes members of these embedded entities. For example, as shown in table 4, 8,575 deceased individuals received payments through general partnerships from 1999 through 2005. Of these, 687 received farm program payments because they were members of one or more entities that were embedded in the general partnership. Generally, these partnerships are consistent with the 1987 Act, as amended, whereby an individual can qualify for up to three payments by being a member of three entities within one general partnership. Furthermore, of the 172,801 deceased individuals identified as receiving farm program payments, 5,081 received more than one payment because (1) they were a member of more than one entity, or (2) they received payments as an individual and were a member of an entity. According to FSA field officials, complex farming operations, such as corporations and general partnerships with embedded entities, make it difficult for FSA to prevent making improper payments to deceased individuals. In particular, in many large farming operations, one individual often holds signature authority for the entire farming operation, which may include multiple members or entities. This individual may be the only contact FSA has with the operation; therefore, FSA cannot always know that each member of the operation is represented accurately to FSA by the signing individual for several reasons. First, it relies on the farming operation to self-certify that the information provided is accurate and that the operation will inform FSA of any operating plan changes, which would include the death of an operation’s member. Such notification would provide USDA with current information to determine the eligibility of the entity to receive the payments. Second, FSA has no management controls, such as computer matching of its payment files with the Social Security Administration’s Death Master File, to verify that an ongoing farming operation has failed to report the death of a member. FSA has a formidable task—ensuring that billions of dollars in program payments are made only to estates and individuals that are eligible to receive them. Our review, however, demonstrates that FSA field offices do not always conduct the necessary annual determinations to ensure that estates are eligible to receive farm program payments. FSA’s performance of these determinations for estates that have been kept open for more than 2 years could serve as an effective deterrent to making improper program payments. However, these determinations can only be a deterrent if they are consistently and thoroughly conducted. As we have found, some FSA field offices have failed to conduct eligibility determinations or have not conducted them consistently and documented the results of their determinations. FSA has relied on farming operations to report the death of a member whose ownership interest makes the operation eligible for program payments. However, it appears that some individuals who certify program eligibility forms for farming operations are either not taking seriously their obligation to notify FSA of the death of a member of the operation or are deliberately withholding this information to maximize their receipt of farm program payments. Our matching of FSA’s farm payment database with the Social Security Administration’s Death Master File indicates that FSA’s reliance is misplaced, in at least some instances. We previously reported that we found examples of farming operations where recipients may circumvent the payment limits by organizing large farming operations to maximize program payments. The complex nature of these entities—such as entities embedded within other entities—increases the potential that deceased individuals will receive farm program payments because the status of these individuals is not easy for FSA to ascertain. Currently, FSA does not have effective management controls to verify that an individual receiving farm program payments, either directly or indirectly through an entity, is still alive. The lack of these controls increases the risk of improper payments being made over time. The shortcomings we have identified underscore the need for improved oversight of federal farm programs. Such oversight can help to ensure that program funds are spent as economically, efficiently, and effectively as possible, and that they benefit those engaged in farming as intended. To provide reasonable assurance that FSA does not make improper payments to estates and deceased individuals, we recommend that the Secretary of Agriculture direct the Administrator of the Farm Service Agency to instruct FSA field offices to conduct all annual estate eligibility determinations as required; implement management controls, such as matching payment files with the Social Security Administration’s Death Master File, to verify that an individual receiving farm program payments has not died; and determine if improper program payments have been made to deceased individuals or to entities that failed to disclose the death of a member, and if so, recover the appropriate amounts. In addition, we have referred the cases we identify in this report to USDA’s Office of Inspector General for further investigation. We provided FSA with a draft of this report for review and comment. FSA agreed with our recommendations and already has begun to take action to implement them. For example, FSA has issued a notice (Notice PL-158, May 31, 2007) to its field offices emphasizing the current payment eligibility rules, procedures, and review requirements for payments with respect to deceased individuals and estates. This directive instructs these offices to review the eligibility of all estates that have been open for more than 2 years and requested 2007 farm program benefits. Furthermore, according to FSA, it is currently working with the Social Security Administration to obtain access to the Death Master File of deceased individuals. FSA intends to develop a process for matching its payment data against the Death Master File on at least an annual basis. According to FSA, it will then have a reliable means for identifying deceased individuals who may also be payment recipients. In addition, once implemented, FSA will no longer have to depend on the farming operation to notify the agency of an individual’s death. Despite its concurrence with our recommendations, FSA did not agree with our use of the term “improper payments” in this report. FSA suggested that we revise the report to refer to the payments as at most “questionable” in view of current eligibility regulations, rather than improper. Specifically, the agency stated that the payments we describe do not meet the definition of improper payments under IPIA. We disagree. We believe three cases we highlight in examples in the report do meet the definition of improper payments under IPIA. IPIA defines improper payments as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. This definition would include any payment made to an ineligible recipient either directly or through an entity. Our examples are consistent with this definition. Furthermore, officials in FSA’s field offices agreed with our findings and told us they intend to recover the payments. For the remaining farm program payments identified in the report, we continue to believe that the potential exists for improper payments because of the lack of FSA management controls and the complexity of some of the farming operations involved. Under current circumstances, FSA cannot be assured that millions of dollars in farm program payments are going to those who met eligibility requirements and thus should have received these payments. FSA’s written comments are presented in appendix II. FSA also provided us with suggested technical corrections, which we have incorporated into this report, as appropriate. 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 of this report to appropriate congressional committees; the Secretary of Agriculture; the Director, OMB; and other interested parties. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. At the request of the Ranking Member of the Senate Committee on Finance, we reviewed the Farm Service Agency’s (FSA) implementation of payment eligibility provisions to identify improper payments to estates and deceased individuals. Specifically, we evaluated the extent to which FSA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals. To determine how well FSA field offices carry out rules that prohibit payments to ineligible recipients, we reviewed guidance that FSA field offices use to determine farm program payment eligibility, including relevant statutes and regulations and agency policy, including the FSA Handbook on Payment Limitations, 1-PL (Revision 1). We reviewed relevant studies prepared by the U.S. Department of Agriculture’s (USDA) Office of Inspector General and the Congressional Research Service, as well as our own past reports. We also reviewed USDA’s FY 2006 Performance and Accountability Report to understand its assessment of internal controls for its farm programs. In addition, we spoke with FSA officials in headquarters, state offices, and local field offices who are responsible for ensuring that (1) estates are properly reviewed for eligibility and (2) payments are not made to deceased individuals. We obtained and analyzed FSA’s computer databases for information on payment recipients from 1999 through 2005. These databases included FSA’s Producer Payment Reporting System, Commodity Certificate file, and Permitted Entity file. The databases contain detailed information on payment recipients: Social Security numbers, payment amounts, the status of recipients as individuals or members of entities, their ownership interest in entities, types of entity, and additional organizational details. The databases also contain information on payments made under USDA’s farm programs, including the Direct and Counter-Cyclical Payments Program, Marketing Assistance Loan Program, Conservation Reserve Program, and Environmental Quality Incentives Program. We also compiled data on farm program benefits provided through cooperative marketing associations. Because our analysis covered the years 1999 through 2005, it also included farm payments from programs authorized before the Farm Security and Rural Investment Act of 2002, such as production flexibility contract payments authorized under the Agriculture Market Transition Act and market loss assistance payments and crop disaster assistance payments authorized under various ad hoc legislation. Appendix III provides a list of USDA farm programs we reviewed. To evaluate FSA’s application of regulations and guidance to assess the overall effectiveness of its review process for deciding whether estates are eligible to receive farm program payments, we reviewed a nonrandom sample of estate eligibility determinations. To identify estates for our review, we analyzed FSA’s databases. The data showed that 2,841 estates had received payments for more than 2 years between 1999 and 2005, thus requiring FSA to conduct a determination of eligibility. Of these, we examined 181 estates in 26 states and 142 counties. These estates included the 162 (i.e., 162 of 2,841) that received over $100,000 in farm program payments during this period. We also selected the 16 estates (i.e., 16 of 2,841) that (1) had received between $50,000 and $100,000 in farm program payments during this period and (2) had at least one member receiving payments through three other entities, which could indicate circumvention of the three-entity rule. Lastly, we selected the three estates (i.e., 3 of 2,841) that had at least one member receiving payments through seven or more other entities. For each estate selected, we reviewed case file documents to verify the basis for FSA field offices’ decisions to grant eligibility. Specifically, we obtained and reviewed files from FSA field offices that ideally would have included the following information to facilitate FSA’s determinations: letters testamentary from a probate court, minutes of the FSA county committee meeting that approved eligibility, explanation letters or documentation for the reason the estate remained active beyond 2 years, farm operating plans, and payment history. States and counties vary widely in the amount and type of documentation they require for probated estates. Consequently, we could not easily determine whether improper payments were made to estates. Furthermore, even in cases in which FSA had not done the required annual determinations, or when relevant documentation was missing or incomplete in the estate file, we could not determine whether improper payments were made without examining each case in depth. To evaluate the extent to which FSA makes improper payments to deceased individuals, we compared recipients of farm program payments in FSA’s computer databases with individuals whose Social Security numbers were listed in the Social Security Administration’s Death Master File, to identify post-death program payments for individuals who were deceased. The Death Master File contains information such as the name and Social Security numbers of deceased individuals in the United States. We assessed the reliability of FSA’s data by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of our review. Although we did not assess the reliability of the Social Security Administration’s Death Master File, it is the most comprehensive list of death information available in the federal government and is generally used by other government agencies and researchers. Using FSA’s databases, we identified the 2.9 million individuals who received payments, either directly or indirectly through an entity, from 1999 through 2005. Payments were attributed to members of an entity by apportioning the payments according to each member’s percentage share of that entity. Using these Social Security numbers, we then compared these individuals with individuals listed in the Social Security Administration’s Death Master File to determine the extent to which deceased individuals may have received improper payments. The data match showed the number and dollar amount of payments FSA provided to deceased individuals from 1999 through 2005. To gain an understanding of circumstances behind seemingly improper payments, we obtained relevant documents from FSA, including farm operating plans and acreage reports, for selected cases. We conducted our review between June 2006 and May 2007 in accordance with generally accepted government auditing standards. 1. We believe the payments we highlight in three examples in the report meet the definition of improper payments under IPIA. IPIA defines improper payments as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. This definition would include any payment made to an ineligible recipient either directly or through an entity. Our examples are consistent with this definition. Furthermore, officials in FSA’s field offices agreed with our findings and told us they intend to recover the payments. For the remaining farm program payments identified in the report, we continue to believe that the potential exists for improper payments because of the lack of FSA management controls and the complexity of some of the farming operations involved. Under current circumstances, FSA cannot be assured that millions of dollars in farm program payments are going to those who met eligibility requirements and thus should have received these payments. 2. For each of the three examples discussed in the report, we verified the accuracy of information in FSA’s payment system and discussed the estate with the FSA field office where the estate was located. Because the field offices have this information, we do not understand why FSA does not believe the report provided sufficient information to investigate these cases further. 3. We would expect FSA field offices to have appropriate documents to verify acceptable reasons for keeping the estate open. These files could have included the following information to facilitate FSA’s determinations: letters testamentary from a probate court, minutes of the FSA county committee meeting that approved eligibility, explanation letters or documentation for the reason the estate remained active beyond 2 years, and farm operating plans. However, when annual determinations were not done or relevant documentation was missing or incomplete in the files, we could not determine with certainty whether improper payments were made to estates. As we discuss on page 4 of this report, the wide variation in state and county documentation required for probated estates made it difficult for us to make eligibility determinations. We continue to believe that the failure of FSA’s field offices to conduct annual determinations of eligibility increases the risk of improper payments being made over time. 4. FSA implies that because the $1.1 billion in farm program payments paid to deceased individuals during 1999 through 2005 amounts to only 8/10 of 1 percent of the total payments made during this period, the amount is negligible. We disagree—a billion dollars is not a negligible sum. In addition, this amount represents only payments made to deceased individuals during this specific period; it does not capture payments made to deceased individuals before and after this period. FSA is obligated to ensure that program funds are spent as economically, efficiently, and effectively as possible. The nation’s current deficit and growing long-term fiscal challenges reinforce the importance of this obligation. Implementing management controls, such as matching payment files with the Social Security Administration’s Death Master File, to verify that an individual receiving farm program payments has not died is a simple, cost- effective means to achieve this end. 5. FSA is correct that counter-cyclical payments may be made for up to 3 years after an individual has died. However, according to our analysis, only $46.5 million (4.2 percent) of the $1.1 billion in payments made to deceased individuals from 1999 through 2005 were counter-cyclical payments made for the same program year as the year in which the individual died. Furthermore, a farming operation is subject to forfeiture of payments, including counter-cyclical payments, if it has not notified FSA of a change in the farming operation, such as the death of an individual who receives payments as a member of that operation. Many deceased individuals who received counter-cyclical payments during this period also received payments under other programs for which FSA should have been notified of the change in the farming operation. However, the fact that an individual was identified as deceased in our computer matching indicates FSA was not informed that a change in the farm operation had occurred, suggesting that the farming operation was not eligible to receive any of the payments, including the counter-cyclical payments. 6. As noted in the report, the source for information in table 3 (p. 17) is USDA’s FY 2006 Performance and Accountability Report. The improper payments and the percent error rate for each program in table 3 are USDA’s estimates. We acknowledge that improper payments made under the Noninsured Assistance Program are not exclusively the result of payments made to deceased individuals. Lamb Meat Adjustment Assistance Program $(20,257) $(22,175) $(777) (33,187) (467,556) (108,096) (470,359) (779,398) (755,675) (20,557) (2,905) Soil and Water Agricultural Assistance Program Trade Adjustment Assistance for Farmers Wool & Mohair Market Loss Assistance Program (4,975) (300) $23,807,786,218 (292,942,256) (8,252,201) (2,005,089) (1,569) (1,668) (532) (261) (80) (524) (76,838) (8,136) (1,153) Includes cotton user marketing certificate gains. Includes the Apple & Potato Quality Loss Program, Sugar Beet Disaster Program, Quality Loss Program, Crop Loss Disaster Assistance Program, Florida Nursery Losses Program, Florida Hurricane Charley Disaster Program, Disaster Reserve Flood Compensation Program, Florida Hurricane Nursery Disaster Program, Florida Hurricane Vegetable Disaster Program, Multi-Year Crop Loss Disaster Assistance Program, North Carolina Crop Hurricane Damage Program, Nursery Losses In Florida Program, and Single Year Crop Loss Disaster Assistance Program, as well as Disaster Supplemental Appropriation payments, Crop Disaster North Carolina payments, Crop Disaster Virginia payments, and 1999 Citrus Losses In California. Includes the Dairy Indemnity Program, Dairy Options Pilot Program, and Dairy Production Disaster Assistance Program. Includes the Livestock Assistance Program, Livestock Indemnity Program, Avian Influenza Indemnity Program, Cattle Feed Program, Pasture Flood Compensation Program, and Pasture Recovery Program. Includes “loan deficiency payment-like” grazing payments for wheat, barley, oats, and triticale. Includes supplemental appropriations for the Noninsured Assistance Program. Includes supplemental appropriations for the Oilseed Payment Program. Includes the Sugar Payment-In-Kind Diversion Program. Includes the Tobacco Loss Assistance Program and the Supplement Tobacco Loss Assistance Program. Includes the Yakima Basin Water Program, Flood Compensation Program for Harney County Oregon, Fresh Market Peaches Program, Idaho Oust Program, Livestock Compensation Program- Grants For Catfish Producers, Limited California Cooperative Insolvency Program, New Mexico Tebuthiuron Application Losses Program, New York Onion Producers Program, Potato Diversion Program, Poultry Enteritis Mortality Syndrome Program, Seed Corn Purchase Containing CRY9C Protein Program, Specialty Crops-Base State Grants Program, Specialty Crops-Value Of Production Program, and State Commodity Assistance Program, as well as Consent Decree payments and Interest Penalty payments. Table 5 shows the variation by state in FSA’s conduct of eligibility determinations from 1999 through 2005 for the 181 estates in our sample. Not all states are represented because we chose estates based on criteria other than location. Our sample of 181 estates included the 162 that received over $100,000 in farm program payments during this period. We also selected the 16 estates that (1) received between $50,000 and $100,000 in farm program payments during this period and (2) had at least one member receiving payments through three other entities, which could indicate circumvention of the three-entity rule. In addition, we selected the three estates that had at least one member receiving payments through seven or more other entities. In addition to the individual named above, James R. Jones, Jr., Assistant Director; Hamid E. Ali; Kevin S. Bray; Thomas M. Cook; Stephanie K. Fain; Ronald E. Maxon, Jr.; Jennifer R. Popovic; and Carol Herrnstadt Shulman made key contributions to this report. Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements Continue. GAO-07-635T. Washington, D.C.: March 29, 2007. Improper Payments: Incomplete Reporting under the Improper Payments Information Act Masks the Extent of the Problem. GAO-07-254T. Washington, D.C.: December 5, 2006. Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the Improper Payments Information Act Remains Incomplete. GAO-07-92. Washington, D.C.: November 14, 2006. 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. Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-417. Washington, D.C.: March 31, 2005. Farm Program Payments: USDA Should Correct Weaknesses in Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations. GAO-04-861T. Washington, D.C.: June 16, 2004. Farm Program Payments: USDA Needs to Strengthen Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations. GAO-04-407. Washington, D.C.: April 30, 2004. Strategies to Manage Improper Payments: Learning From Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 1, 2001. Farm Programs: Changes to the Marketing Assistance Loan Program Have Had Little Impact on Payments. GAO-01-964. Washington, D.C.: September 28, 2001. Farm Programs: Information on Recipients of Federal Payments. GAO-01-606. Washington, D.C.: June 15, 2001. Financial Management: Billions in Improper Payments Continue to Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000. | Farmers receive about $20 billion annually in federal farm program payments, which go to individuals and "entities," including corporations, partnerships, and estates. Under certain conditions, estates may receive payments for the first 2 years after an individual's death. For later years, the U.S. Department of Agriculture (USDA) must determine that the estate is not being kept open for payments. As requested, GAO evaluated the extent to which USDA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals. GAO reviewed a nonrandom sample of estates based, in part, on the amount of payments an estate received and compared USDA's databases that identify payment recipients with individuals the Social Security Administration listed as deceased. USDA has made farm payments to estates more than 2 years after recipients died, without determining, as its regulations require, whether the estates were kept open to receive these payments. As a result, USDA cannot be assured that farm payments are not going to estates kept open primarily to obtain these payments. From 1999 through 2005, USDA did not conduct any eligibility determinations for 73, or 40 percent, of the 181 estates GAO reviewed. Sixteen of these 73 estates had each received more than $200,000 in farm payments, and 4 had each received more than $500,000. Also, for the 108 reviews USDA did conduct, GAO identified shortcomings. For example, from 1999 through 2005, 69 of the 108 estates did not receive annual reviews for every year of payments received, and some USDA field offices approved groups of estates for payments without reviewing each estate. Furthermore, 20 estates that USDA approved for payment eligibility had no documented explanation for keeping the estate open. USDA cannot be assured that millions of dollars in farm payments are proper. It does not have management controls to verify that it is not making payments to deceased individuals. For 1999 through 2005, USDA paid $1.1 billion in farm payments in the names of 172,801 deceased individuals (either as an individual recipient or as a member of an entity). Of this total, 40 percent went to those who had been dead for 3 or more years, and 19 percent to those dead for 7 or more years. Most of these payments were made to deceased individuals indirectly (i.e., as members of farming entities). For example, over one-half of the $1.1 billion payments went through entities from 1999 through 2005. In one case, USDA paid a member of an entity--deceased since 1995--over $400,000 in payments for 1999 through 2005. USDA relies on the farming operation's self-certification that the information provided is accurate and that the operation will inform USDA of any changes, such as the death of a member. Such notification would provide USDA with current information to determine the eligibility of the entity to receive the payments. The complex nature of some farming operations--such as entities embedded within other entities--can make it difficult for USDA to avoid making payments to deceased individuals. |
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Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss the results of our review of the federal judiciary’s assessment of its bankruptcy judgeship needs in the 1993, 1995, and 1997 assessment cycles. Limiting judgeship requests to the number necessary is important because each bankruptcy judgeship costs about $721,000 to establish and about $575,000 per year to maintain. At the same time, it is important that there be sufficient bankruptcy judgeships to enable the bankruptcy courts to adjudicate bankruptcy cases fairly and efficiently. Specifically, my testimony focuses on three principal issues: (1) the process, policies, and workload standards that the Judicial Conference of the United States used to assess the bankruptcy districts’ requests for additional bankruptcy judgeships; (2) how the Judiciary applied its policies and workload standards across the districts that requested bankruptcy judgeships; and (3) the extent of noncase-related travel in 1995 and 1996 by bankruptcy judges in the 14 districts for which the Judicial Conference of the United States has requested bankruptcy judgeships in 1997. In brief, we found that the Bankruptcy Committee and the Judicial Conference generally followed the Judicial Conference’s process and policies and consistently applied the Conference’s statistical workload standards in assessing individual district’s requests for additional judgeships in 1993, 1995, and 1997. For example, the Bankruptcy Committee and Judicial Conference placed heaviest emphasis on whether the districts requesting additional judgeships had a caseload that exceeded 1,500 weighted filings per existing authorized judgeship. Neither the Committee nor the Conference approved any request for additional judgeships from districts that did not meet this minimum standard. According to officials at the Administrative Office of the U.S. Courts (AOUSC), neither the Committee nor the Judicial Conference keeps written documentation on how other available data, such as case management practices or a district’s geography (travel distances between places of holding court), were used in assessing districts’ judgeship requests. AOUSC officials also stated that the use of data other than weighted case filings in assessing judgeship needs is inherently judgmental. The amount of time judges use for noncase-related travel—travel that is not related to adjudicating specific cases—could potentially affect the amount of time judges have to devote to individual cases. In assessing a bankruptcy judge’s workload, the Judicial Conference assumes that a bankruptcy judge will spend, on average, about 30 percent of his or her time—about 600 hours, or 75 work days per year—on noncase-related matters, such as travel, training, administrative affairs, and general case management activities that cannot be attributed to a specific case. We received information on noncase-related travel from 80 of the 84 authorized judges in the 15 districts that would receive or share 1 of the judgeships requested in 1997. These 80 judges reported a total of 416 noncase-related trips in 1995 and 403 in 1996. On the basis of the information reported, we calculated that overall these judges each used an average of 12.5 work days for noncase-related travel in each of these years. About 98 percent of these trips were made to destinations within the United States. Together, circuit or district meetings and activities; Judicial Conference meetings and activities; and workshops, seminars, and other activities sponsored by AOUSC or the Federal Judicial Center (FJC), accounted for about 66 percent of all noncase-related trips and about 74 percent of all noncase-related travel workdays in 1995. Comparable figures for 1996 were about 67 percent and about 73 percent, respectively. In correspondence to the Subcommittee Chairman on August 8, 1997, we provided more details about these trips for each district. Through AOUSC, we also surveyed the 13 authorized judges in the 4 districts with weighted filings of 1,500 or more during the 1997 assessment cycle that did not request judgeships. The 12 judges in these four districts (one position was vacant) reported a total of 177 noncase-related trips—75 in calendar year 1995 and 102 in calendar year 1996. Based on these reported data, we calculated that the 12 judges spent a total of 178 workdays in 1995 and 258 workdays in 1996 on noncase-related travel. This is a per judge average of 14.8 workdays in 1995 and 21.5 workdays in 1996. Overall, about 23 percent of all trips in these two years were sponsored and paid for by organizations other than the federal judiciary. To develop the information in this statement, we obtained documentation from AOUSC on (1) the process, policies, and workload standards the Judicial Conference has established for assessing the need for bankruptcy judgeships; (2) how the process, policies, and workload standards were used in the 1993, 1995, and 1997 assessment cycles to determine the number of additional bankruptcy judgeships needed and requested; and (3) the temporary assistance requested by and provided to the districts that sought additional judgeships in 1993, 1995, and/or 1997. Through AOUSC, we surveyed the 84 judges in the 15 districts that would receive or share one of the bankruptcy judgeships the Judicial Conference requested in 1997 to obtain information on the judges’ noncase-related travel in calendar years 1995 and 1996. Through AOUSC, we also surveyed the 13 judges in the 4 districts with weighted filings of 1,500 or more in the 1997 assessment cycle that did not request additional judgeships to obtain data on their noncase-related travel in calendar years 1995 and 1996. We did our work between March and August 1997 in Washington, D.C., and Dallas, TX, in accordance with generally accepted government auditing standards. Details of our scope and methodology are presented in appendix I. Bankruptcy cases in the United States are filed in 1 of the 90 federal bankruptcy courts. The Judicial Conference is statutorily required to periodically submit to Congress recommendations for new federal bankruptcy judgeships. Congress last authorized new bankruptcy judgeships in 1992. Subsequently, the Conference has sent recommendations for additional bankruptcy judgeships to Congress in 1993, 1995, and 1997. Congress considered, but not approve, any new judgeships from the 1993 and 1995 requests and is currently considering the 1997 request. To assist the Conference in advising Congress on the need for additional judgeships, the Conference’s Committee on Administration of the Bankruptcy System (Bankruptcy Committee) is to conduct periodic national judgeship surveys to evaluate requests for additional bankruptcy judgeships. In 1993, 1995, and 1997, the Bankruptcy Committee conducted its surveys and analyses through its Subcommittee on Judgeships. In considering each district’s bankruptcy judgeship request, the Bankruptcy Committee may recommend to the Judicial Conference one of seven options: one or more permanent judgeships, a temporary judgeship, a combination of permanent and temporary judgeships, the conversion of a temporary judgeship to a permanent judgeship, the extension of the term of an existing temporary judgeship, a judgeship to be shared by two or more districts; or, no changes to the district’s existing number and type of authorized judgeships. A permanent judgeship is a position that is statutorily added to the bankruptcy district’s current authorized total and remains authorized until statutorily rescinded. A temporary judgeship is a position that is statutorily created and authorized for 5 years after a judge is appointed to fill the temporary judgeship. It is important to note that it is the judgeship that is temporary, not the judge appointed to fill the position. The judge appointed to a temporary judgeship serves the same full 14-year term as a colleague appointed to fill a permanent position. When a temporary judgeship’s 5-year authorization expires, the next vacancy to occur in the district cannot be filled. However, between the time that the temporary judgeship expires and a vacancy occurs, it is possible for the district to have more judges than authorized judgeships. Converting a district’s existing temporary judgeship to a permanent judgeship reclassifies an existing judgeship, rather than adding a judgeship to a district’s existing authorized total. In 1991, the Judicial Conference established a process, with policies and weighted workload standards, for reviewing bankruptcy judgeships. The formal process has 8 basic steps (see fig. 1) that, when fully implemented, would take about 9 months to 1 year to complete. As I will discuss later in my testimony, this process was generally followed in developing the Judicial Conference’s 1993, 1995, and 1997 bankruptcy judgeship requests. The eight basic steps in this formal process are as follows: 1. The Bankruptcy Committee requests that the chief judge of each appellate, district, and bankruptcy court assess the need for additional bankruptcy judgeships within their respective jurisdictions based on the Judicial Conference’s policies. At the same time, the Committee provides each bankruptcy court (or district) information on its weighted filings per current authorized judgeship. 2. The bankruptcy and district courts provide their views on the need for additional judges to their respective circuit judicial councils. The bankruptcy court also sends its views to the district court.3. After reviewing the material provided by the bankruptcy and district courts, the circuit judicial council forwards its recommendations, which may differ from those of the bankruptcy and district courts in the circuit, to the Bankruptcy Judges Division of AOUSC, which serves as staff to the Bankruptcy Committee. 4. Under the direction of the Bankruptcy Committee’s Subcommittee on Judgeships, written mail surveys are sent to those districts for which judgeships have been requested. The Subcommittee on Judgeships conducts an on-site survey whenever a district initially requests additional judgeships. When a district renews a request previously approved by the Judicial Conference, but which Congress has not approved, the Bankruptcy Committee determines whether to conduct another survey. The on-site survey team is to generally consist of a bankruptcy judge member of the Bankruptcy Committee and staff of AOUSC’s Bankruptcy Judges Division. The team interviews a variety of court officials and local attorneys, and reviews court files, dockets, and reports. The survey team then prepares a written report with a recommendation to the Subcommittee on Judgeships regarding the bankruptcy court’s judgeship request. 5. For each bankruptcy district requesting judgeships, the Subcommittee on Judgeships reviews the district’s judgeship request, the district’s completed mail survey, and the on-site survey report (if done), then prepares a recommendation for the Bankruptcy Committee on the district’s judgeship request. 6. The Subcommittee sends its recommendations, along with the applicable on-site survey reports (where done), to the circuit councils, district courts, and bankruptcy courts in those circuits and bankruptcy districts for which bankruptcy judges were requested. The circuit councils, district courts, and bankruptcy courts may provide any comments they have on the Subcommittee’s recommendations, the survey report, and provide any other additional information they believe is relevant to the judgeship requests in their circuit or bankruptcy district. The Subcommittee on Judgeships reviews these comments, makes its final recommendation for each district, and sends its recommendations and accompanying documentation to the Bankruptcy Committee. 7. The Bankruptcy Committee reviews the mail survey, on-site survey report (if done), any other accompanying documents, and the Subcommittee on Judgeships’ recommendations for each district, votes on each request, and forwards its recommendations to the Judicial Conference. 8. The Judicial Conference considers the Bankruptcy Committee’s recommendations, approves or alters the Committee’s recommendations, and forwards the Conference’s final recommendations to Congress. In reviewing judgeship requests, the Bankruptcy Committee is to consider a number of factors adopted by the Judicial Conference in 1991. The first factor is weighted filings. Based on the results of a study of the time bankruptcy judges devoted to individual categories of bankruptcy cases,each case filed is assigned to 1 of 17 categories. Each category is determined on the basis of the bankruptcy chapter under which the case is filed, and within each chapter, the dollar value of the debtor’s assets or liabilities. A case weight is assigned to each of the 17 categories, representing the average amount of judicial time the case would be expected to require. Generally, to be eligible for an additional judgeship, the Judicial Conference expects a bankruptcy district to have a minimum annual average of 1,500 weighted filings for each current authorized judgeship. To be eligible for a permanent judgeship, the Judicial Conference’s standard is that a district’s weighted filings per judgeship must be 1,500 or higher after adding any judgeships to the district’s existing judgeship total. For example, a district with 5 judges could qualify for an additional permanent judgeship if its weighted filings per judgeship would be at least 1,500 with 6 judgeships (its existing 5 plus the requested position). If the weighted filings per judgeship would drop below 1,500 with the additional judgeship, the district could potentially qualify for a temporary, but not permanent, judgeship. The Judicial Conference’s policy recognizes that bankruptcy judges’ workloads may be affected by factors not captured in the most recent report of weighted filings and states that the Bankruptcy Committee is to consider a number of factors in addition to weighted filings. These factors include (1) the nature and mix of the court’s caseload; (2) historical caseload data and filing trends (generally, the most recent 5-year period); (3) geographic, economic, and demographic factors in the district; (4) the effectiveness of the requesting court’s case management efforts; (5) the availability of alternative solutions and resources for handling the court’s workload, such as assistance from judges outside the district; (6) the impact that approval of requested additional resources would have on the court’s per judgeship caseload; and (7) any other pertinent factors. The Bankruptcy Committee’s written description of the assessment process also recognized that (1) bankruptcy case filings may fluctuate because they are dependent upon national and local economic conditions, and (2) temporary fluctuations can often be addressed by short-term resources, such as temporary assistance from judges outside the district and the use of temporary law clerks. At its September 1996 meeting, the Judicial Conference approved a change in the schedule for completing the biennial surveys for evaluating judgeship needs for district courts, courts of appeals, and bankruptcy courts. Beginning in 1998, the surveys are generally to be done in even-numbered years so that the Conference’s recommendations for additional judgeships can be delivered to Congress in odd-numbered years. This change is intended to permit the judiciary to work with Congress on a judgeship bill over an entire 2-year congressional term. In 1993, 1995, and 1997, the Bankruptcy Committee generally followed the Judicial Conference’s established process, policies, and workload standards in assessing bankruptcy judgeship needs. The Bankruptcy Committee recommended to the Judicial Conference fewer judgeships than districts requested or the circuit councils recommended. Overall, the Committee also recommended fewer permanent and more temporary judgeships than were requested. The Conference adopted the Bankruptcy Committee’s recommendations in each year, 1993, 1995, and 1997. (See tables II.1 - II.3 in app. II for additional details.) In 1993, 16 districts requested 22 additional judgeships (21 permanent and 1 temporary). The Bankruptcy Committee’s Subcommittee on Judgeships conducted both a written mail survey and an on-site survey of each of the 16 bankruptcy districts that requested one or more additional judges. The Bankruptcy Committee recommended 19 additional judgeships (13 permanent and 6 temporary) for 15 judicial districts, and the Judicial Conference approved this recommendation in September 1993. The Bankruptcy Committee declined requests for 3 permanent judgeships and converted requests for 5 permanent judgeships to temporary judgeships. At its January and June 1994 meetings, the Bankruptcy Committee concluded that these 19 positions were still needed based on weighted filings alone. Congress did not approve any judgeships from the Judicial Conference’s 1993 request. At its January 1995 meeting, the Committee, using more recent statistical data, determined that some of the positions the Committee had approved in 1993 and 1994 may no longer have been needed. At this meeting, the Committee also adopted new guidelines for reassessing the additional judgeship positions that the Conference had approved in 1993 and 1994. Under the new guidelines, districts whose previously approved requests were still pending before Congress would be asked to reassess their need for these additional judgeship positions and submit a statement to the Committee on whether or not the positions were still needed. The Committee considered a position still needed, without a new survey, if the district’s weighted filings per authorized judgeship were 1,500 or more. The Committee retained the option to resurvey any district renewing its request for additional judgeships whose weighted filings were below 1,500 per authorized judgeship. The Bankruptcy Committee’s Subcommittee on Judgeships conducted on-site visits to each district for which an additional judgeship had been approved in 1993, and whose case filings during 1994 fell below 1,500 weighted filings per authorized judgeship. On the basis of these surveys, the circuit judicial councils of the Fifth and Ninth Circuits withdrew their requests for additional judgeships in the Southern District of Mississippi and the District of Arizona, respectively. In five other districts, the Circuit Councils reaffirmed their bankruptcy districts’ requests for a total of six judgeships. However, the Bankruptcy Committee declined the requests for these six judgeships. Overall, the Bankruptcy Committee recommended that the Judicial Conference reduce the number of requested positions from 19 judgeships in 15 districts to 11 judgeships (including 6 temporary) in 8 districts. The Conference approved the Bankruptcy Committee’s recommendation at its September 1995 meeting and transmitted it to Congress. Congress did not approve any judgeships from the Judicial Conference’s 1995 request. At its September 1996 meeting, the Judicial Conference approved a new schedule for judgeship surveys. As a result of this change and because Congress had not approved the Conference’s 1995 bankruptcy judgeship request, the Bankruptcy Committee began an expedited survey process in November 1996. In January 1997, the Bankruptcy Committee found that each of the 11 positions approved in 1995 continued to be needed based on the weighted case filings as of September 30, 1996. The Committee also considered requests for 9 additional positions (for a total of 20). In each district, the weighted filings per judgeship exceeded the 1,500 standard. The Committee recommended to the Judicial Conference 18 additional judgeships (including 11 temporary). The Judicial Conference adopted the Committee’s recommendations and sent the Conference’s judgeship request to Congress. The Conference’s 1997 request is now pending before Congress. Table 1 provides an overview of the number of judgeships requested and approved at each major step in the process in 1993, 1995, and 1997. In our analysis, we found that in the 1993 and 1997 assessment cycles, all of the districts requesting additional bankruptcy judgeships—16 in 1993 and 15 in 1997—had weighted case filings over 1,500 per authorized judgeship prior to the addition of any judgeships. However, in the 1995 assessment cycle, 8 of the 14 requesting districts had weighted case filings per judgeship over 1,500; the remaining 6 districts had weighted case filings below 1,500. (See table II.1 in app. II.) Our analysis also showed that the Judicial Conference approved additional permanent bankruptcy judgeships only when the weighted case filings would be 1,500 or more per judgeship after adding the requested judgeship(s) to the district’s current authorized number of judgeships. If the weighted case filings would drop below 1,500 per judgeship after adding the requested judge(s), the Bankruptcy Committee and the Conference approved a temporary judgeship or no increase in judgeships. In two districts, the Committee approved both one permanent and one temporary judgeship—the Southern District of New York in 1993, and the District of Maryland in 1997. In these two districts, the weighted workload was considered sufficiently high after adding one permanent judgeship to merit another judgeship, but not sufficiently high to merit a second permanent judgeship. Not all districts whose weighted case filings met the minimum threshold of 1,500 weighted filings per authorized judgeship requested additional judgeships in 1993, 1995, or 1997. We found that during the 1993 assessment cycle, 10 districts with weighted case filings above 1,500 per authorized judgeship did not request additional judges. In 1995, four such districts did not request additional judgeships; and, in 1997, five such districts did not. (See tables II.5-II.7 in app. II.) However, one of the five districts in 1997 was the Northern District of Mississippi, which is to share the additional position requested for the Southern District of Mississippi. Conversely, in 1995, six districts whose weighted filings were below 1,500 per authorized judgeship requested additional judgeships. None of these six districts’ requests were approved by the Bankruptcy Committee. (See table II.3 in app. II.) We spoke to officials in the four districts that had more than 1,500 weighted case filings per authorized judgeship in 1997, but had not asked for additional judgeships. The officials in these four districts told us that they had not requested any additional judgeships because (1) one district was not aware that its weighted case filings were at or above 1,500 per authorized judgeship; (2) one district said it could handle the workload if the district’s temporary judgeship, scheduled to expire in October 1998, was converted to a permanent judgeship; and (3) the remaining two districts currently share a judgeship and could not agree on how an additional judgeship would be allocated between the two districts. The Judicial Conference’s policy for assessing a bankruptcy district’s need for additional judgeships states that the Bankruptcy Committee is to review a number of workload factors in addition to weighted filings. These factors include the nature and mix of the bankruptcy district’s workload; historical caseload data and filing trends; geographic, economic, and demographic factors in the district; the effectiveness of case management efforts; the availability of alternative solutions and resources for handling the district’s workload; the impact that approval of requested additional resources would have on the district’s per judgeship caseload; and any other pertinent factors. The Bankruptcy Committee asked that districts requesting additional judgeships address these factors “with as much specificity as possible.” A district could also provide any additional information it thought relevant to its request. Most of the districts surveyed in 1993, 1995, and 1997 provided information on at least four of these factors. AOUSC officials said they provided us with all the written information on these factors that was available to the Bankruptcy Committee for its deliberations. AOUSC officials said that the use of this information in assessing judgeship requests is inherently judgmental and that neither AOUSC nor the Committee keeps minutes of the Committee’s discussions regarding individual districts. Consequently, it was not possible to determine from the documentation we received, how this information was or was not used in assessing districts’ bankruptcy judgeship requests. Nevertheless, none of the judgeship requests approved by the Judicial Conference were in districts that did not meet the 1,500 weighted filings standard. The Judicial Conference’s policies encourage districts to use visiting and recalled judges wherever possible as an alternative to requesting additional judgeships. For each district that requested additional bankruptcy judgeships in the 1993, 1995, and/or 1997 assessment cycles, we requested information on whether the districts had requested, received, and/or used assistance from visiting or recalled judges. The circuit executives for all 12 circuits provided us documentation on each of the bankruptcy districts that had requested and been assigned assistance from judges outside their districts in each of those years. However, the circuit executives did not have information on whether and to what extent the districts actually used the assistance available from visiting and recalled judges. Our analysis of this information showed that 18 of the 19 districts that requested additional bankruptcy judges during 1993 to1997 had requested assistance from judges outside their districts during this period. (See table II.4 in app. II.) Only the Middle District of Pennsylvania had not requested either visiting or recalled judges at some time during the period from January 1, 1993, to June 1997. Ten of the 18 districts that requested assistance received intracircuit assignments (judges from within their circuit) to provide assistance with their caseloads. None of the four districts in California relied on intracircuit assignments. These districts are in the Ninth Circuit, which uses its own “workload equalization program” that transfers cases from districts in the circuit with above-average caseloads to districts in the circuit that have below-average caseloads. This program allows cases to be transferred rather than judges. According to the circuit, transferring cases minimizes both the inconvenience to the parties involved as well as judges’ travel time and expenses. Six districts received intercircuit assignments (judges from outside their circuits) to provide assistance with their caseloads. Only four of these six districts received both intracircuit and intercircuit assignments of bankruptcy judges. Eleven of the 18 districts that requested assistance had been assigned recalled judges as a means to alleviate the heavy caseloads. Bankruptcy judges’ travel can be categorized as case-related and noncase-related. Case-related travel is travel to work on specific bankruptcy cases whether within a judge’s district or in other districts. Noncase-related travel is travel that is not related to adjudicating specific bankruptcy cases. The amount of time devoted to noncase-related travel could potentially affect the amount of time judges have to devote to work on individual cases. In assessing bankruptcy judges’ workloads, the Judicial Conference assumes that each bankruptcy judge will spend, on average, about 30 percent of his or her time—about 600 hours, or 75 work days per year—on matters that cannot be attributed to a specific case, such as travel, training, court administration matters, and general case management activities that cannot be attributed to a specific case. These 600 hours, or 75 work days, are in addition to the average of 1,500 hours or 187.5 workdays that each judge is assumed to spend annually on work attributable to specific bankruptcy cases. Through AOUSC, we requested information on the noncase-related travel of the judges in the 14 districts for which the Judicial Conference requested judgeships in 1997, plus the Northern District of Mississippi which is to share the position requested for the Southern District of Mississippi. We received information from 80 of the 84 judges in these districts judges on noncase-related travel in calendar years 1995 and 1996. These judges reported a total of 416 trips in 1995 and 403 trips in 1996. On the basis of the data reported, we calculated that these judges had an average of 12.5 noncase-related travel work days each year. As shown in table 2, there was a marked difference between the districts with the highest and lowest average number of noncase-related trips per judge and between the districts with the highest and lowest average number of workdays per judge for noncase-related trips. The reasons for these differences were not apparent from our data. Together, circuit or district meetings and activities; Judicial Conference meetings and activities; and AOUSC- or FJC-sponsored workshops, seminars, or other activities accounted for about 66 percent of all noncase-related trips and about 74 percent of all noncase-related travel workdays reported for 1995. Comparable figures for calendar year 1996 were about 67 percent and 73 percent, respectively. About 98 percent of the 819 trips were for destinations within the United States. Overall, about 34 percent of all trips made in these two years were sponsored by organizations other than the federal judiciary and were paid for by the judges themselves or the sponsoring organizations. You requested that we also obtain information on the noncase-related travel of the 13 authorized judges in the four districts with weighted filings of 1,500 or more in 1997 that did not request judgeships. The 12 judges in these 4 districts (one position was vacant) reported a total of 177 noncase-related trips—75 in calendar year 1995 and 102 in calendar year 1996. On the basis of these reported data, we calculated that the 12 judges spent a total of 178 workdays in 1995 and 258 workdays in 1996 on noncase-related travel. This is a per judge average of 14.8 workdays in 1995 and 21.5 workdays in 1996. Together, circuit or district meetings and activities; Judicial Conference meetings and activities; and AOUSC- or FJC-sponsored workshops, seminars, or other activities accounted for 72 percent of all noncase-related trips and about 79 percent of all noncase-related travel workdays reported for 1995. Comparable figures for calendar year 1996 were about 80 percent and about 83 percent, respectively. All but 1 of the 177 trips reported were for destinations within the United States. Overall, about 23 percent of all trips made in these 2 years were sponsored and paid for by organizations other than the federal judiciary. (Additional details are in app. II, tables II.8 - II.10.) On September 18, 1997, we provided a draft of this statement to AOUSC officials for comment. On September 19, 1997, we met with AOUSC officials to discuss their comments. Overall, AOUSC officials said they found the statement to be fair and accurate. AOUSC suggested that we change our description of the formal judgeship assessment process to state that on-site surveys are always to be done when a district made its initial request for additional judgeships, but are not required when the district renews a previously-approved request and district’s weighted workload remained at or above 1,500 weighted filings. AOUSC provided a formal written support for this change, and we incorporated the new language into our statement. AOUSC official also noted that judges’ personal vacations were not included in the average of 600 hours that bankruptcy judges are assumed to spend on activities that cannot be attributed to a specific case. We also included several technical changes, as appropriate. This concludes my prepared statement, Mr. Chairman. I would be pleased to answer any questions you or other members of the Subcommittee may have. To identify the process, policies, and standards the Judicial Conference used to assess the need for additional bankruptcy judgeships, we asked the Administrative Office of U. S. Courts (AOUSC) to provide all available documentation on the Conference’s policies, process, and standards from 1993 through 1997, including any changes that occurred during this period and the reasons for those changes. To determine how the process, policies, and standards were applied during the 1993, 1995, and 1997 assessment cycles, we asked AOUSC to provide all available documentation for each step in the process from the initial bankruptcy district request to the final Judicial Conference decision. With this documentation, we used a structured data collection instrument to review how the Conference’s process, policies, and standards were applied to each bankruptcy district’s judgeship request in 1993, 1995, and 1997. We also interviewed AOUSC officials about how the process, policies, and standards were used in the 1993, 1995, and 1997 assessment cycles. To determine which districts had requested and used temporary assistance from recalled judges or judges outside their districts from January 1993 to June 1997, we contacted each of the 12 circuit executives. AOUSC did not maintain these data, and the circuit executives had no consistent data on the extent to which the districts actually used the assistance available. To identify districts whose weighted case filings for each assessment cycle—1993, 1995, 1997—were at least 1,500 per authorized judgeship, but which did not request additional judgeships, we obtained AOUSC data on weighted filings for each of the 90 bankruptcy districts for each of those assessment cycles. To determine why each these districts did not request additional judgeships, we interviewed AOUSC officials. We also interviewed local court officials in the four districts with weighted filings of 1,500 or more during the 1997 assessment cycle that did not request additional judgeships. To identify the number, purpose, and destination of noncase-related trips for the judges in each of the 14 districts for which the Judicial Conference requested bankruptcy judgeships in 1997, through the AOUSC we surveyed the judges in each district, plus the Northern District of Mississippi, which is to share the judgeship requested for the Southern District of Mississippi. These 15 districts have a total of 84 authorized judgeships, and we received responses from 81 judges. However, one judge did not provide information on the dates of each trip or the paying organization. Thus, our analysis is based on the responses of 80 judges. We organized the reported trips into five categories: (1) judicial meetings and activities within the district or circuit; (2) workshops, seminars, and other activities sponsored by AOUSC or the FJC; (3) meetings, conferences, and seminars sponsored by the National Conference of Bankruptcy Judges (NCBJ), the National Association of Bankruptcy Trustees (NABT), or the National Association of Chapter 13 Trustees (NACTT); (4) Judicial Conference activities; and (5) other. We did not independently verify the data on weighted filings, nor the information bankruptcy judges provided on their noncase-related travel, including the dates, purpose, cost, destination, or paying organization for each trip. D.C. NY (E) NY (N) NY (S) PA (E) PA (M) VA (E) MS (S) MI (E) TN (W) CA (C) CA (E) CA (N) CA (S) FL (S) Table II.2: Results of the 1993, 1995, and 1997 Needs Assessments for Additional Bankruptcy Judges, by Type of Judgeship Convert temporary to permanent judgeships (Table notes on next page) D.C. NY (E) NY (N) NY (S) PA (E) PA (M) Weighted case filings after the judgeship approval 1 P & 1 T 1 P & 1 T 1 P & 1 T 1 P & 1 T 1 P & 1 T 1 P & 1 T 1 P & 1 T 1 P & 1 T (continued) VA (E) MS (S) MI (E) TN (W) CA (C) CA (E) CA (N) CA (S) Weighted case filings after the judgeship approval (continued) FL (S) P = Permanent judgeship T = Temporary judgeship N/D = Not documented Note 1: N/A indicates data were not sufficiently complete to be meaningful. The last formal surveys of the districts requesting additional bankruptcy judges were performed in 1993. Only when the requests were new (i.e., no survey had been performed since 1993) or if the weighted case filings were below 1,500 were surveys conducted. In most districts, the bankruptcy courts reviewed the weighted case filings data; and if the case filings were above the 1,500 threshold, the courts would renew their request through their respective Circuit Judicial Council. Thus, there is little documentation from the district courts and relatively few surveys were performed in 1995 or 1997. As a result, we did not attempt to factor in the data for the district courts or AOUSC surveys in these 2 years because the data would be misleading. Note 2: Based on guidance provided by AOUSC, unless documented otherwise, all requests by the bankruptcy courts for additional judgeships were assumed to be for permanent positions. Mississippi (Southern) did not ask for a specific number of judges in 1997, rather the district requested that a survey be performed to determine if any additional judgeships were warranted. Provided judges to districts in other circuits The Ninth Circuit uses the “work equalization program” in which cases from districts with above-average caseloads are transferred to districts with below-average caseloads. According to the circuit, this minimizes the inconvenience to the parties and reduces travel expenses. Because of this program, the cases within the Ninth Circuit are transferred rather than using intracircuit assignments of judges. CA (C) D.C. MI (E) NY (E) TN (W) NY (N) NY (S) PA (M) MS (N) AL (N) PA (E) VA (E) CA (S) CA (E) FL (S) CA (N) TX (N) GA (S) TN (M) TN (W) PA (M) CA (C) AL (N) PA (E) MI (E) NY (E) NY (N) FL (S) TN (W) CA (C) NY (N) MS (N) 0 AL (N) NY (E) PA (E) GA (M) MI (E) GA (S) VA (E) TX (E) MS (S) FL (S) PA (M) CA (E) While Mississippi (Northern) did not request a judgeship, it was to share the judgeship requested by Mississippi (Southern). Number of work days each year 30 Circuit or district meetings, activities 48 AOUSC or FJC workshops, seminars, 7 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 21 Other (e.g., law school seminars, bar association meetings) 37 Circuit or district meetings, activities 84 AOUSC or FJC workshops, seminars, 4 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 28 Other (e.g., law school seminars, bar association meetings) 12 Circuit or district meetings, activities 36 AOUSC or FJC workshops, seminars, 0 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 3 Other (e.g., law school seminars, bar association meetings) 11 Circuit or district meetings, activities 48 AOUSC or FJC workshops, seminars, 0 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 9 Other (e.g., law school seminars, bar association meetings) 9 Circuit or district meetings, activities (continued) Number of work days each year 3 AOUSC or FJC workshops, seminars, 0 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 2 Other (e.g., law school seminars, bar association meetings) 7 Circuit or district meetings, activities 12 AOUSC or FJC workshops, seminars, 0 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 2 Other (e.g., law school seminars, bar association meetings) 3 Circuit or district meetings, activities 0 AOUSC or FJC workshops, seminars, 0 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 4 Other (e.g., law school seminars, bar association meetings) 3 Circuit or district meetings, activities 13 AOUSC or FJC workshops, seminars, 0 NCBJ, NABT, or NACTT conferences Judicial Conference meetings, activities 0 Other (e.g., law school seminars, bar association meetings) The Middle and Southern Districts of Georgia share a bankruptcy judgeship. The travel data for this shared judgeship are included in the totals for the Middle District of Georgia. The Eastern District of Texas has two authorized bankruptcy judgeships, but one of the positions is vacant. Currently, the second judge in the district is a recalled judge. Our analysis excluded the travel data for the recalled judge because we did not receive or report travel data for recalled judges in the 15 districts for which we reported in our correspondence of August 8, 1997. Judicial Conference meetings, activities 15 Other (e.g., law school seminars, bar association meetings) Birmingham, AL (6); Montgomery, AL (3); Washington, D.C. (2); Talladega, AL; Troy, AL; Perdido Beach, AL; Orlando, FL 25 Circuit or district meetings, activities Birmingham, AL (9); Panama City, FL (6); Tuscaloosa, AL (4); Decatur, AL (3); Anniston, AL (3) San Francisco, CA (7); Atlanta, GA (6); San Antonio, Tx (3); Kansas City, MO (2); Tempe, AZ; Mobile, AL; Chicago, IL; Philadelphia, PA 1 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 15 Other (e.g., law school seminars, bar association meetings) Boston, MA (3); San Francisco, CA (2); Washington, D.C. (2); Amelia Island, FL; San Antonio, TX; Atlanta, GA; Augusta, GA 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities (continued) Destination (number of trips) Amelia Island, FL (2); San Francisco, CA; Brunswick, GA; Atlanta, GA; Savannah, GA 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 1 Other (e.g., law school seminars, bar association meetings) 1 Circuit or district meetings, activities New Orleans, LA 0 AOUSC or FJC workshops, (continued) Destination (number of trips) Tyler, TX (2); San Francisco, CA; Washington, DC; San Antonio, TX 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 0 Other (e.g., law school seminars, bar association meetings) The Middle and Southern Districts of Georgia share a bankruptcy judgeship. The travel data for this shared judgeship are included in the totals for the Middle District of Georgia. The Eastern District of Texas has two authorized bankruptcy judgeships, but one of the positions is vacant. Currently, the second judge in the district is a recalled judge. Our analysis excluded the travel data for the recalled judge because we did not receive or report travel data for recalled judges in the 15 districts for which we reported in our correspondence of August 8, 1997. Federal Judiciary (12) 2 NCBJ, NABT, or NACTT Judicial Conference meetings, activities (continued) Number of trips each year 15 Other (e.g., law school seminars, bar association meetings) Arts Council (4); Univ. of Alabama Law School (3); Cumberland School of Law (2); Alabama Bar Assoc. (2); U.S. AID (2); Alabama Bankers; American Bar Assoc. Federal Judiciary (22) 1 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 15 Other (e.g., law school seminars, bar association meetings) Alabama State Bar (4); Arts Council (3); American Bar Assoc. (2); Cumberland School of Law (2); U.S. AID; ABI; Alabama Courts; Assoc. of Bankruptcy Judicial Assts. Federal Judiciary (11) Federal Judiciary (16) 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 3 Other (e.g., law school seminars, bar association meetings) Federal Judiciary (3) (continued) Number of trips each year 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 1 Other (e.g., law school seminars, bar association meetings) Federal Judiciary (6) 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 1 Other (e.g., law school seminars, bar association meetings) 1 Circuit or district meetings, activities Federal Judiciary 0 AOUSC or FJC workshops, 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 2 Other (e.g., law school seminars, bar association meetings) Federal Judiciary (5) 0 NCBJ, NABT, or NACTT Judicial Conference meetings, activities 0 Other (e.g., law school seminars, bar association meetings) (Table notes on next page) The Middle and Southern Districts of Georgia share a bankruptcy judgeship. The travel data for this shared judgeship are included in the totals for the Middle District of Georgia. The Eastern District of Texas has two authorized bankruptcy judgeships, but one of the positions is vacant. Currently, the second judge in the district is a recalled judge. Our analysis excluded the travel data for the recalled judge because we did not receive or report travel data for recalled judges in the 15 districts for which we reported in our correspondence of August 8, 1997. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the federal judiciary's assessment of its bankruptcy judgeship needs in the 1993, 1995, and 1997 assessment cycles. GAO found that: (1) the Judicial Conference's Bankruptcy Committee and the Judicial Conference generally followed the Conference's process and policies, and consistently applied the Conference's workload standards in assessing individual districts' requests for additional judgeships; (2) neither the Committtee nor the Conference approved any request for additional judgeships from districts whose weighted case filings did not meet the minimum standard; (3) the Bankruptcy Committee also asked that districts requesting judgeships provide information on several factors, other than weighted filings, that may affect their need for additional judges; (4) according to officials at the Administrative Office of the U.S. Courts (AOUSC), neither the Committee nor the Conference keeps written documentation on how the available data were used in assessing judgeship requests; (5) according to AOUSC, the use of such information is inherently judgmental; (6) time devoted to noncase-related travel could affect the time judges have to devote to individual cases; (7) in assessing bankruptcy judges' workload, the Judicial Conference assumes that a bankruptcy judge will spend, on average, about 30 percent of his or her time-about 600 hours, or 75 work days per year-on noncase-related matters; (8) GAO received information on non-case related travel from 80 of the 84 authorized judges in the 15 districts that would receive or share one of the judgeships requested in 1997; (9) these 80 judges reported a total of 416 noncase-related trips in 1995 and 403 in 1996, and GAO calculated that they each traveled an average of 12.5 work days for non case-related travel in each of these years; (10) about 98 percent of these trips were made to destinations within the United States; (11) together, circuit or district meetings and activities, Judicial Conference meetings and activities, and workshops, seminars, and other activities sponsored by the AOUSC or the Federal Judicial Center, accounted for about 66 percent of all trips and 74 percent of all non-case related travel workdays in 1995; and (12) comparable figures for 1996 were about 67 percent and about 73 percent, respectively. |
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Military commissaries have existed for many years and provide a nonpay benefit to U.S. military personnel. They sell tax-free food and household items at cost plus a 5-percent surcharge. DeCA is responsible for operating DOD’s worldwide commissary system. It was established in October 1991 to consolidate the four separate commissary systems then operated by the military services. Headquartered at Fort Lee, Virginia, DeCA is organized into 7 regions and employs about 18,000 people. It operates a system of 309 stores—209 in the continental United States and 100 overseas. According to DeCA, it is the ninth largest food retailer in the United States and has total annual sales of approximately $5 billion with U.S. stores generating about 75 percent of the sales. The eligible commissary customer base totals over 11 million people consisting of about 3.8 million active duty personnel and their family members; about 2.3 million Selected Reservists and their spouses and children; and almost 4.9 million retired military personnel, which includes their spouses and children. In addition, the customer base includes a number of “Gray Area” retirees, some members of the Individual Ready Reserve (IRR), Medal of Honor recipients, veterans with a 100-percent disability, and civil servants (including diplomats) and their dependents overseas. The active duty community has unlimited access privileges to the commissaries as do the other members of the customer base. Reservists, on the other hand, are (1) authorized 12 visits per year if they have earned a minimum number of points creditable for retirement and (2) access during any period of active duty service. According to DeCA, military retirees account for almost half of its customer patronage. DeCA employees in the continental United States are not authorized to shop in commissaries. Prior to 1986, Selected Reservists were allowed commissary privileges only during periods of active duty—normally 14 days during each year—but not during weekend drills. In 1986, Selected Reservists were authorized to use the commissary once for each day of active duty training up to a maximum of 14 times. These commissary visits could be used anytime during the 1-year period following the completion date of active duty training. The current reservist access policy was established in 1990. That year, legislation set access for all members of the Ready Reserve—Selected Reservists and certain members of the IRR—who earn at least 50 retirement points per year the right to a minimum of 12 commissary visits per year. “Gray Area” retirees were also authorized 12 visits each calendar year. Reservists entitled to commissary access are issued a special card that is punched each time a purchase is made at a commissary. Since 1993, DOD has proposed changing commissary policy three times to allow reservists unlimited access; however, neither DOD nor DeCA have performed any studies to examine or analyze the potential financial impact of these suggested policy changes. None of the proposals were adopted by Congress. The first was submitted for fiscal year 1994 and would have granted reservists, including “Gray Area” retirees, the same unlimited access as active duty personnel. For fiscal year 1996, DOD proposed that “Gray Area” retirees be granted permanent, unlimited commissary access and that the other reservists be provided unlimited access for a 1-year test period. For fiscal year 1997, DOD proposed a 1-year test of unlimited benefits for all reservists (including dependents) at one or more areas in the United States. No plans have been developed to conduct the field tests proposed in fiscal years 1996 and 1997. Officials in DOD and DeCA and representatives of industry and military associations hold varying opinions concerning unlimited commissary access for reservists; however, none of the organizations or offices we visited had performed any analysis or conducted any studies to support their particular views. DOD officials who are responsible for personnel and reserve affairs proposed the initiative and believed that the effects on appropriated funding levels would be minor or nonexistent. They stated that the proposed policy change was the “right thing to do,” and would not likely affect private sector grocers adversely. On the other hand, an official in the DOD Comptroller’s office expressed reservations about the policy change because it could potentially lead to the hiring of additional personnel, thereby increasing the need for appropriated funding. DeCA officials stated that they did not know what the financial impact would be and that the agency would carry out any policy established by DOD and Congress. Representatives of the Reserve Officers’ Association and the Military Coalition strongly support unlimited commissary access for reservists on the basis that this change would take away what they perceive as a “second class citizen” stigma for reservists when compared to the active military. These groups also said that the proposed change would not greatly affect private sector supermarkets. Representatives from the Food Marketing Institute, a food industry association and lobby group, told us that their organization did not support the proposed change, had lobbied strongly against it, and believed the food industry would lose customers and sales if reservists were given unlimited commissary access. The Congressional Budget Office is conducting an overall review of DOD’s resale operations, which include the exchange systems; commissaries; and morale, welfare and recreation activities. An initial report is expected in late 1996 or early 1997. This work is being performed for the House Committees on Budget and Government Reform and Oversight. Broad objectives include examining overall costs, identifying any hidden costs, and determining the worth or value of these activities to their patrons. Commissary funding is obtained from two primary sources—an annual appropriation and a surcharge added to each sale. For fiscal years 1992 to 1996, DeCA’s total obligations have averaged about $1.31 billion annually, about $1 billion (over 70 percent) in appropriated funds and $315 million from the surcharge. Because appropriated funds pay for DeCA’s personnel costs, there is a valid concern that the need for appropriated funds would increase if the customer base expanded and sales increased. Appendix II presents additional data on commissary funding. The largest funding source is the annual congressional appropriation. DeCA has received an average of about $1 billion annually for the 5 years of its existence. Appropriated funds are used primarily to cover two operating expenses: (1) labor costs (civilian employee salaries and personnel contracts) and (2) the transportation of U.S. goods to overseas stores. Appropriated fund support in 1996 totaled almost $879 million. Of this total, $595 million went toward labor costs, $149 million for transportation, and $135 million for nonpersonnel administrative and other expenses. Military commissaries are nonprofit organizations that sell merchandise at cost plus a 5-percent surcharge. The surcharge is placed into the revolving Surcharge Collections Fund from which DeCA has obligated, on average, about $315 million annually. The surcharge is used to pay for (1) facilities, maintenance, and operating supplies, such as paper bags and packaging materials; (2) construction of new commissaries and the renovation of older stores; and (3) some equipment, including data processing items. The actual financial impact, if any, of allowing reservists unlimited access would depend on the extent of additional commissary sales and increased costs generated as a result of programmatic changes DeCA might make to accommodate any increase in sales. These changes, such as additional hiring and store expansion or renovation, could take some time to occur and to have a measurable impact on operations. DOD proposed in fiscal year 1996 that a nationwide field test be conducted for a 1-year period to evaluate the impact of unlimited access by reservists. In fiscal year 1997, DOD suggested another test at one or more areas in the United States. Both suggestions would require temporarily granting access to commissaries to all reservists or, at least, those in a certain area or areas. The primary concern with testing unlimited accessibility is that withdrawal of the benefit later could have a negative impact on morale and on the perception of the benefits of military service. We believe DOD and DeCA could develop reliable estimates of the potential impact of this policy change using a study and data analysis approach and that such an approach would be more appropriate than a field test. Key elements of such a study are discussed in the following sections. The first step in analyzing the impact of opening the commissaries to reservists is to determine how many personnel in each category (e.g., “Gray Area” retirees, Selected Reservists, IRR, active duty, etc.) use the commissaries. This information could be developed by DeCA using recognized survey techniques. While DOD has conducted two surveys involving reservists in the past several years, neither has provided adequate or sufficient information regarding reservist usage. A 1992 DOD Reserve Components Survey was done to gain insight into the utilization of and satisfaction with military facilities by reserve officers, enlisted personnel, and their spouses. It did not attempt to estimate the overall commissary patronage level attributable to reservists or project their usage to the system as a whole. This survey disclosed that 39 percent of reservists reported that they used the commissary system; however, 61 percent said they did not. Sixty eight percent of all reservists surveyed cited distance from the commissary as a factor that limited their usage of the system while the policy restricting reservists’ access to commissaries was reported by 25 percent. A 1994 Commissary Patron Demographic Survey developed information to describe certain aspects of the typical commissary customer and estimated that reservists represented about 5 percent of commissary patronage. However, according to DeCA officials as well as our analysis, the survey results were not projectable to a systemwide perspective because of flaws in methodology. Specifically, (1) the distribution of commissaries selected for the survey was based on the distribution of the general population—not the population distribution of reservists in the United States—and (2) the survey was conducted during a holiday period that did not represent normal operations. To identify locations where increased patronage is most likely, DeCA needs to analyze the locations of commissaries in relation to concentrations of reservists and the distances to individual stores. Reservists are located throughout the United States, but, only 209 stores were available within the continental United States in 1996. This means that many reservists are not located close to a store and, therefore, may not be able to use the system on a regular basis. Analyzing demographic data that reflects the location of reservists in relation to available commissary stores and baseline estimates of existing patronage levels in the overall system should identify those geographic areas where increased sales are likely or possible. The distribution of stores is shown in table 1. Stores likely to experience sales increases could be identified by analyzing the demographic data and determining the baseline estimates of existing patronage levels. Potential sales increases could be estimated by several approaches or a combination thereof. For example, (1) reservists could be surveyed by interview at commissary stores determined to be most likely to experience increased patronage, (2) reservists could be surveyed on a nationwide basis to gain insight into any anticipated changes in buying patterns and commissary usage, and (3) commissary store managers could be interviewed for their views and estimates of potential increases (if their estimates were thought to be reliable). The costs and reliability of the results would vary under each approach; therefore, a judgment weighing the tradeoffs would be necessary to determine the specific approach to use. DOD and DeCA need to develop a detailed understanding of how increased sales would affect store costs, in particular labor costs, and commissary store workloads (sales levels, customer volumes, store hours, etc.). Such an understanding is important to the process of projecting the level of increase that would likely trigger actions affecting appropriated funding levels—additional personnel hours, overtime, and additional hiring. A major supermarket chain operating in the Washington, D.C., area uses a methodology that involves the comparison of historical store sales and payroll hours to estimate and project the effect of increased sales on personnel and other costs at new stores or at existing stores with changing demographics. For example, comparing the personnel and other costs of a store with annual sales of $20 million to one with 10-percent higher sales, that is, one with sales of $22 million, provides valuable and reliable indications of the additional number of personnel hours needed to support a 10-percent increase at a store with historical sales of $20 million. Such a methodology could be applied to the commissary system to develop a range of estimates of the impact on personnel and other costs generated from various percentages of projected increased patronage and sales from reservists, that is, 5, 10, 15, 20, etc. The increased personnel costs, if any, calculated at store and regional levels for each projected sales increase would roughly equal the potential impact range on the level of appropriated fund support resulting from granting reservists unlimited commissary access. We recommend that the Secretary of Defense ensure that any future legislative proposal to expand commissary access for military reservists be supported by a methodologically sound analysis that estimates the potential impact on appropriated fund support for the commissary system. DOD concurred with our recommendation and stated that DeCA and the Office of the Assistant Secretary of Defense (Reserve Affairs) will jointly develop a survey targeted to ascertain the impact expansion of commissary access to military reservists will have on the commissary system. According to DOD, the results of the survey and subsequent analysis will be used to determine the feasibility of future legislative proposals to expand commissary access to military reservists. Where appropriate, we have incorporated DOD’s comments and other points of clarification throughout the report. Appendix I explains our scope and methodology. Appendix II shows charts depicting budget and obligation information for DeCA since it was established. Appendix III contains a reproduction of DOD’s comments. The major contributors to this report are listed in appendix IV. We are sending copies of this report to interested congressional committees and Members of Congress; the Secretary of Defense; the Director, DeCA; and the Director, Office of Management and Budget. We will also make copies available to others on request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Our study of the Department of Defense (DOD) policy regarding access to the commissary system by military reservists and proposed changes to allow unlimited access was conducted primarily at offices in the Office of the Secretary of Defense in the Pentagon and at Defense Commissary Agency (DeCA) headquarters at Fort Lee, Virginia. We interviewed DeCA officials and reviewed and analyzed financial data for headquarters, regions, and commissaries within those regions to obtain information regarding DeCA’s budget and funding sources and the application of funds from each source. We did not verify the accuracy of the data provided by these officials. At Fort Lee, Virginia, we toured the commissary store and interviewed the manager to obtain information on commissary prices, sales, and operations. We interviewed DOD officials in the offices of the Assistant Secretary of Defense (Reserve Affairs), the Assistant Secretary of Defense (Force Management and Personnel), and the DOD Comptroller’s Office to gain information on the rationale for granting reservists unlimited commissary access and their views on the issue. We were also briefed by representatives of the Reserve Officers’ Association, the Military Coalition, and the Food Marketing Institute. In addition, we contacted a local grocery chain to discuss its methods to evaluate and project sales increases on their operations and costs. We conducted our review from April 1996 to December 1996 in accordance with generally accepted government auditing standards. APF (Overseas) APF (United States) Charles W. Perdue The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed proposals to change the Department of Defense (DOD) policy that limits military reservists' access to commissary stores, focusing on the: (1) evolution of the policy on military reservists' access to the commissaries and proposals to change that policy; (2) sources of the Defense Commissary Agency's (DCA) funding; and (3) information needed to analyze the impact on appropriated funds of granting military reservists unlimited access to the commissary system. GAO found that: (1) commissary access for military reservists before 1986 was limited to a maximum of 14 days and was authorized only during periods of active duty training; (2) since 1990, reservists have been authorized to earn 12 visits a year to the commissary system in addition to access during any period of active duty service; (3) DOD has submitted three proposals since 1990 to grant reservists unlimited access, but none have been adopted by Congress because of concerns about the impact such a change might have on the level of appropriated funds and the concerns expressed by civilian grocery providers about the impact on their businesses; (4) the commissary system is funded primarily from an annual appropriation that has averaged about $1 billion for fiscal years (FY) 1992 through 1996; (5) the other funding source is the 5-percent surcharge that is added to each sale in all commissary stores, which has provided an average of about $315 million over the same period; (6) while DOD has proposed legislation to grant reservists unlimited commissary access, it has not developed estimates of the potential financial impacts of such a policy change; (7) potentially, any increase in the commissary customer base, such as granting unlimited access to reservists, could increase the sales and overall workload of the commissary system and increase personnel costs, which could, in turn, increase the level of appropriated funds needed for commissary operations or, at least, cause funding levels to be higher than they would otherwise be; (8) DOD's FY 1996 and 1997 proposals called for variations of a 1-year field test to identify the effects of increased access for reservists on commissary operations; (9) field tests would give specific individuals unlimited commissary access for 1 year to develop impact studies; (10) such a test runs the risk of appearing to withdraw a benefit following the test's conclusion; (11) GAO believes that a methodologically sound study, using data that could be developed by DOD and DCA, could provide reliable estimates of the financial impact of granting reservists unlimited commissary access; and (12) key elements of such a study would be to: (a) establish baseline data by determining the current level of reservist patronage of the commissary system; (b) correlate commissary locations in the United States with reservist population concentrations to identify locations with the potential to experience increased patronage; and (c) estimate the effects of increased commissary sales/workloads on operating costs and the level of appropriated fund support needed. |
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Dual-eligible beneficiaries—individuals eligible for both Medicare and Medicaid—generally fall into two categories: low-income seniors (those aged 65 years old and over) and individuals with disabilities under the age of 65 years. Requirements to protect the rights of beneficiaries under both programs are of particular importance to dual-eligible beneficiaries because of their generally greater health care needs. Several efforts have been made in the past to better integrate care for dual-eligible beneficiaries. Medicare is a federally financed program that in 2011 provided health insurance coverage to nearly 49 million beneficiaries—people age 65 and older, certain individuals with disabilities, and those with end-stage renal disease. In Medicare FFS, beneficiaries may choose their health care providers among any enrolled in Medicare. However, CMS also contracts with MA organizations, private entities that offer managed care plans to Medicare beneficiaries. As of 2011, about 25 percent of Medicare beneficiaries were enrolled in a MA plan. As part of the agency’s oversight of MA plans, CMS responds to complaints from beneficiaries and other parties, conducts surveillance, and conducts compliance audits. CMS responds to complaints from beneficiaries, health care providers, and other parties that come into the agency through a 1-800-MEDICARE phone line. It is through this mechanism that CMS generally resolves issues that are beneficiary- specific. CMS conducts surveillance by having routine discussions with managed care organizations, monitoring plan-submitted data, and tracking and monitoring complaint rates by MA plan and complaint category. CMS uses compliance audits to assess whether a managed care organization’s operations are consistent with federal laws, regulations, and CMS policies and procedures. Audits typically involve a combination of desk reviews of documents submitted by MA organizations, and, at CMS’s discretion, site visits. Medicaid is a joint federal-state program that finances health care coverage for certain low-income individuals.matching funds for services provided to Medicaid beneficiaries, each state must submit a state Medicaid plan for approval by CMS. The state Medicaid plan defines how the state will operate its Medicaid program, including which populations and services are covered. States must operate their Medicaid programs within broad federal parameters. While complying with these federal requirements, however, states have the flexibility to tailor their programs to the populations they serve, including the imposition of additional protections for beneficiaries. For example, states generally are required by federal Medicaid law to cover certain benefits, while other benefits may be included at a state’s option. Subject to CMS approval, states may choose to operate a portion of or their entire Medicaid programs as FFS or managed care. With respect to managed care, states vary widely in terms of the scope of services they provide and the populations they enroll. States have certain options when considering whether to enroll Medicaid beneficiaries into managed care, including whether enrollment is voluntary or mandatory. States may obtain the authority to mandatorily enroll Medicaid beneficiaries into managed care plans with CMS approval of a state plan amendment. However, under federal law, states cannot require certain categories of beneficiaries, including dual-eligible beneficiaries, to mandatorily enroll under this authority. states may obtain the authority to enroll Medicaid beneficiaries, including dual-eligible beneficiaries, into managed care through the approval of two types of Medicaid waivers: Section 1115 of the Social Security Act provides the Secretary of Health and Human Services with the authority to grant states waivers of certain federal Medicaid requirements and allow costs that would not otherwise be eligible for federal funds for the purpose of demonstrating alternative approaches to service delivery. Under a 1915(b) waiver, the Secretary may waive certain Medicaid requirements, allowing states to operate a managed care program to the extent it is cost-effective and consistent with the purposes of the program. See 42 U.S.C. § 1396u-2(a)(1)-(2). managed care plans. However, more recently states are beginning to move dual-eligible beneficiaries into managed care plans as well. In 2010, about 9.3 percent of dual-eligible beneficiaries were enrolled in Medicaid managed care plans. Another type of waiver, the 1915(c) waiver, is the primary means by which states provide home- and community-based services (HCBS) to Medicaid beneficiaries. Under a 1915(c) waiver, states can provide HCBS that may not be available under the state’s Medicaid plan to beneficiaries that would, if not for the services provided under the waiver, require institutional care.may provide under a 1915(c) waiver or through the state’s Medicaid plan, in addition to other services such as respite care, personal care, and case management. Home health care is one of the services that states At the federal level, CMS oversight of state Medicaid programs includes monitoring the programs and providing guidance to states. States must provide assurances to CMS that they have mechanisms in place to ensure that any managed care organization with which the state contracts complies with federal regulations in order to obtain approval for enrolling Medicaid beneficiaries into managed care. Though CMS is not a party to the contract, states are required to obtain CMS approval of the contracts between states and managed care organizations in order to qualify for federal funding. States administer the day-to-day operations of their Medicaid programs. At the state level, requirements for Medicaid managed care plans are often included as part of the contract between the state and the managed care plan and may derive from federal or state law, regulations, or policies. States generally oversee managed care plans through a combination of informal and formal monitoring that may include regular meetings, reviews of plan-submitted reports, audits, and financial reviews. Medicare and Medicaid have a number of requirements intended to protect the rights of beneficiaries, some of which are of particular importance to dual-eligible beneficiaries. Medicare and Medicaid have requirements that specify the circumstances under which a beneficiary may be compelled to enroll in a managed care plan instead of obtaining services through the FFS program. How beneficiaries are enrolled in managed care, for example whether the enrollment is mandatory or voluntary, could have implications for dual- eligible beneficiaries who may have more serious health care needs and who, because of cognitive impairments, may require assistance in understanding their options or the implications of their choices. In general, federal law and regulations do not specifically require MA plans or Medicaid managed care plans to cover services provided by a beneficiary’s previous providers if that provider is not in the plan’s network when a beneficiary first enrolls in a plan or switches plans. There are limited circumstances when managed care plans are required to cover such services during a transition period. Medicare and Medicaid also have certain federal requirements for managed care plans to ensure coordination of at least some services for beneficiaries. Dual-eligible beneficiaries often have complex health care needs and, therefore, may see several different providers. Accordingly, continuing relationships with providers, as well as ensuring coordination of care, is of particular importance to this population. Medicare and Medicaid have requirements for managed care plans to maintain provider networks that ensure beneficiaries can access a range of health care providers and obtain services in a timely manner. Within Medicaid managed care, provider participation problems have been specifically noted for specialty and dental care. Medicare and Medicaid have requirements about the type and format of materials provided to beneficiaries to promote enrollment into a managed care plan or communicate information about coverage and costs. Inappropriate marketing practices have in the past led some Medicare beneficiaries to enroll in MA plans in which they had not intended to enroll or that did not meet their health care needs. Inappropriate marketing may include activities such as providing inaccurate information about covered benefits and conducting prohibited marketing practices, such as door-to- door marketing without appointments and providing potential beneficiaries with meals or gifts of more than nominal value to induce enrollment. Medicare and Medicaid have requirements about how beneficiaries can qualify for certain services and the scope of coverage provided. According to CMS, two services where coverage differences between Medicare and Medicaid are particularly problematic for dual-eligible beneficiaries are nursing facility services and home health care. While both programs cover these benefits, they differ in terms of how a dual- eligible beneficiary can qualify for the benefit and the scope of the coverage provided. As a result, there can be cost-shifting between the programs. Nursing Facility Services. Medicare and Medicaid both set requirements for the conditions a beneficiary must meet to become eligible for coverage of nursing facility services. Medicare’s coverage of nursing facility care is limited to 100 days of posthospital skilled nursing facility (SNF) services. SNF services may only be provided in an inpatient setting and include skilled nursing (such as intravenous injections, administration of prescription medications, and administration and replacement of catheters); room and board; and physical, occupational, and speech language therapies. In contrast, Medicaid’s coverage of nursing facility services includes skilled nursing, rehabilitation needed due to injury, disability or illness, and long-term care. Under federal law, state Medicaid programs must cover nursing facility services for qualified individuals age 21 or over. All states have chosen to also offer the optional benefit of nursing facility services for individuals under 21 years of age. Medicare beneficiaries may continue to need nursing facility care after their Medicare benefit is exhausted. In such instances beneficiaries may pay privately or use any long-term care insurance they may have. In certain circumstances, the beneficiaries may also be eligible for Medicaid if, for example, they spend enough of their resources to meet Medicaid eligibility rules in their state. If the beneficiary does become dually eligible, the beneficiary may then qualify for Medicaid coverage of nursing facility services, beyond what Medicare covers. Overlapping coverage of nursing facility care in Medicare and Medicaid provides nursing facilities with a financial incentive to transfer dual-eligible beneficiaries back to hospitals when nursing facility care is being paid for by Medicaid. By transferring dual-eligible beneficiaries from a nursing facility to a hospital, the nursing facility will qualify for what is generally a higher payment under Medicare when beneficiaries are readmitted and require skilled nursing services. One study of hospitalizations among dually eligible nursing facility residents in 2005 found that approximately 45 percent of hospitalizations among beneficiaries receiving Medicare SNF services or Medicaid nursing facility services were potentially avoidable. Home Health Care. Medicare and Medicaid both set requirements for how a beneficiary can qualify for home health services, and state Medicaid programs further refine these requirements for Medicaid coverage. Medicare’s home health benefit covers skilled nursing services, physical therapy, speech-language pathology, occupational therapy, medical social services, and medical equipment. required to cover home health services for certain categories of beneficiaries, including those who are entitled to nursing facility services under the state plan. Under Medicaid’s home health benefit, states must cover nursing services, home health aide services, and medical supplies and equipment for use in the home. States may also choose to cover physical, occupational, or speech therapy under this benefit. The Medicare Payment Advisory Commission reported that some states have tried to increase the proportion of home health services for dual-eligible beneficiaries covered by Medicare, rather than Medicaid. For instance, some states have required home health agencies to show proof of a Medicare denial for home health services for a dual-eligible beneficiary before covering the service under Medicaid. Medicare may also cover home health aide services on a part-time or intermittent basis if they are needed as support services for skilled nursing services. of daily living (ADL), instrumental activities of daily living (IADL), supervision or guidance with ADLs, or a mix of those. Beneficiaries’ ability to contest a determination that their benefits will be denied, reduced, or terminated is a basic right provided for both Medicare and Medicaid beneficiaries. must follow depends on whether the benefit being contested is a Medicare or Medicaid benefit. Both Medicare and Medicaid have standard appeals processes and expedited appeals processes in cases of urgent need. In this report, we only describe the standard Medicare and Medicaid appeals processes. January 2012, 84 PACE sites in 29 states enrolled about 21,000 beneficiaries. There are key differences in enrollment choice requirements across the Medicare and Medicaid programs, the FFS and managed care payment systems and the selected states. Certain consumer protection requirements are unique to managed care plans in areas such as continuity and coordination of care and provider networks. Other consumer protection requirements also differ across the programs, payment systems, and selected states. The MMA authorized a type of MA plan referred to as a special needs plan to address the unique needs of certain categories of Medicare beneficiaries, including dual-eligibles. Pub. L. No. 108-173, § 231, 117 Stat. 2066, 2207 (2003) (codified, as amended, at 42 U.S.C. § 1395w-21(a)(2)(A)(ii)). SNPs, including D-SNPs, have been reauthorized several times since their establishment was first authorized in 2003. Within Medicare, enrollment in managed care is always voluntary, whereas state Medicaid programs can require enrollment in managed care in certain situations. In Medicare, beneficiaries—including dual- eligible beneficiaries—are enrolled in FFS unless they select an MA plan. In general, beneficiaries may select an MA plan voluntarily when they first become eligible for Medicare, during an annual coordinated election period, or during special election periods, such as when an MA plan’s contract is terminated or discontinued in the area where a beneficiary lives or when CMS determines that beneficiaries meet exceptional conditions. CMS has created a special election period for dual-eligible beneficiaries, and accordingly, they may opt into MA or FFS or change MA plans at any time. They generally may select any MA plan, including D-SNPs, that serves the area where they live, though the number of plans available varies by area. MA plans may limit the providers from whom Medicare beneficiaries, including dual-eligible beneficiaries, may receive covered services, whereas beneficiaries in Medicare FFS may receive covered services from any provider enrolled in Medicare. In contrast, a Medicaid beneficiary’s ability to choose to remain in FFS or enroll in managed care depends on how the state structures its Medicaid program. As an alternative to FFS, states can structure their Medicaid programs to require enrollment in managed care, or allow beneficiaries to choose between the two payment systems. Unlike in Medicare, states can mandatorily enroll beneficiaries, including dual-eligible beneficiaries, into Medicaid managed care with CMS approval of a section 1115 demonstration waiver or section 1915(b) waiver. States mandating enrollment into a managed care plan generally must provide beneficiaries a choice of at least two plans, except in specific circumstances, such as in rural areas. Otherwise, similar to Medicare, the number of available Medicaid managed care plans varies, depending on how many plans are offered where the beneficiary lives. Subject to the terms and conditions of the waiver, Medicaid managed care plans can generally limit beneficiaries, including dual-eligible beneficiaries, to the plan’s provider network, whereas beneficiaries in Medicaid FFS may receive covered services from any qualified Medicaid provider. CMS officials informed us, however, that for dual-eligible beneficiaries, the agency does not have the authority to allow states to limit the beneficiary’s choice of provider for Medicare covered benefits when mandatorily enrolling them into Medicaid managed care plans. State requirements vary with respect to Medicaid enrollment into FFS or managed care and for choice between plans if beneficiaries enroll in managed care. For example: Arizona: The state requires Medicaid beneficiaries, including all dual- eligible beneficiaries, to enroll in either the Medicaid acute or long- term managed care programs under a section 1115 demonstration waiver. Beneficiaries in the state’s acute care program have a choice among managed care plans. Beneficiaries enrolled in the long-term care program generally have a choice of plans if they live in or are moving to Pima or Maricopa counties, which are the state’s two most populated counties and the only counties where more than one long- term care plan operates. California: Medicaid beneficiaries’ choice of payment system varies depending on where they live among California’s 58 counties. In 28 mostly rural counties all dual-eligible beneficiaries are in FFS. In the remaining 30 counties, the state has three different Medicaid programs for enrolling beneficiaries in managed care. Dual-eligible beneficiaries in 14 California counties are mandatorily enrolled in managed care through a county-organized health system, which is a health plan operated by a county that contracts with the state to provide health care benefits to Medicaid beneficiaries. Because there is only one plan in each of these counties, beneficiaries enrolled in the county-organized health systems have no choice between plans. Dual-eligible beneficiaries in 14 counties may choose between FFS or the state’s Two-Plan managed care program. Under the Two-Plan program, beneficiaries who enroll in managed care have a choice between the Local Initiative Health Plan—a public agency that is independent of the county—and a commercial plan. In the remaining two counties—Sacramento and San Diego—dual-eligible beneficiaries can choose between FFS or the Geographic Managed Care program.eligible beneficiaries who enroll in managed care can choose from several commercial managed care plans. Under the Geographic Managed Care program, dual- Minnesota: Dually eligible seniors in Minnesota must enroll in one of two managed care programs, and dual-eligible beneficiaries who became eligible on the basis of their disabilities can choose whether to enroll in a managed care program. Minnesota has a 1915(b)(c) waiver to mandatorily enroll dually eligible seniors in a Medicaid managed care plan. Alternatively, these seniors can choose to enroll in a participating D-SNP that, under contract with the state, integrates Medicare and Medicaid financing and services. Dual-eligible beneficiaries age 18 to 64 who have disabilities may opt back into FFS. If they do not opt into FFS, they are enrolled in managed care and may opt into FFS at any time. Whether dual-eligible beneficiaries have a choice between plans varies depending on the county where they live. North Carolina: According to North Carolina Medicaid officials, all Medicaid beneficiaries, including dual-eligible beneficiaries, are in FFS, and the majority of dual-eligible beneficiaries are in a primary care case management program, where primary care providers are paid on a FFS basis, in addition to receiving a monthly fee to perform certain care coordination activities. In general, federal law and regulations do not specifically require MA plans or Medicaid managed care plans to cover services provided by a beneficiary’s previous providers if that provider is not in the plan’s network when a beneficiary first enrolls in a plan or switches plans. There are limited circumstances when managed care plans are required to cover such services during a transition period. MA organizations must ensure that covered services are available and accessible to beneficiaries. In implementing this requirement, CMS officials informed us that MA organizations must ensure that there is no gap in coverage or problems with access to medically necessary services when a beneficiary must change to a plan-contracted provider. For example, a beneficiary receiving oxygen may need to switch to a new oxygen supplier when the beneficiary joins the MA plan or switches plans. As the beneficiary transitions to the new oxygen supplier, the MA plan may need to reimburse the beneficiary’s previous provider to ensure that there is no gap in coverage, and that the beneficiary maintains access to medically necessary services. MA organizations also must ensure coordination of services through various arrangements with network providers, such as programs that coordinate plan services with community and social services in the area, such as services offered by an area agency on aging. Additionally, D-SNPs or any other type of SNP must provide dual-eligible beneficiaries with access to appropriate staff to coordinate or deliver all services and benefits, and coordinate communication among plan personnel, providers, and the dual-eligible beneficiaries themselves. As with Medicare, Medicaid managed care plans are generally not required to cover services by a beneficiary’s previous provider if that provider is not in the plan’s network. However, states determine to what extent Medicaid managed care plans must provide beneficiaries with access to a person or entity primarily responsible for coordinating health services on the basis of the services the plan must cover. Individual states may have continuity of care requirements for their Medicaid managed care programs, as defined under an applicable waiver or state requirements. For example, in California, beneficiaries newly enrolled in managed care plans may request and receive coverage of the completion of treatments initiated by an out-of-network provider with whom they have an ongoing relationship in certain circumstances, such as for the treatment of a terminal illness or acute condition. The length of the coverage depends on the stability of the beneficiary and the nature of the medical condition. Minnesota also has continuity of care requirements. For newly enrolled dually eligible seniors, managed care plans must cover medically necessary services that an out-of-network provider, a different plan, or the state agency authorized before the dual-eligible beneficiary enrolled with the managed care plan. However, the plan is allowed to require that the dual-eligible beneficiary receive the services from an in-network provider if that would not create an undue hardship on the dual-eligible beneficiary and the services are clinically appropriate. Arizona requires that managed care plans employ transition coordinators to ensure continuity of care, and beneficiaries in the state’s long-term care program receive additional case management for help navigating their care options, including planning, coordinating and facilitating access to services. Medicare and state Medicaid programs require managed care plans to meet certain provider network standards. In order to limit beneficiaries to a network of providers, MA organizations must meet a number of requirements, including maintaining and monitoring a network of appropriate providers, under contract, that is sufficient to provide adequate access to covered services to meet the needs of enrolled beneficiaries. Federal guidelines establish minimum network adequacy requirements that vary depending on a county’s geographic designation, such as whether the county is urban or rural. MA organizations must contract with sufficient numbers of certain types of provider specialists per 1,000 Medicare beneficiaries in a county. For example, MA plans operating in rural counties must have at least one full-time equivalent (FTE) primary care provider per 1,000 beneficiaries. Additionally, MA organizations must demonstrate that their network meets geographic requirements related to the time and distance it takes beneficiaries to travel to providers. For example, in rural counties, MA organizations must also ensure that 90 percent of beneficiaries can access primary care providers within 40 minutes and 30 miles of travel. MA organizations must also ensure that the networks include a minimum number of specialists and specialty facilities, such as at least one cardiologist and one skilled nursing facility per 1,000 beneficiaries. States must ensure, through contracts, that Medicaid managed care plans demonstrate that they have the capacity to serve expected enrollment in the service area in accordance with state standards. For example, plans must submit documentation to the state that they offer an appropriate range of preventive, primary care, and specialty services, and maintain a network of providers that is sufficient in number, mix, and geographic distribution to meet the needs of the enrollees. Unlike Medicare, however, federal Medicaid laws and regulations do not establish minimum provider network requirements and instead generally require states to set the standards for access to care. Accordingly, subject to the terms and conditions of a waiver, if applicable, states may establish requirements that define the minimum number and types of providers in a network, and time and distance requirements between beneficiaries and primary care providers, as well as other network adequacy requirements. For example, Medicaid managed care plans in California must maintain a provider to beneficiary ratio of one FTE primary care physician for every 2,000 beneficiaries and one FTE physician from any specialty for every 1,200 beneficiaries. In some counties, managed care plans must also ensure that primary care physicians are located within 30 minutes or 10 miles of beneficiaries’ residences, unless the state approves an alternative time and distance standard. In addition to time and distance standards, Arizona requires managed care plans to contract with a specific number of providers, as determined by the state, which varies by each area that the plan serves. Arizona also defines time frames for beneficiaries to be able to access some services. For example, Arizona Medicaid managed care plans must provide beneficiaries with access to emergency primary care services within 24 hours, urgent primary care services within 2 days, and routine primary care services within 21 days. Plans must include a minimum number of other types of providers—such as dentists, pharmacists, home- and community-based services providers, and behavioral health facilities—in their networks as well. Medicare and Medicaid each have requirements regarding the marketing materials managed care organizations send out to beneficiaries. MA organizations are required to comply with a variety of federal requirements for marketing materials that are intended to promote enrollment in a specific health plan. For example, organizations generally must submit marketing materials to CMS for review prior to sending to beneficiaries. Materials must provide an adequate written description of the plan’s benefits and services and comply with formatting requirements, such as a minimum font size. In addition, MA organizations must translate materials into any non-English language that is the primary language of at least 5 percent of individuals in the plan’s service area. Medicaid managed care plans are required to comply with both federal and state requirements for marketing materials. For example, Medicaid managed care plans must obtain state approval before distributing marketing materials. Federal requirements also mandate that materials must be written in an easily understood language and format, though requirements for format are not precisely defined. In addition, plans must make information, including Medicaid marketing materials, available in each prevalent language spoken by enrollees and potential enrollees in the plan’s service area. Subject to the terms and conditions of a waiver, if applicable, states may further define requirements for readability and material translation, while other states may prohibit marketing altogether. For example, marketing materials in California must be translated when a threshold number of beneficiaries whose primary language is not English live in a managed care plan’s service area or in the same or adjacent zip codes, among other circumstances. Additionally, all Medicaid marketing materials in California must be written at no higher than the sixth-grade reading level and be approved by the state Medicaid agency. Arizona prohibits Medicaid managed care plans from conducting any marketing that is solely intended to promote enrollment; all marketing materials must include a health message. Other requirements affecting dual-eligible beneficiaries, such as coverage for nursing facility and home health services and the appeals process, vary between Medicare and Medicaid, and between the FFS and managed care payment systems. Beneficiaries must meet different requirements to qualify for nursing facility care under Medicare and Medicaid. As required under federal law, to qualify for Medicare’s 100 days of SNF coverage, beneficiaries must have a prior hospital stay. Specifically, Medicare beneficiaries must have been hospitalized for medically necessary inpatient hospital care for at least 3 consecutive calendar days, not including the discharge date. In addition, Medicare beneficiaries must meet certain criteria, such as: (1) require skilled nursing or rehabilitative services on a daily basis, (2) services must only be rendered for a condition the beneficiary had during hospitalization, and (3) require daily skilled services that can only be provided in an SNF. Unlike Medicare, Medicaid does not limit coverage of nursing facility services to beneficiaries with prior hospital stays and states must cover services provided by qualified SNFs as well as other types of nursing facilities. Instead, federal Medicaid law requires states to provide coverage of nursing facility services for adult Medicaid beneficiaries when medically necessary. Within broad federal parameters, such as requiring that beneficiaries need daily, inpatient nursing facility services that are ordered by a physician, states may impose additional requirements when defining coverage for this benefit.beneficiaries in North Carolina, must show they meet the requirements to be in a nursing facility by demonstrating some qualifying conditions. Qualifying conditions may include, among other things, (1) the need for services that require a registered nurse a minimum of 8 hours a day and other personnel working under the supervision of a licensed nurse, (2) the need for restorative nursing to maintain or restore maximum function or prevent deterioration in individuals with progressive disabilities as much as possible, or (3) the need for a specialized therapeutic diet. In Arizona, the acute care program covers nursing facility services for a limited amount of time (90 days) if hospitalization will occur otherwise or the treatment cannot be administered safely in a less restrictive setting, such as at home. Medicaid beneficiaries in the long-term care program in Arizona have longer-term nursing facility benefits. Beneficiaries qualify for the long-term-care program when they have a functional or medical condition that impairs functioning to the extent that the individual would be deemed at immediate risk of institutionalization. Impairments may include, among other things, requiring nursing care, daily nurse supervision, regular medical monitoring, or presenting impairments with cognitive functioning or self-care with ADLs. Beneficiaries must meet different requirements to qualify for home health services under Medicare and Medicaid. Medicare beneficiaries may only qualify for home health coverage when they are confined to a home or an institution that is not a hospital, SNF, or nursing facility. Additionally, the beneficiary must be under the care of a physician, need intermittent physical therapy, speech language pathology skilled nursing care,services, or have a continuing need for occupational therapy services, and receive services under a written plan of care. Unlike in Medicare, states may not require that Medicaid beneficiaries be confined to a home or institution in order to qualify for home health benefits. Instead, federal regulations require that in order to qualify for Medicaid coverage, home health services generally must be provided at the beneficiary’s home and ordered by a physician as part of a written As with nursing plan of care, which must be renewed every 60 days. facility services, state Medicaid programs have the authority to impose additional conditions on accessing home health benefits, and accordingly state programs vary with respect to when beneficiaries may qualify for home health benefits. For example, to receive home health coverage in North Carolina, a physician must order the home health services and must have face-to-face contact with the beneficiary 90 days prior to care or 30 days after care, and the services must be medically necessary. Beneficiaries must have at least one reason, from a specific list of reasons set by the state, to receive home health services.beneficiaries might qualify if they require assistance leaving the home because of a physical impairment or medical condition, or if they are medically fragile. For example, Medicare and Medicaid each have multiple levels of appeals, which vary further between each program’s managed care and FFS delivery systems. Accordingly, the appeals processes that dual-eligible beneficiaries encounter differ depending on whether the benefit being denied, reduced, or terminated is a Medicare or Medicaid benefit, and whether the individual is enrolled in FFS or managed care. Both programs require that beneficiaries in either managed care and FFS be notified of their right to appeal. Medicare has five levels of appeals for managed care and FFS. 1. Beneficiaries enrolled in an MA plan must first request review by the MA organization. In FFS, beneficiaries first request review by the claims processing contractor that made the initial coverage decision.2. For MA, if the adverse determination is affirmed, the issues must be automatically reviewed and resolved by an independent review entity, and for Medicare FFS, beneficiaries may request review by a qualified For beneficiaries in either FFS or managed independent contractor.care, this is the earliest opportunity for their claim to be reviewed by a different entity than the one that made the original determination. 3. If the independent entity affirms the adverse determination, MA and FFS beneficiaries have the right to request a hearing before an administrative law judge (ALJ) in the Department of Health and Human Services if the amount remaining in controversy—the projected value of denied services or a calculated amount based on charges for services provided—is above a specified level. 4. MA and FFS beneficiaries who are dissatisfied with the ALJ hearing decision may request review by the Medicare Appeals Council. 5. MA and FFS beneficiaries may request judicial review by a U.S. district court of a decision by the Medicare Appeals Council if the amount in controversy is above a specified level. 42 C.F.R. §§ 405.1100, 422.608. The Medicare Appeals Council undertakes a de novo review and may issue a final decision, dismiss the appeal, or remand the case to the ALJ with instructions for rehearing the case. Medicare FFS beneficiaries may also request this review if the ALJ dismissed their case or failed to issue a timely decision. There are no federal Medicare requirements that benefits continue during the appeals processes for either managed care or FFS, nor do federal law and regulations require that FFS or MA beneficiaries receive personal assistance, including assistance from a care coordinator or other specialist, when navigating the appeals process. However, there are certain protections incorporated into the appeals process that are designed to assist Medicare beneficiaries. For example, Medicare beneficiaries may appoint a representative to assist them with an appeal. Beneficiaries also may seek assistance through the Office of the Medicare Beneficiary Ombudsman, which is responsible for resolving inquiries and complaints for all aspects of the Medicare program, through the 1-800-MEDICARE help line. States can structure their Medicaid appeals processes within the parameters of federal requirements. Medicaid FFS beneficiaries must have access to a fair hearing before a state agency for certain actions, including when benefits are terminated, suspended, or reduced. Once a final agency decision is made, Medicaid FFS beneficiaries may request a judicial review of the decision if permitted under state law. Beneficiaries in Medicaid managed care plans must have the ability to appeal a termination, suspension, or reduction of a benefit to the plan as well as have access to a state fair hearing. States determine whether beneficiaries must first exhaust their appeal to their Medicaid managed care plans before they may request a state fair hearing. During these appeals, benefits generally must continue in certain circumstances. Benefits generally must continue until a final agency decision is made if the beneficiary is mailed a notice of action and files an appeal before the date of the action. As in Medicare, neither federal regulations nor law require that beneficiaries in Medicaid FFS have access to personal assistance in navigating the appeals process. States, however, have the option of providing this assistance to FFS beneficiaries. For beneficiaries in Medicaid managed care, plans must give beneficiaries assistance with completing appeal forms and taking other procedural steps, including providing interpreter services and toll-free numbers for assistance. The appeals processes in the states that we reviewed varied, for instance as to whether a beneficiary in managed care has to appeal to his or her managed care plan first. For example, Arizona requires beneficiaries to first appeal to their managed care plan before requesting a state fair hearing. In contrast, Minnesota allows beneficiaries to request a state fair hearing without first appealing to their managed care plan. Dual-eligible beneficiaries in Minnesota may also request help from the state ombudsman, and county boards are required to designate a coordinator to assist the state Medicaid agency, including coordinating appeals with the ombudsman. See appendix II for a more detailed summary of these consumer protection requirements across programs, payment systems, and selected states. CMS and states used compliance and enforcement actions that ranged from informal written notices to contract terminations in order to help ensure MA organizations and Medicaid managed care plans complied with consumer protection requirements. CMS used both compliance and enforcement actions to bring noncompliant MA organizations into compliance with federal requirements. Compliance actions are intended to prompt managed care organizations to address issues of noncompliance, such as the timing of disenrollments, whereas enforcement actions impose a penalty on a managed care organization and are taken to address more significant violations. According to CMS, the nature of each violation is considered when determining the appropriate compliance or enforcement action and the actions generally proceed through the process in a step-by-step manner before enforcement actions are taken. CMS takes compliance actions against MA organizations to address violations that are identified during the agency’s monitoring and auditing activities. According to agency guidance, compliance actions are appropriate when the MA organization: (1) demonstrates sustained poor performance over a period of time; (2) has a noncompliance issue that involves a large number of beneficiaries; or (3) does not meet its contractual requirements. The lowest-level compliance action is a notice of noncompliance, which may be an e-mail from a CMS contract manager to a managed care plan stating that an aspect of the program is out of compliance. The notice of noncompliance requests the plan respond with how it will address the problem and may be followed by a warning letter from CMS that identifies a limited and quickly fixable issue of noncompliance that requires immediate remedy. If CMS determines that the noncompliance affects multiple beneficiaries and represents an ongoing or systemic inability by the plan to adhere to Medicare requirements, CMS will send a formal letter to the MA’s chief executive officer stating the concern and requiring the organization to develop and implement a corrective action plan (CAP). The CAP must address the deficiencies identified by CMS, provide an attainable time frame for implementing corrective actions, and devise a process for the managed care organization to validate and monitor that the corrective actions were taken and remain effective. Between January 1, 2010, and June 30, 2012, CMS took 546 compliance actions generally related to consumer protection requirements of importance to dual-eligible beneficiaries. (See table 1.) These issues of noncompliance that could potentially affect dual-eligible beneficiaries were identified during CMS’s ongoing oversight activities, analysis of plan deliverables, and complaints made by beneficiaries or providers. Of these 546 actions, 386, or 70 percent, were due to marketing issues.sent notice of noncompliance or warning letters for marketing issues related to misrepresentation of requirements for enrollment and use of unapproved marketing materials. CMS The three states we reviewed used similar sequences of actions to identify and address issues of noncompliance by their Medicaid managed care plans. State officials reported that when noncompliance issues are suspected they first notify the plans and give them an opportunity to remedy the problem. Subsequent deficiencies may require a Medicaid managed care plan to initiate a corrective action plan that the state would monitor to assure the appropriate changes are made. Between January 1, 2010, and June 30, 2012, the three states reported they took a total of 157 compliance actions against their Medicaid managed care plans. These actions ranged from sending warning letters, issuing notices to cure, requiring CAPs, and imposing financial penalties.common action taken by the states was to require a managed care plan to implement a CAP. The reasons that states required Medicaid managed care plans to institute CAPs during the reporting period varied. California and Minnesota identified noncompliance with the appeals and grievance process that required corrective actions.take corrective actions to ensure beneficiaries were able to access appropriate translation services. The majority of the CAPs required by Minnesota’s Medicaid office dealt with plan management of beneficiary appeals and grievances. Arizona required CAPs to address the use of unapproved marketing materials. After appeals, the next most frequent reason states requested CAPs on consumer protection requirements was to address problems regarding beneficiaries’ access to providers, services, or drugs. Figure 2 illustrates the reasons why Medicaid managed care plans were required to implement a CAP for the 91 CAPs issued during the period. We received written comments on a draft of this report from the Department of Health and Human Services, which are reprinted in appendix III, and technical comments, which we incorporated as appropriate. The department noted that the report was an accurate assessment of the programs we reviewed, and added that the Medicare- Medicaid Coordination Office has already made some progress aligning the requirements between the two programs in the area of appeals. CMS has developed a revised Notice of Medicare Denial of Coverage (or Payment) that includes optional language to be used in cases where a Medicare health plan enrollee also receives full Medicaid benefits that are being managed by the Medicare health plan. The revised Notice of Medicare Denial of Coverage (or Payment) is under review as part of the approval process. We will send copies of this report to the Administrator of CMS and interested congressional committees. We will also make copies available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In Arizona’s Medicaid program, called the Arizona Health Care Cost Containment System, nearly all Medicaid beneficiaries, including dual- eligible beneficiaries, are enrolled in the acute care managed care program for Medicaid benefits. Individuals requiring long-term supports and services are enrolled in a separate long-term care managed care program. Both managed care programs operate under a section 1115 demonstration waiver. As of January 2012, Arizona had about 110,000 dual-eligible beneficiaries enrolled in Medicaid managed care, and over 1.3 million total Medicaid beneficiaries. California’s Medicaid system, called Medi-Cal, includes 28 counties with only a fee-for-service (FFS) system and 30 counties with one of three different managed care programs. Of the managed care options, the first is a county-operated health system, which requires nearly all Medicaid beneficiaries in participating counties, including dual-eligible beneficiaries, to enroll in a plan operated by the county. The second is the Two-Plan model, which has a commercial plan and a Local Initiative Health Plan—a public agency that is independent of the county. In the third program, called Geographic Managed Care, several commercial plans are offered as choice for beneficiaries. In both the Two-Plan and Geographic Managed Care programs, most Medicaid beneficiaries in the county are mandatorily enrolled in a managed care plan, but dual-eligible beneficiaries are in FFS unless they enroll voluntarily into one of the health plans. California officials reported that, as of June 2012, 26 percent of California’s approximately 1 million dual-eligible beneficiaries are enrolled in managed care, while the remaining 74 percent of dual-eligible beneficiaries are in FFS. In Minnesota, dual-eligible beneficiaries who are 65 years old and older are required to enroll in a managed care program called Minnesota Senior Care Plus (MSC+). As of June 2012, about 10,500 dually eligible beneficiaries 65 and older in Minnesota are enrolled in MSC+. Alternatively, dual-eligible beneficiaries 65 and older may choose to enroll in the Minnesota Senior Health Options (MSHO) program. Unlike MSC+ plans, MSHO plans are Medicare special needs plans that also have contracts with the state for the Medicaid benefits package, which enables the plans to integrate Medicare and Medicaid financing and services for dual-eligible beneficiaries. About 35,700 dually eligible beneficiaries 65 and older in Minnesota are enrolled in a MSHO plan. Dual-eligible beneficiaries age 18 to 64 who have a disability are enrolled in the state’s Special Needs Basic Care managed care program if they do not opt into Medicaid FFS. As of July 2012, about 39,000 of the state’s disabled population (both dual-eligible beneficiaries and non-dual-eligible beneficiaries) are enrolled in Special Needs Basic Care. More than 21,000 of these disabled beneficiaries were dual-eligible beneficiaries. According to Minnesota Medicaid officials, as of June 2012, almost 14 percent, or about 114,500, of Minnesota’s Medicaid population are dual-eligible beneficiaries, and 59 percent of the state’s dual-eligible beneficiaries are enrolled in managed care. According to North Carolina Medicaid officials, North Carolina primarily operates its Medicaid program through a primary care case management (PCCM) program, called Carolina Access. Under the PCCM program, primary care providers are paid on a FFS basis, in addition to receiving a monthly fee for certain care coordination activities. The state’s enhanced PCCM program, called Community Care of North Carolina, includes 14 networks of primary care providers that are responsible for an enhanced set of care coordination activities. According to North Carolina Medicaid officials, dual-eligible beneficiaries are assigned a primary care provider in one of the 14 networks, but they may opt out of the program if they choose a healthcare provider outside of the state’s Medicaid program. As of June 2012, according to state officials, about 13 percent of the state’s Medicaid population was dually eligible for Medicare and Medicaid and almost 68 percent of dual-eligible beneficiaries in the state were enrolled in the state’s PCCM program. Table 3 describes selected consumer protection requirements for Medicare and Medicaid fee-for-service (FFS), and table 4 describes selected consumer protection requirements for Medicare Advantage (MA) and Medicaid managed care. In addition to the contact named above, Randy DiRosa (Assistant Director), Lori Achman, Anne Hopewell, Lisa Motley, Laurie Pachter, Pauline Seretakis, Lillian Shields, and Hemi Tewarson made key contributions to this report. | Dual-eligible beneficiaries are low-income seniors and individuals with disabilities enrolled in Medicare and Medicaid. In 2010, there were about 9.9 million dual-eligible beneficiaries. Both programs have requirements to protect the rights of beneficiaries. These requirements are particularly important to dual-eligible beneficiaries, who must navigate the rules of both programs and generally have poorer health status. To help inform efforts to better integrate the financing and care for dual-eligible beneficiaries, GAO (1) compared selected consumer protection requirements within Medicare FFS and Medicare Advantage, and Medicaid FFS and managed care, and (2) described related compliance and enforcement actions taken by CMS and selected states against managed care plans. GAO identified consumer protections of particular importance to dual-eligible beneficiaries on the basis of expert interviews and literature, including protections related to enrollment, provider networks, and appeals. GAO reviewed relevant federal and state statutes, regulations, and policy statements, and interviewed officials from CMS and four states selected on the basis of their share of dual-eligible beneficiaries and use of managed care (Arizona, California, Minnesota, and North Carolina). GAO analyzed data on compliance and enforcement actions in Medicare Advantage and Medicaid managed care from January 1, 2010, through June 30, 2012. Medicare and Medicaid consumer protection requirements vary across programs, payment systems--either fee-for-service (FFS) or managed care--and states. Within Medicare, enrollment in managed care through the Medicare Advantage (MA) program must always be voluntary, whereas state Medicaid programs can require enrollment in managed care in certain situations. For example, Arizona requires nearly all beneficiaries, including dual-eligible beneficiaries, to enroll in managed care, but in North Carolina all beneficiaries are in FFS. In addition, Medicare and state Medicaid programs require managed care plans to meet certain provider network requirements to ensure beneficiaries have adequate access to covered services. For example, MA plans in rural counties must have at least one primary care provider per 1,000 beneficiaries. Subject to federal parameters, states establish network requirements for their Medicaid programs. For example, in California every plan must have at least one primary care provider per 2,000 beneficiaries. Finally, Medicare and Medicaid also have different appeals processes that do not align with each other. The Medicare appeals process has up to five levels of review for decisions to deny, reduce, or terminate services, with certain differences between FFS and MA. In Medicaid, states can structure appeals processes within federal parameters. States must establish a Medicaid appeals process that provides access to a state fair hearing and Medicaid managed care plans must provide beneficiaries with the right to appeal to the plan, though states can determine the sequence of these appeals. For example, Arizona requires beneficiaries to appeal to the managed care plan first, while a beneficiary in Minnesota may go directly to a state fair hearing without an initial appeal to the managed care plan. Both the Centers for Medicare & Medicaid Services (CMS), the agency that administers the Medicare program and oversees states' operation of Medicaid programs, and states took a range of compliance and enforcement actions to help ensure that MA and Medicaid managed care organizations complied with their consumer protection requirements. Between January 1, 2010, and June 30, 2012, CMS took 546 compliance actions against MA organizations on the issues GAO identified as generally related to consumer protections of particular importance to dual-eligible beneficiaries. Compliance actions included notices, warning letters, and requests for corrective action plans (CAP). During the same period, CMS took 22 enforcement actions against MA organizations, including the imposition of 17 civil money penalties--nearly all for late or inaccurate marketing materials. For five serious violations, CMS suspended enrollment into the MA plan and suspended the MA plan's ability to market to beneficiaries. Similarly, states used notices, letters, fines, and CAPs to improve Medicaid managed care plan compliance with Medicaid consumer protection requirements. During the same period, Arizona, California, and Minnesota required managed care plans to undertake 91 corrective action plans, 52 percent of which related to problems with plans' appeals and grievances processes. In commenting on a draft of the report, the Department of Health and Human Services noted that the report was an accurate assessment of the programs we reviewed. |
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Individuals who buy coverage directly from a health insurer are often denied coverage due to a pre-existing condition. We previously reported that in the first quarter of 2010, 19 percent of applicants in the individual market were denied enrollment and a quarter of insurers had denial rates of 40 percent or higher. Similarly, a study by America’s Health Insurance Plans reported that in 2008, 15 percent of individual insurance applications for adults age 18 through 64 that went through medical underwriting were denied coverage.conducted by insurers to assess an applicant’s health status and other risk factors to determine whether and on what terms to offer coverage to applicants. Medical underwriting is the process The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established consumer protections on access, portability, and renewability With respect to individuals leaving group of health insurance coverage. coverage and applying for coverage in the individual market, HIPAA prohibited health insurers from denying coverage to or imposing any pre- existing condition exclusion on individuals who have had at least 18 months of prior creditable coverage with no break of more than 63 days; have exhausted any available continuation coverage; are uninsured and are not eligible for other group coverage, Medicare, did not lose group coverage because of the nonpayment of premiums or fraud. See Pub. L. No. 104-191, Title I, 110 Stat. 1936, 1939 et. seq. applicants but offer coverage at a premium that is higher than the standard rate based on the presence of a pre-existing condition. A medical condition reported by an individual is considered a pre-existing condition by the insurer if it exists at the time the individual applies for coverage or if an individual was treated for or diagnosed with the condition in the past. States, which have the responsibility for regulating private insurance, have in some instances required protections for individuals with pre- existing conditions. State protections include the following: Guaranteed issue requirements prohibit the denial of coverage to individuals based on pre-existing conditions. In some states, all products must be guaranteed issue, while in other states guaranteed issue requirements are only applicable to some products or to some individuals, for instance individuals with 12 months of continuous coverage, or to some standard products, such as a basic health plan. An insurer of last resort law requires one insurer in the state to issue products to individuals regardless of pre-existing conditions. Rating restrictions prohibit insurers in the individual market from adjusting an individual’s health insurance premiums based on an individual’s health status. Two types of rating restrictions are pure community rating and adjusted community rating. Under the former, insurers may not adjust premiums due to health status, age, or gender; under the latter, they may adjust premiums according to characteristics such as gender or age, depending on the state. Rate bands limit the extent to which premiums can vary based on an individual’s health status, for example, to a certain percentage of the average premium. Limitations on the number of years a health insurer can look back at an individual’s health history when making its determination as to whether and at what price to offer coverage. High-risk health insurance pools that provide coverage to individuals whose health status, including the presence of pre-existing conditions, limits their access to coverage in the private individual health insurance market. High-risk insurance pools—typically publicly subsidized, state-run nonprofit associations—often contract with a private health insurer to administer the pool and offer a range of health plan options. Until 2014, PPACA requires that individuals who have pre-existing conditions and have been uninsured for 6 months be offered the opportunity to enroll in a temporary national high-risk pool program, known as the Pre-Existing Condition Insurance Plan (PCIP). PCIP will close at the end of 2013, which is when PPACA will begin to require insurers to accept every individual who applies for coverage, regardless of factors related to health status. States were given the option of running their own PCIP with federal funding, or allowing the Department of Health and Human Services (HHS) to administer the PCIP in their state. Twenty- seven states elected to administer a PCIP for their residents, while 23 states and the District of Columbia opted to allow HHS to administer their PCIPs. Despite similar goals, PCIP and state high-risk pools are separate entities and differ from one another in certain ways. Beginning in 2014, PPACA prohibits insurers in the private individual market from denying coverage, charging higher-than-average premiums, or restricting coverage to individuals based on the individual’s health status. PPACA will, therefore, make guaranteed issue and adjusted community rating national requirements. Hypertension was the most commonly reported medical condition among adults during 2009 that could result in a health insurer denying coverage, requiring higher-than-average premiums, or restricting coverage with an exclusionary rider. Our analysis of MEPS data found that about 33.2 million adults age 19-64 years old, or about 18 percent, reported hypertension in 2009. Individuals with hypertension reported average annual expenditures of $650 related to treating the condition, though the maximum expenditures reported were $61,540. (See table 2.) Mental health disorders and diabetes were the second and third most commonly reported medical conditions by adults age 19-64 years old. About 19.0 million adults, or 10.3 percent, reported mental health disorders, and about 11.9 million adults, or about 6.4 percent, reported diabetes. Average annual expenditures for these conditions were $1,757 for mental health disorders and $1,782 for diabetes. Cancer was the condition with the highest average annual treatment expenditures, nearly $9,000 per adult. Individuals may have multiple medical conditions, which would increase their total expenditures. The number of adults reporting specific conditions in any given year does not include all adults who may have had that condition in the past. For instance, there are many individuals who may have had cancer in the past who would not report cancer in a given year. Therefore, the number of adults who have ever had cancer is higher than the approximately 4.2 million reporting cancer in 2009. About 11 million adults, or 6.0 percent, reported ever being told by a health professional that they had cancer. Health insurers commonly look at both current medical conditions and conditions an individual was treated for or diagnosed with in the past when making a decision whether and at what price to offer health insurance coverage. Depending on the list of conditions used to define pre-existing conditions in each of five estimates, we found that between 36 million and 122 million adults (age 19-64) reported having medical conditions in 2009 that could result in a health insurer denying coverage, requiring higher- than-average premiums, or restricting coverage with an exclusionary rider (see fig. 1). This represents from 20 to 66 percent of the adult population, with a midpoint estimate of 32 percent. The differences among the estimates can be attributed to the number and type of conditions included in the different lists of pre-existing conditions. For example, estimate 1, which is the lowest estimate, includes adults reporting that they had ever been told they had 1 or more of 8 conditions. All 8 conditions were designated as priority conditions by AHRQ because of the conditions’ prevalence, expense, or relevance to policy.Estimate 3, the midpoint estimate, includes any individual who had one of over 60 conditions commonly used to determine eligibility in state high- risk pools. Estimate 5, the highest estimate, includes any individual reporting they had experienced any condition considered chronic during 2009. The list of chronic conditions used for this estimate included 417 separate conditions. See appendix I for information on the list of conditions included in each estimate. The number of adults with pre-existing conditions varies by state, but most individuals with pre-existing conditions live in states that report not having insurance protections similar to PPACA. Certain groups had higher rates of pre-existing conditions than others, including women, whites, and those with public insurance. Compared to others, adults with pre-existing conditions spend thousands of dollars more annually on health care, but pre-existing conditions are common across all family income levels. We found that the percentage of adults with pre-existing conditions varies among states. We analyzed data from the 35 states where MEPS generated a reliable estimate. Our low estimate (estimate 1) ranged from 17 percent in New York and New Jersey to 25 percent in Ohio. For the midpoint estimate (estimate 3), the range was from 27 percent in Florida to 47 percent in Kentucky. For the high estimate (estimate 5), the range was from 58 percent in Georgia to 75 percent in Kentucky and Massachusetts. (See table 3). For population estimates for the 35 states, see appendix II. We estimate that 88-89 percent of adults with pre-existing conditions live in states without insurance protections similar to the PPACA provisions, which will become effective in 2014. We classified states as having protections similar to PPACA if the state reported having (1) a guaranteed issue requirement for some or all products in the individual insurance market and (2) pure or adjusted community rating. The only five states reporting such protections are Maine, Massachusetts, New Jersey, New York, and Vermont. While the majority of states do not offer protections similar to what will be required nationally in 2014, many states do offer some protection to individuals with pre-existing conditions. Insurance department officials in 12 states reported having a guaranteed issue requirement for some or all products in the individual insurance market. Eight states reported either pure or adjusted community rating requirements. Appendix III shows the various state protections for individuals with pre-existing conditions in the 50 states and the District of Columbia. Regardless of the list of conditions used to generate the estimates, we found that more women reported a pre-existing condition than men. Based on the different definitions of pre-existing conditions we used, from 21 to 72 percent of women reported a pre-existing condition in 2009. From 18 to 59 percent of men reported a pre-existing condition. The midpoint estimate for women and men was 37 percent and 28 percent, respectively. (See fig. 2.) We found that the prevalence of pre-existing conditions among adults increases with age (see fig. 3). In the 55- to 64-year-old age group, from 43 (low estimate) to 84 percent (high estimate) of adults reported a pre- existing condition that would cause an insurance company to deny coverage, offer coverage at a higher-than-average rate, or restrict coverage. In contrast, from 6 percent (low estimate) to 45 percent (high estimate) of 19-24 year olds (the youngest age group) reported a pre- existing condition. The midpoint estimate for 55-64 year olds was 48 percent, as compared to a midpoint estimate of 19 percent for 19-24 year olds. Asian and Pacific Islanders and Hispanics have the lowest reported rates of pre-existing conditions in each estimate, significantly lower than the rate seen across all adults. For example, for the midpoint estimate, 15 percent of Asian and Pacific Islanders reported a pre-existing condition, compared to 32 percent of all adults. In two of three estimates (the low and high estimates), white adults are slightly more likely to report a pre-existing condition than the adult population as a whole. This difference was statistically significant, but the difference was not statistically significant for the midpoint estimate. (See table 4.) Compared to individuals with other types of insurance coverage, uninsured adults and those with private individual insurance have the lowest reported rates of pre-existing conditions (see fig. 4). The lower reporting of pre-existing conditions among the uninsured, in part, may reflect the fact that they are less likely than the insured to receive timely preventive care and some common health problems such as hypertension and diabetes often go undetected without routine checkups. In addition, the uninsured are also less likely to have regular preventive care, including cancer screenings. The lower reporting of pre-existing conditions among those with private individual insurance may be a reflection of the fact that insurers try to limit the number of people with pre-existing conditions that they accept into their plan.protections for individuals with pre-existing conditions exist in employer- The greatest sponsored group insurance and public insurance programs, which are the groups that reported the highest rates of pre-existing conditions. As noted previously, group insurance plans are not allowed to deny insurance coverage or increase an individual’s premiums based on health status. Such protections may encourage individuals in employer group coverage or government insurance to maintain their coverage should they be diagnosed with certain medical conditions. We recently reported that research has consistently found that after a health diagnosis, workers with employer-sponsored coverage were less likely to leave a job or reduce their hours compared to workers who did not rely on their employer for health coverage. Adults with pre-existing conditions, on average, spend thousands of dollars more for all health care—between $1,504 and $4,844 more per year—than other adults. Based on the set of conditions included in estimate 1, which included the smallest number of individuals with pre- existing conditions, average annual health care expenditures were $8,535 in 2009, compared to $3,691 for all adults (see fig. 5). The average expenditures for the midpoint estimate (estimate 3) were $7,296 and the average expenditures for the high estimate (estimate 5) were $5,195. Average medical expenditures among those with pre-existing conditions decreased as the number of people in the estimate reporting a pre- existing condition increased. As more individuals are included in the estimate, it is likely that the average severity of the medical conditions decreases, thus decreasing the average expenditure estimate. The distribution of adults across income groups, whether measured by total family income or income as a share of the federal poverty level, is similar, regardless of pre-existing condition status (see tables 5 and 6). We found that the average annual family income for adults with pre- existing conditions was between $64,000 and $71,000, as compared to the average family income of all adults, which is about $69,000. We provided a draft of this report to HHS for comment, but in its written response HHS said that it had no substantive or technical comments. HHS noted that PPACA provided individuals with pre-existing conditions new protections, including the opportunity to enroll in the Pre-existing Condition Insurance Plan and the prohibition on insurers limiting or denying insurance coverage because of a pre-existing condition beginning in 2014. HHS’s letter is included as appendix IV. 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 Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, 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) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To answer all of our research objectives, we (1) identified different sets of medical conditions that researchers have used to define the conditions that would cause an insurance company to deny health insurance coverage, offer coverage at higher-than-average premiums, or restrict health insurance coverage; and (2) analyzed data from the 2009 Medical Expenditure Panel Survey (MEPS). We chose the MEPS because it is nationally representative of the civilian, noninstitutionalized population, provides information on medical conditions, medical expenditures, and demographics, and has been used by other researchers to answer similar research objectives. We limited our analysis to adults, defined as individuals age 19 to 64, and we excluded approximately 2.7 million adults continuously enrolled in Medicare in all 12 months of 2009. Based on Medicare eligibility rules, all of these individuals would have a medical condition. We identified four previous studies that used different lists of pre-existing conditions to develop five estimates of the number of individuals with pre- existing conditions or the number of individuals potentially eligible for high-risk pools. Because high-risk pools are designed for individuals who cannot obtain insurance in the private individual market because of a pre- existing condition, estimates of individuals potentially eligible for high-risk pools can serve as a proxy for individuals with pre-existing conditions. Each of the previous studies looked at different populations, used different years of data, and, in one case, a different source of data. We assigned each condition list an estimate number from 1 to 5 in order to more readily identify which set of conditions was associated with each estimate.Pollack is referred to as estimate 1. For example, the condition list in the study authored by Harold Estimate 1 is based on the condition list in Harold Pollack’s article “High- Risk Pools for the Sick and Uninsured Under Health Reform: Too Little and Thus Too Late,” in the Journal of General Internal Medicine (published online on September 2, 2010). Pollack considered individuals to be plausible high-risk pool participants if they had ever been told they had emphysema, diabetes, stroke, cancer, congestive heart failure, heart disease, angina, or heart attack. Estimate 2 is described below with the information on estimate 4 because both estimates came from the same study. Additionally, estimate 2 is based on the methodology used in estimate 3. Estimate 3 is based on the condition list in the Families USA report “Health Reform: Help for Americans with Pre-Existing Conditions,” published in May 2010. According to a methodology developed by researchers from The Lewin Group, individuals were identified as having a pre-existing condition if they reported, in the previous year, one of 67 conditions most commonly included in lists for determining high-risk pool eligibility across all the states with high-risk pools. The conditions were: acquired immune deficiency syndrome (AIDS), alcohol/drug abuse/chemical dependency, Alzheimer’s disease, angina pectoris, anorexia nervosa, aplastic anemia, aortic aneurysm, arteriosclerosis obliterans, artificial heart valve/heart valve replacement, ascites, brain tumor, cancer (except skin), cancer (metastatic), cardiomyopathy/primary cardiomyopathy, cerebral palsy/palsy, chronic obstructive pulmonary disease (COPD), chronic pancreatitis, cirrhosis of the liver, congestive heart failure, coronary artery disease, coronary insufficiency, coronary occlusion, Crohn’s disease, cystic fibrosis, dermatomyositis, diabetes, emphysema/pulmonary emphysema, Friedreich’s disease/ataxia, hemophilia, hepatitis, HIV positive, Hodgkin’s disease, Huntington’s chorea/disease, hydrocephalus, intermittent claudication, kidney failure/kidney disease with dialysis/renal failure, lead poisoning with cerebral involvement, leukemia, Lou Gehrig’s disease/amytrophic lateral sclerosis/ALS, lupus erythematosus disseminate/lupus, major organ transplant, malignant tumor, mood and psychotic disorders (including depression, schizophrenia, and bipolar disorder), motor or sensory aphasia, multiple or disseminated sclerosis, muscular atrophy or dystrophy, myasthenia gravis, myocardial infarction (heart attack), myotonia, obesity, paraplegia or quadriplegia, Parkinson’s disease, peripheral arteriosclerosis, polyarteritis, polycystic kidney, postero-lateral sclerosis, rheumatoid arthritis, sickle cell anemia/sickle cell disease, silicosis, splenic anemia/True Banti’s Syndrome/Banti’s disease, Still’s disease, stroke, syringomyelia (spina bifida or myelomeningocele), tabes dorsalis, thalassemia (Cooley’s or Mediterranean anemia), ulcerative colitis, and Wilson’s disease. Estimates 2 and 4 were based on the two condition lists in the Department of Health and Human Services’ (HHS) report “At Risk: Pre- Existing Conditions Could Affect 1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform” (Washington, D.C.: January 2011). This report included two estimates of individuals with pre-existing conditions. Estimate 2 replicated the methodology developed by The Lewin Group for the Families USA study with two exceptions. First, obesity was not included in the list of conditions that would cause a denial because HHS researchers did not find obesity on the condition lists used by state high-risk pools. Second, HHS included individuals who reported that they had ever been diagnosed with the following conditions: coronary heart disease, myocardial infarction, other heart disease, angina pectoris, stroke, emphysema, cancer, and diabetes. HHS’s second estimate, estimate 4, included the same conditions as its first estimate with additional conditions added based on a review of the underwriting guidelines of seven health insurers. In addition to the conditions included in estimate 2, estimate 4 included individuals reporting arthritis, asthma, high cholesterol, hypertension, or obesity, as well as those who had ever been diagnosed with arthritis, asthma, high cholesterol, or hypertension. Estimate 4 also includes individuals reporting neurotic and related disorders, stress and adjustment disorders, conduct disorders, and emotional disturbances. Estimate 5 was based on the methodology used in the GAO report Health Insurance: Enrollment, Benefits, Funding, and Other Characteristics of State High-Risk Health Insurance Pools, GAO-09-730R (Washington, D.C.: July 22, 2009). This report used the Healthcare Cost and Utilization Project’s Chronic Condition Indicator to identify chronic conditions in the 2006 MEPS, which were assumed to make a person medically uninsurable and therefore potentially eligible for a state high- risk pool. The Chronic Condition Indicator categorizes all International Classification of Diseases, Ninth Edition, Clinical Modification (ICD-9-CM) codes as chronic or not chronic. A chronic condition is defined as a condition that lasts 12 months or longer and meets one or both of the following tests: (a) it places limitations on self-care, independent living, and social interactions; and (b) it results in the need for ongoing intervention with medical products, services, and special equipment. Individuals reporting any condition considered chronic were included in this estimate. We used the three-digit ICD-9-CM codes for medical conditions. Of 1,019 three-digit ICD-9-CM codes, the Chronic Condition Indicator categorized 417 as chronic. To standardize the estimates from the different sources, we applied the conditions identified by each study to the same population (19 to 64 year olds not enrolled in Medicare) and the same year and source of data (the 2009 MEPS) to construct estimates 1 through 5. To estimate the number of adults (age 19 to 64) with medical conditions that would cause an insurance company to restrict or deny insurance coverage and the average expenditures related to these conditions, we analyzed MEPS data on medical conditions and expenditures. We reported data only for those medical conditions included in at least one of the condition lists used for estimates 1 through 5. MEPS respondents report medical conditions identified as the reason for a medical event, the reason for a disability day, or as something that is “bothering” the respondent during the reference year (in this case, 2009). To protect respondent privacy, we only reported estimates based on sample sizes of 100 or more. We defined expenditures as payments from all sources for hospital inpatient care, ambulatory care provided in offices and hospital outpatient departments, care provided in emergency departments, and the purchase of prescribed medications. We did not include expenditures for dental expenses or other medical expenses, such as durable and nondurable supplies, medical equipment, eyeglasses, and ambulance services because these items could not be linked to specific conditions. We also excluded expenses for home health care. We classified expenditures with a condition if a visit, stay, or medication purchase was cited as being related to the specific condition. To describe the demographic and geographic profile of adults with pre- existing conditions we focused on the low, midpoint, and high estimates of adults with pre-existing conditions, which we call estimates 1, 3, and 5, respectively. We provided state estimates for the 35 states with sufficient sample size in the MEPS data to reliably report an estimate. We did not have large enough sample sizes to generate state-level estimates of the number of adults with pre-existing conditions in Alaska, Delaware, Idaho, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont, West Virginia, Wyoming, and the District of Columbia. To estimate the number of individuals living in states with insurance protections similar to those that will be offered under PPACA in 2014, we surveyed state insurance department officials in September 2011, asking them to confirm or correct information on guaranteed issue requirements and rating restrictions previously reported by the Kaiser Family Foundation’s statehealthfacts.org website.confirm information on guaranteed issue requirements and rating restrictions in place as of September 2011. We received responses from all states and the District of Columbia. Based on those responses, we used MEPS’s state-based estimates of adults age 19 to 64 with pre- existing conditions to identify the number of individuals living in states reporting a guaranteed issue requirement for at least some policies and either pure community rating or adjusted community rating—insurance We asked the state officials to protections similar to those that will be offered under PPACA in 2014. Guaranteed issue requirements prohibit the denial of coverage to individuals based on pre-existing conditions. In some states, all products must be guaranteed issue, while in other states guaranteed issue requirements are only applicable to some individuals, for instance those with 12 months of continuous coverage, or some standard product, such as a basic health plan. Under pure community rating, insurers may not adjust premiums based on health status, age, or gender. Under adjusted community rating, insurers may not adjust premiums based on health status, but may adjust premiums based on characteristics such as gender or age, depending on the state. There are limitations to our analysis. First, each insurance company separately determines which medical conditions will result in a denial, limitation in coverage, or an increase in premiums. An individual who may be denied by one insurer could obtain coverage from another. Therefore, the population of individuals who would be denied by an insurer, offered restricted coverage, or offered coverage at higher-than-average premiums actually varies by each health insurer. Second, our estimates could overstate the adult population with pre-existing conditions because of the way in which conditions are aggregated in the MEPS database. To protect survey participant confidentiality, five-digit ICD-9-CM codes are truncated into a three-digit code, which means that individuals reporting other related conditions may also be captured. To determine the reliability of the MEPS data, we reviewed related documentation, compared our estimates to other published results, and spoke with an official from the Agency for Healthcare Research and Quality, which is the federal agency responsible for MEPS. We determined that the MEPS data were sufficiently reliable for the purposes of our engagement. The 2009 data are the most recently available for MEPS. We conducted this performance audit in accordance with generally accepted government auditing standards from July 2011 through March 2012. 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 based on our audit objectives. In addition to the contact named above, Walter Ochinko, Assistant Director; Lori Achman; George Bogart; Sean DeBlieck; Giselle Hicks; and Laurie Pachter made key contributions to this report. | Individuals who buy coverage directly from a health insurer are often denied coverage due to a pre-existing condition during a process called medical underwriting, which assesses an applicants health status and other risk factors. Beginning January 1, 2014, the Patient Protection and Affordable Care Act (PPACA) prohibits health insurers in the individual market from denying coverage, increasing premiums, or restricting benefits because of a pre-existing condition. GAO was asked to examine the effect of this provision on adults who are 19-64 years old. GAO examined (1) the most common medical conditions that would cause an insurance company to restrict or deny insurance coverage for adults and the average annual costs associated with these conditions, (2) estimates of the number of adults with pre-existing conditions, and (3) the geographic and demographic profile of adults with pre-existing conditions. To address these three issues, GAO (1) identified four recent studies that narrowly or more broadly identified five lists of conditions likely to result in restricted coverage in the individual insurance market and (2) used the 2009 Medical Expenditure Panel Survey to generate five separate estimates, referred to as estimates 1 through 5. There is no commonly accepted list of pre-existing conditions because each insurer determines the conditions it will use for medical underwriting. We also contacted state insurance department officials in all 50 states and the District of Columbia to confirm information about state insurance protections that currently limit or prohibit medical underwriting. Hypertension was the most commonly reported medical condition among adults that could result in a health insurer denying coverage, requiring higher-than-average premiums, or restricting coverage. GAOs analysis found that about 33.2 million adults age 19-64 years old, or about 18 percent, reported hypertension in 2009. Individuals with hypertension reported average annual expenditures related to treating the condition of $650, but maximum reported expenditures were $61,540. Mental health disorders and diabetes were the second and third most commonly reported conditions among adults. Cancer was the condition with the highest average annual treatment expendituresabout $9,000. Depending on the list of conditions used to define pre-existing conditions in each of the five estimates, GAO found that between 36 million and 122 million adults reported medical conditions that could result in a health insurer restricting coverage. This represents between 20 and 66 percent of the adult population, with a midpoint estimate of about 32 percent. The differences among the estimates can be attributed to the number and type of conditions included in the different lists of pre-existing conditions. For example, estimate 1, which is the lowest estimate, includes adults reporting that they had ever been told they had 1 or more of 8 conditions. Estimate 3, the midpoint estimate, includes any individual reporting they had one of over 60 conditions. Estimate 5, the highest estimate, includes any individual reporting a chronic condition in 2009. The estimated number of adults with pre-existing conditions varies by state, but most individuals, 88-89 percent depending on the list of pre-existing conditions included, live in states that do not report having insurance protections similar to those in PPACA. Compared to others, adults with pre-existing conditions spend thousands of dollars more annually on health care, but pre-existing conditions are common across all family income levels. The Department of Health and Human Services reviewed a draft of this report and had no substantive or technical comments. |
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The Commission acts as a regional partner with state and local governments focusing on basic infrastructure needs and promoting economic growth for rural Alaska. Since the Commission’s inception in 1998, programs focused on developing transportation, energy, health facilities, economic development, training, and community facilities have received funding for infrastructure projects and to promote economic growth. Although congressional priorities have changed recently, as have funding levels, four major programs—energy, transportation, health facilities, and training—continued to receive grant funds. The Commission has historically received federal funding from several sources, including an annual appropriation, and is a party to allocation transfers with other federal agencies, such as transfers from the Federal Highway Administration under the Department of Transportation (DOT). The Commission also receives funds from the Trans-Alaska Pipeline Liability Fund. The Commission implements its major programs and operations by awarding grants for implementing specific projects in rural Alaska. In fiscal year 2013, the Commission’s energy program—which is focused on bulk fuel storage tank upgrades; community power generation and rural power systems upgrades; energy cost reduction projects; renewable, alternative, and emerging energy technologies; and power line interties—received approximately $14 million in federal funding, or 78 percent of the Commission’s budgetary authority. The purpose of the program is to provide code-compliant bulk fuel storage and electrification with a goal of improving energy efficiency and decreasing energy costs. In fiscal year 2013, the energy program funded the completion of three bulk fuel facilities, two rural power system upgrades, energy efficiency upgrades in 13 communities, and one emerging energy technology project. The transportation program divides funds between the roads and waterfront components of the program. One major objective of the roads component is to improve roads between rural communities. The waterfront component addresses port and harbor needs, such as regional port reconstruction and boat launch ramp construction. Since its establishment in fiscal year 2005, the transportation program has completed 86 road projects and 97 waterfront development projects. In addition, the Commission reported that as of March 2014, 24 road and waterfront development projects were in the planning, design, or construction phase. The transportation program was not included in the fiscal year 2013 Commission budget; however, approximately $15 million in previously awarded program grants were disbursed in fiscal year 2013. The health facilities program provides technical assistance as well as business planning for the facilities. This program was initially established to improve Alaska’s health infrastructure through investments in renovations, repairs, and replacement of health facilities. Since the program’s inception in fiscal year 1999, the Commission reported that in conjunction with the Department of Health and Human Services, it has contributed to 140 primary care clinics, 20 elder supportive housing facilities, 49 primary care projects, and 20 behavioral health facilities. The health facilities program was not included in the fiscal year 2013 Commission budget; however, approximately $7 million in previously awarded program grants were disbursed in fiscal year 2013. The training program was established to provide training and employment opportunities to rural residents employed in the construction, maintenance, and operation of Commission projects. Program funds paid for courses, books, tools, tuition, lodging, and transportation. In fiscal year 2013, the Commission reported that 137 people completed training courses or received certificates in construction, maintenance, and operation of Commission projects; 53 obtained certificates in construction education; and 17 were placed in construction apprenticeships. In addition, the Commission partnered with the University of Alaska to assist 402 students in completing course work in community health aide, dental assistance, medical office/health care reimbursement, and medical lab-related skills. The training program was not included in the fiscal year 2013 Commission budget; however, approximately $1 million in previously awarded program grants were disbursed in fiscal year 2013. The IG Act establishes that one of the primary responsibilities of a federal agency’s OIG is to keep the agency head and the Congress informed about problems and deficiencies related to the administration of the agency’s programs and operations, corrective actions needed, and the progress of those corrective actions. The IG Act created independent IG offices at major departments and agencies with IGs who are appointed by the President, are confirmed by the Senate, and may be removed only by the President with advance notice to the Congress stating the reasons. In 1988, the IG Act was amended to establish IG offices in DFEs. OIGs of DFEs have many of the same authorities and responsibilities as the OIGs originally established by the IG Act, but with the distinction that IGs are appointed by and may be removed by their agency heads rather than by the President and that their appointment is not subject to Senate confirmation. The IG Act addresses the qualifications and expertise of the IGs, specifying that each IG appointment is to be made without regard to political affiliation and solely on the basis of integrity and demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public administration, or investigation. The fields in which an IG can have experience are intended to be sufficiently diverse so that many qualified people could be considered but are also limited to areas relevant to the tasks considered necessary. The Inspector General Reform Act of 2008 (Reform Act) amended the IG Act by adding requirements related to OIG independence and effectiveness. The Reform Act includes a provision intended to provide additional OIG independence through the transparent reporting of OIG budget requests. This provision requires an agency’s submission for the President’s budget to separate the OIG’s budget request from the agency’s and include any comments provided by the OIG with respect to the proposal. The Dodd-Frank Wall Street Reform and Consumer Protection Act of specifying that for 2010 (Dodd-Frank Act) further amended the IG Act, DFEs with a board or commission, the board or commission is the head of the DFE for purposes of IG appointment, general supervision, and reporting under the IG Act. Furthermore, if the DFE has a board or commission, the IG Act requires the OIG to report organizationally to the entire board or commission as the head of the DFE. In addition, the Dodd-Frank Act requires the written concurrence of a two-thirds majority of the board or commission to remove an IG. Prior to this provision, most OIGs at commission or board led DFEs reported to, and were subject to removal by, the individual serving as head of the commission or board. Our analysis of the budget information provided by the Commission’s Chief Financial Officer (CFO) showed that the Commission allocated budgetary funds for the OIG of approximately $1 million over the 3-year period from fiscal years 2011 through 2013. The total budgetary resources of the Commission OIG increased from fiscal years 2011 through 2013, from $310,000 to $331,000, for an increase of about 7 percent (see fig. 1). During this 3-year period, the OIG consisted of one full-time employee, the IG, who obtained additional support through contracts with both auditors and others to assist with his oversight responsibilities, such as interviews related to ongoing inspections, and to mediate disputes between Commission officials and grant recipients regarding grant payments. Based on the budget and expenditure information we received from the Commission, we found that during fiscal years 2011 through 2013, the OIG spent an average of 84 percent per fiscal year of the budgetary resources provided to his office. The Commission reported that the budgeted amounts not used by the OIG within the fiscal year to which they were allocated were returned to the Commission and were available for the Commission’s use. The OIG did not carry over unused funding into the next fiscal year. Our review of the OIG’s use of the resources provided in fiscal years 2011 through 2013 showed that about 59 percent of the OIG’s annual budget was for salary and benefits for the IG. The rest of the annual budget was for the Commission’s annual financial statement audit (13.4 percent), travel (12.4 percent), other contract services (11.7 percent), training (3.1 percent), supplies (0.3 percent), and the CIGIE assessment (0.2 percent). (See fig. 2.) During fiscal years 2011 through 2013, the Commission OIG issued six semiannual reports to the Congress, as required by the IG Act, and conducted 12 inspections. The 12 inspections conducted by the Commission OIG reviewed various issues, such as management policies and practices and compliance with applicable laws. The OIG did not perform any audits or investigations. The IG told us that for the 12 inspections he conducted, he used the following methods to communicate the results of completed inspections: written inspection reports available on the OIG’s website, inspection results included in the semiannual reports to the Congress, and inspection results included in the Commission’s annual agency financial reports (see fig. 3). During fiscal years 2011 through 2013, the OIG provided limited oversight of the Commission’s major programs and operations. Per the IG Act, OIG oversight includes assessing the effectiveness and efficiency of agency programs and operations; providing leadership and coordination to detect fraud and abuse; and making recommendations to management to promote the economy, efficiency, and effectiveness in the administration of these programs. It also includes providing a means for keeping the head of the agency and the Congress informed about problems and deficiencies relating to program administration and agency operations and the necessity for, and progress of, corrective action. The 12 OIG inspections provided oversight of less than 1 percent of the total grant dollars the Commission awarded during fiscal years 2011 through 2013. The OIG contracted with an independent public accountant (IPA) to conduct the Commission’s annual financial statement audit but did not follow up on the IPA’s concerns related to grant monitoring. Furthermore, the OIG did not have a risk-based annual work plan or policies and procedures to identify the Commission’s major programs and operations that needed OIG oversight. Without adequate OIG oversight of the Commission’s programs and operations, including grants, the OIG is unable to reasonably ensure accountability over federal funds. The OIG is also limited in its ability to minimize the Commission’s risk of fraud, waste, and abuse occurring in its major programs and operations. The Commission’s OIG oversight covered a small percentage of the Commission’s programs. During fiscal years 2011 through 2013, the Commission’s major programs were energy, transportation, health facilities, and training. These programs represent approximately 84 percent of funds granted by all Commission programs. According to the Commission’s CFO, during fiscal years 2011 through 2013, the agency awarded grants totaling $56 million and disbursed $167 million on both new and previously awarded grants. Our analysis of the 12 inspections completed by the OIG over that period found that 5 of these inspections focused on the Commission’s grant administration and 7 focused on the agency’s operations. Of the 5 grant- related inspections, only 2 of these inspections clearly identified specific grant amounts disbursed by the Commission that were examined by the OIG. In these 2 inspections, the OIG provided oversight for $150,000 of grant funds disbursed for training programs, all of which were reported in fiscal year 2012. The $150,000 of grant funds inspected by the OIG represented less than 1 percent of the total grants awarded by the Commission during fiscal years 2011 through 2013. We found that 3 of the OIG’s inspection reports examined various complaints and issues related to the grants process, such as assessing whether a grant applicant was improperly denied a subaward (grant preaward stage), assessing whether certain agency policy resulted in the unfair treatment of a grantee (grant implementation stage), and determining whether a grantee was treated unfairly because of a specific Commission policy and legal requirements that were attached to a grant (grant implementation stage). However, the OIG did not conduct any inspections that assessed the effectiveness and efficiency of the agency’s other major programs— energy, transportation, and health facilities—or make recommendations to management promoting the economy, efficiency, and effectiveness in the administration of these programs, which is one of the major OIG goals established in the IG Act. The other 7 inspections completed by the OIG over that period focused on (1) whether agency operations complied with applicable laws and regulations, (2) the Commission’s authority for accepting funds from nonfederal sources, and (3) potential agency restructuring. According to the IG, his workload was driven by requests from four sources: the Federal Cochair, aided by the CFO; Office of Management and Budget (OMB) officials; the House Committee on Oversight and Government Reform; and three Senate Oversight Committees (Finance, Budget, and Homeland Security and Governmental Affairs). The training grants he inspected were based on referrals from the Federal Cochair. Under the IG Act, OIGs are responsible for coordinating audits and investigations. Further, OIGs are required by the IG Act to adhere to professional standards developed by CIGIE, to the extent permitted by law and not inconsistent with applicable auditing standards. The Commission OIG’s primary vehicle for oversight was the inspection. CIGIE’s Quality Standards for Inspection and Evaluation defines an inspection as a systematic and independent assessment of the design, implementation, or results of an agency’s operations, programs, or policies. The inspection function at each agency is tailored to its unique mission; is not overly prescriptive; and may be used by the agency to provide factual and analytical information, measure performance, identify savings and funds put to better use, or assess allegations of fraud, waste, abuse and mismanagement. The Commission OIG’s policies and procedures for inspections specifically stated that the Commission OIG “will conduct its interviews of agency issues through an ‘inspection’ methodology that conforms to the CIGIE quality standards for that procedure.”12 inspections. As part of its oversight duties, the OIG is responsible for selecting and overseeing the IPA responsible for performing the Commission’s annual financial statement audit. These responsibilities include providing technical advice, serving as the agency liaison to the IPA, and ensuring that the audit was completed timely and in accordance with generally accepted government auditing standards. As the agency’s Contracting Officer’s Technical Representative (COTR) for the Commission’s annual financial statement audit, the IG developed detailed policies and procedures and completed a detailed audit monitoring plan documenting the OIG’s oversight activities. The IG also reviewed the IPA’s workpapers at key phases during the audit process to determine whether the fieldwork completed supported the IPA’s conclusions. We found that the OIG had practices in place to effectively monitor the annual financial statement audit conducted by the IPA. In fiscal years 2011 through 2013, the IPA reported several concerns to the Commission about the agency’s grants monitoring activities. A sample of grant-funded projects reviewed by the IPA found that the Commission did not (1) have a follow-up process to determine whether grants were used as intended; (2) include the review of the grantee’s single audit reports as part of its grants monitoring practices; (3) review past performance (and current status of previous projects) to ensure that the grant was used as intended, prior to approval of new grants; and (4) assess the extent to which it could recapture grant amounts from grantees as a result of substantial changes in the use of these grants. Although the OIG effectively monitored the IPA performing the Commission’s annual financial statement audit, we found that the OIG did not focus its oversight efforts after the audit had been completed to ensure that the Commission addressed the IPA’s concerns with the agency’s grants monitoring practices. We found that the OIG issued inspections related to some of the Commission’s major programs and operations; however, the OIG did not conduct any performance audits related to these same programs and operations. There are fundamental differences between inspections and audits. Inspections are narrower and more focused in scope than audits and they are also significantly less rigorous than an audit conducted in accordance with Government Auditing Standards. Audits provide essential accountability and transparency over government programs. According to the IG, he leveraged his resources (one full-time employee) to do the most good. The IG stated that his office was not staffed at a level that would support audits; he decided inspections were an effective method for leveraging what he had and responding to very specific issues that were often complaint driven. However, because the OIG did not conduct audits of the agency’s programs and operations, the Commission did not have the benefit of the broader scope and more rigorous standards of audits to help ensure effective grant oversight, accountability for grant funds, and the proper use of taxpayer dollars. We also found that the OIG did not conduct investigations. OIG investigations help federal agency managers strengthen program integrity and use funds more effectively and efficiently. Investigations vary in purpose and scope and may involve alleged violations of criminal or civil laws as well as administrative requirements. The focus of an investigation can include the integrity of programs, operations, and personnel in agencies at federal, state, and local levels of government. According to CIGIE’s Quality Standards for Investigations, areas investigated by the OIG may also focus on issues related to procurement and grant fraud schemes; environment, safety, and health violations; benefits fraud; the background and suitability of individuals for employment or a security clearance designation; whistle-blower retaliation; and other matters involving alleged violations of law, rules, regulations, and policies. Some investigations address allegations of both civil and criminal violations, ranging in significance from a misdemeanor to a felony, while others could involve administrative misconduct issues. CIGIE’s Quality Standards for Investigations also state that investigations can lead to criminal prosecutions and program exclusions; recovery of damages and penalties through criminal, civil, and administrative proceedings; and corrective management actions. Without conducting investigations, the Commission OIG was limited in its ability to identify criminal, civil, and administrative activities of fraud or misconduct related to Commission programs and operations. Our review of the OIG’s policies and procedures in place during fiscal years 2011 through 2013 found that the OIG did not document its policies and procedures for its management and operations as an OIG. CIGIE’s Quality Standards for Federal Offices of Inspector General sets forth the overall quality framework to which OIGs must adhere, to the extent permitted under law. Although the OIG did not document its policies and procedures for managing and operating its office, we identified some quality standards that were implemented, while others were not. Our review of the OIG’s inspections issued during fiscal years 2011 through 2013 found that the inspections did not fully adhere to CIGIE’s Quality Standards for Inspection and Evaluation. While the OIG had documented policies and procedures for inspections, we found that the design and implementation of the inspection policies and procedures did not fully adhere to professional standards. Our review also found that the semiannual reports submitted to the Congress by the IG did not include required information in accordance with the reporting requirements of the IG Act. The Commission OIG did not have documented policies and procedures for conducting office operations that adhered to CIGIE’s Quality Standards for Federal Offices of Inspector General. These quality standards are used as guidance by OIGs in the operation of federal OIGs and consist of (1) ethics, independence, and confidentiality; (2) professional standards; (3) ensuring internal control; (4) maintaining quality assurance; (5) planning and coordinating; (6) communicating the results of OIG activities; (7) managing human capital; (8) reviewing legislation and regulations; and (9) receiving and reviewing allegations. Although the Commission OIG did not document its policies and procedures for its operations and management, we found that the OIG did implement, to some extent, certain standards in CIGIE’s Quality Standards for Federal Offices of Inspector General. Specifically, the Commission OIG implemented, to some extent, the following five quality standards: ethics, independence, and confidentiality; professional standards; communicating results of OIG activities; managing human capital; and reviewing legislation and regulations. However, the Commission OIG did not implement the following four quality standards that are critical for the management and operations of the OIG: planning and coordinating, maintaining quality assurance, ensuring internal control, and receiving and reviewing allegations. The extent to which the IG implemented these quality standards is discussed below. Ethics, independence, and confidentiality. The CIGIE quality standard for ethics, independence, and confidentiality states that the IG and OIG staff shall adhere to the highest ethical principles by conducting their work with integrity. Objectivity, independence, professional judgment, and confidentially are all elements of integrity. We found no evidence to indicate that the IG did not adhere to CIGIE’s quality standard to ethically conduct his work and no evidence to indicate the IG did not adhere to CIGIE’s quality standards for independently performing his duties. We also found no evidence to indicate that the IG did not safeguard the identity of confidential sources and protect privileged, confidential, and national security or classified information in compliance with applicable laws, regulations, and professional standards. Professional standards. The CIGIE quality standard for professional standards states that each OIG shall conduct, supervise, and coordinate its audits, investigations, and inspections in compliance with applicable professional standards. We found that the Commission OIG provided some evidence for adhering to professional standards. Although the Commission OIG’s inspection reports did not always adhere to CIGIE’s Quality Standards for Inspection and Evaluation, we found that the IG did complete inspections. Also, the OIG’s monitoring of the contract with the IPA hired to conduct the Commission’s annual financial statement audit documented the OIG’s detailed oversight and coordination of this agency requirement, providing evidence of adherence to Government Auditing Standards. Ensuring internal control. The CIGIE standard for ensuring internal control states that each IG and OIG staff shall direct and control OIG operations consistent with Standards for Internal Control in the Federal Government. These standards require that internal control be part of the OIG’s management infrastructure, serve as a continuous built-in component of operations effected by people, and provide reasonable assurance that the OIG’s objectives are met. The internal control structure includes the control environment, risk assessment, control activities, information and communication, and monitoring. Control activities are policies, procedures, techniques, and mechanisms that help ensure that the OIG’s directives are carried out. Effective internal control also assists the OIG in managing change to cope with shifting environments and evolving demands. An internal control structure is continually assessed and evaluated to ensure that it is well designed and operated, is appropriately updated to meet changing conditions, and provides reasonable assurance that objectives are being achieved. The OIG should design internal control activities to contribute to its mission, goals, and objectives. Specifically, control activities include a wide range of diverse activities, such as approvals, authorizations, verifications, reconciliations, performance reviews, security activities, and the production of records and documentation. We found that the Commission OIG lacked critical elements of an effective internal control structure. For example, the OIG did not conduct a risk assessment to determine which agency programs or operations to evaluate. Instead, the IG relied on the input from Commission officials and congressional staff to determine which programs and operations to evaluate. The OIG also lacked policies and procedures for managing and operating its office, which would have provided the needed guidance to ensure that the OIG’s directives were carried out efficiently and effectively. While we acknowledge that the OIG is an office of one, independently determining which programs or agency operations to evaluate as well as developing policies and procedures for the OIG’s management and operations are elements of internal control that are still achievable by a small office. Without an effective internal control structure, it is difficult for an OIG to ensure its own effective and efficient management and operations and safeguard its assets. Maintaining quality assurance. The CIGIE standard for maintaining quality assurance states that each OIG shall establish and maintain a quality assurance program to ensure that work performed adheres to established OIG policies and procedures; meets applicable professional standards; and is carried out economically, efficiently, and effectively. Because OIGs evaluate how well agency programs and operations are functioning, they have a special responsibility to ensure that their own operations are as effective as possible. The OIG quality assurance program is an evaluative effort conducted by reviewers external to the units or personnel being reviewed to ensure that the overall work of the OIG meets appropriate standards. The quality assurance program has an internal and an external component. Furthermore, organizations that perform audits are subject to a peer review at least once every 3 years. Audits performed in accordance with Government Auditing Standards must provide reasonable assurance that the audit organization and its personnel are consistent with professional standards and applicable legal and regulatory requirements. Internal quality assurance reviews can include reviews of all aspects of the OIG’s operations and are distinct from regular management and supervisory activities, comparisons, and other activities by OIG staff performing their duties. External quality assurance reviews provide OIGs with added assurance regarding their adherence to prescribed standards, regulations, and legislation through a formal objective assessment of OIG operations. OIGs are strongly encouraged to have external quality assurance reviews of audits, investigations, inspections, evaluations, and other OIG activities. While the nature and extent of an OIG’s quality assurance program depends on a number of factors—such as the OIG size, the degree of operating autonomy allowed its personnel and its offices, the nature of its work, its organization structure, and appropriate cost-benefit considerations—CIGIE standards state that each OIG shall establish and maintain a quality assurance program. The Commission OIG did not have a quality assurance program and had not developed policies and procedures to help ensure quality assurance. The Commission IG told us that peer reviews were only required if an OIG had conducted audits, and because his office did not perform audits, it was not subject to this quality assurance requirement. Conversely, the Commission OIG inspection and semiannual reports could have been subjected to an internal quality assurance review, an external quality assurance review, or both. The Commission OIG provided draft inspection and semiannual reports to the Federal Cochair and the other commissioners, providing management an opportunity to comment on the drafts prior to final issuance. However, the Federal Cochair and commissioners do not qualify as external quality assurance reviewers because they are directly involved in the activities or programs being reviewed. In addition, they may not be familiar with applicable professional standards that govern OIG-issued work products. Without documented policies and procedures for maintaining a quality assurance program, the OIG could not ensure that its management and operations adhered to the CIGIE standards or complied with the IG Act. In addition, the risk is significantly increased that issued work will not meet established standards of performance, including applicable professional standards, or be carried out economically, efficiently, and effectively. While we acknowledge that the Commission OIG is an office of one and maintaining quality assurance under these circumstances presents challenges, adherence to this quality standard is required. Planning and coordinating. The CIGIE standard for planning and coordinating states that each OIG shall maintain a planning system assessing the nature, scope, and inherent risks of agency programs and operations. strategic and performance plans, including goals, objectives, and performance measures to be accomplished by the OIG within a specific time period. Some of the elements of the planning process include (1) using a strategic planning process that carefully considers current and emerging agency programs, operations, risks, and management challenges; (2) developing a methodology and process for identifying and prioritizing agency programs and operations as potential subjects for audit, investigation, inspection, or evaluation; and (3) using an annual performance planning process that identifies the activities to audit, investigate, inspect, or evaluate and translates these priorities into outcome-related goals, objectives, and performance measures. Strategic and annual work plans are useful tools in documenting the IG’s strategic vision for providing leadership for activities designed to promote economy, efficiency, and effectiveness for an entity’s programs and operations. Council of the Inspectors General on Integrity and Efficiency, Quality Standards for Federal Offices of Inspector General (Washington, D.C.: August 2012). We found that the OIG did not prepare an annual work plan or strategic plan. Instead, an informal and undocumented planning process was used by the IG and Federal Cochair that involved routine meetings, e-mails, and conversations. Without an annual work plan or strategic plan, the Commission OIG is limited in its ability to ensure that the oversight it provided was relevant, timely, and responsive to the priorities to the Commission. Further, without a risk-based approach for oversight that includes identifying and prioritizing agency programs and operations as potential subjects for audit, investigation, inspection, or evaluation, the OIG did not have a road map to help guide the general direction and focus of its work to ensure appropriate oversight of the Commission’s major programs. Communicating results of OIG activities. The CIGIE quality standard related to communicating the results of OIG activities states that the OIG shall keep agency management, program managers, and the Congress fully and currently informed about appropriate aspects of OIG operations and findings. The OIG should also assess and report to the Congress, as appropriate, the OIG’s strategic and annual performance, as well as the performance of the agency it oversees. Furthermore, the OIG is responsible for reporting promptly to the Attorney General whenever the IG has reasonable grounds to believe there has been a violation of federal criminal law. The IG and Federal Cochair told us that they did discuss the areas the IG planned to inspect. The OIG communicated the results of its activities by submitting semiannual reports to the Congress, ensuring that inspection reports were available on the OIG’s website, and meeting with congressional staff to discuss various issues. Managing human capital. The CIGIE quality standard for managing human capital states that the OIG should have a process to ensure that OIG staff possess the core competencies needed to accomplish the OIG’s mission. Because the Commission OIG consisted of the IG and no staff, standards for managing human capital are applicable only to the Commission IG. The IG provided documentation verifying that as a certified public accountant and attorney in the state of Alaska, he had met the continuing education requirements for these designations and possessed the core competencies needed to accomplish the OIG’s mission. Because the Commission OIG was an office of one, the IG used the services of others to assist with his oversight duties. As discussed earlier, he contracted with an IPA for the agency’s annual financial statement audit and contracted with a retired investigator to assist with inspections. We found that the OIG had a process to ensure that these contractors possessed the needed skills for the services they provided. Reviewing legislation and regulations. The CIGIE quality standard for reviewing legislation and regulations states that the OIG shall establish and maintain a system for reviewing and commenting on existing and proposed legislation, regulations, and directives that affect both the program and operations of the OIG’s agency or the mission and functions of the OIG. While the OIG had not established a documented system for the steps it followed for reviewing legislation and regulations, we found an assessment of relevant Commission-related legislation and regulations in the OIG’s semiannual reports to the Congress. Receiving and reviewing allegations. The CIGIE quality standard for receiving and reviewing allegations states that the OIG shall establish and follow policies and procedures for receiving and reviewing allegations. This process should ensure that appropriate disposition, including appropriate notification, is made for each allegation. Furthermore, the IG Act requires each OIG to establish a direct link on the OIG website for individuals to anonymously report fraud, waste, and abuse. The Commission OIG did not have an OIG hotline link on its website to serve as a mechanism for receiving and reviewing allegations, as appropriate. The IG provided his e-mail address and telephone number on the Commission’s OIG website. He reported that there was no OIG hotline link on the website because the Commission only had about 15 employees and a tip through an OIG hotline was not necessarily how employees made contact with the OIG. According to the IG, contact with the Commission’s small workforce was primarily through e-mails, phone calls, and group teleconferences. OIG hotlines exist to elicit information from federal employees, contractors, and the general public that furthers an OIG’s mission to (1) promote effectiveness, efficiency, and economy in its organization’s programs and operations and (2) prevent and detect fraud, waste, and abuse in such programs and operations. Accordingly, hotlines play a critical role in the work of OIGs, because an OIG can only investigate, refer, or otherwise handle matters of which it is aware. Agency employees, contractors, and members of the public who make reports to an OIG via its hotline are an important resource because they can provide the OIG with notification of or insider information about potential problems. Hotlines have been used in organizations as a means for individuals fearing retaliation to seek remedies for problems anonymously within the organization. In recent years, there has been increased interest in the use of OIG hotlines as the principal mechanism for reporting and detecting fraud, waste, and abuse. Entities both within and outside the IG community have studied OIG hotlines and their important impact on the effectiveness of the IG community. In addition to detecting fraud, waste, and abuse, hotlines are used by some OIGs to identify agency programs or operations as potential subjects for audit or investigation. However, the Commission OIG did not conduct any investigations for criminal prosecution, and there was no supporting evidence of the disposition of referrals or tips received. Without an established OIG hotline, with its protection of anonymity, it may be difficult for agency employees, contractors, and the general public to report insider information about potential problems at the Commission. We reviewed the OIG’s work products, which consisted of inspection reports and semiannual reports issued during fiscal years 2011 through 2013, and their associated policies and procedures. Our evaluation of the OIG’s written policies and procedures for inspections found that they did not include guidance for all of the 14 CIGIE inspection standards and that there were deficiencies in the guidance that was included. In addition, we found that the inspection reports the OIG issued during fiscal years 2011 through 2013 did not fully adhere to applicable CIGIE inspection standards. Finally, we found that the semiannual reports issued by the OIG during fiscal years 2011 through 2013 did not fully comply with the reporting requirements per the IG Act. CIGIE’s Quality Standards for Inspection and Evaluation promulgates 14 sets of criteria for performing inspections: (1) competency; (2) independence; (3) professional judgment; (4) quality control; (5) planning; (6) data collection and analysis; (7) evidence; (8) records maintenance; (9) timeliness; (10) fraud, other illegal acts, and abuse; (11) reporting; (12) follow-up; (13) performance management; and (14) working relationships and communication. CIGIE inspection standards state that it is the responsibility of each OIG that conducts inspections to develop internal written policies and procedures to ensure that all work adheres to the standards and is in compliance with the IG Act. The IG Act requires OIGs to adhere to these standards to the extent permitted under law and not inconsistent with applicable auditing standards. The Commission OIG had established written policies and procedures that provide guidance for 7 of the 14 CIGIE standards; however, our review of the guidance found deficiencies. Regarding implementation of the CIGIE inspection standards, we reviewed the OIG’s 12 inspections reported from fiscal years 2011 through 2013 and found documentary evidence that some CIGIE standards, including some that were not included in the OIG’s policies and procedures, were implemented. However, inspections were not conducted in full accordance with the standards. The following standards were not included in the OIG’s policies and procedures but were implemented to some extent in the conduct of inspections. Data collection and analysis. CIGIE inspection standards state that the collection of information and data focuses on the function being inspected, consistent with inspection objectives and sufficient to provide a reasonable basis for reaching conclusions. The Commission OIG did not have policies and procedures for data collection and analysis that adhered to CIGIE’s standards for inspections. However, the supporting documentation for the inspections we reviewed did have information to support data collection for the inspections. Specifically, we found that 9 of the 12 inspections completed had supporting documentation sufficient in detail for reaching the identified findings in the inspection reports. We also found that the methods used to collect supporting documentation for the inspections were reliable and valid. The supporting documentation collected consisted of source documents such as interview write-ups by the contracted investigator, relevant excerpts from the laws and regulations referenced in the inspection reports, and other information. Supporting documentation for 5 of the 12 inspections showed evidence that the information had been reviewed for accuracy and reliability, and another 4 of 12 inspections showed evidence of partial review by the Commission IG. The remaining 3 inspection reports did not show evidence of supporting documentation being reviewed for accuracy and reliability. Evidence. CIGIE’s standards for inspections state that evidence to support findings, conclusions, and recommendations should be sufficient, competent, and relevant and should provide a basis for bringing a reasonable person to the reported conclusions and findings. Furthermore, evidence may take many forms, such as physical, testimonial, documentary, and analytical, which includes computations, comparisons, and rational arguments. The Commission OIG did not have policies and procedures for evidence that adhered to CIGIE’s standards for inspections. Although the OIG’s policy and procedure stated that “the Denali IG’s basic documentation will include the inspection plan, a cross-referenced copy to work papers, and detailed footnotes,” the policy and procedure did not adhere to the CIGIE inspection standard. Additionally, we found no documented evidence in the OIG’s workpapers to support the inspection conclusions and recommendations for its reports. For example, we did not find any workpapers containing the Commission IG’s analysis of the supporting documentation or that linked the Commission IG’s processes or methods used to the reported findings, conclusions, or recommendations for all 12 of the inspection reports we reviewed. Records maintenance. CIGIE inspection standards state that all relevant documentation generated, obtained, and used in supporting inspection findings, conclusions, and recommendations should be retained for an appropriate amount of time. The Commission OIG did not have policies and procedure for records maintenance that adhered to CIGIE’s standards for inspections. Although the Commission OIG’s policies and procedures did not address records maintenance, the OIG did maintain supporting documentation in its workpaper files. We found that the OIG retained documentation for 9 of the 12 inspection reports completed. However, for the 2 inspection reports included in the Commission’s agency financial report, the OIG did not have any workpapers. For the remaining inspection report, the supporting documentation that was maintained was incomplete. Timeliness. CIGIE inspection standards state that inspections should strive to deliver significant information to appropriate management officials and customers in a timely manner. The Commission OIG did not have policies and procedures for timeliness that adhered to CIGIE’s standards for inspections. Although the Commission OIG’s policies and procedures did not address timeliness, we found no evidence to suggest that the inspection reports were not in accordance with the timeliness standard. This is based on the time the inspections began and the inspection report dates, which ranged from 1 month to about 2 years. Fraud, other illegal acts, and abuse. CIGIE standards for inspections state that inspectors should be alert to any indicator of fraud, other illegal acts, or abuse. They also state that inspectors should be aware of vulnerabilities to fraud and abuse associated with the area under review to facilitate identifying potential or actual illegal acts or abuse that may have occurred. The Commission OIG did not have policies and procedures for considering fraud, other illegal acts, and abuse that adhered to CIGIE’s standards for inspections. We also found that the OIG did not conduct a fraud assessment for any of the 12 inspections the OIG conducted. Follow-up. CIGIE standards for inspections state that appropriate follow- up will be performed to ensure that any inspection recommendations made to department or agency officials are adequately considered and appropriately addressed. The Commission OIG did not have policies and procedures related to following up on report recommendations to determine whether corrective actions had been taken. We found that the OIG did not perform follow-up for any of the 12 inspection reports. Of the 5 published inspection reports, the OIG did not follow up on the three recommendations made in those reports. In addition, of the 5 inspections mentioned in the OIG’s semiannual reports to the Congress, the OIG did not follow up on the 13 recommendations made as a result of those inspections. The remaining 2 inspections published in the agency financial report did not contain any recommendations. Performance measurement. CIGIE standards for inspections state that mechanisms should be in place to measure the effectiveness of inspection work. CIGIE standards describe the importance of being able to demonstrate the positive results that inspections contribute to the more effective management and operation of federal programs. Performance measures for OIG inspections, for example, could focus on the number of implemented recommendations and outcomes or changes in policy. The Commission OIG did not have policies and procedures related to performance measurement that adhered to CIGIE’s standards for inspections. We also found that the OIG did not establish performance measures to determine the effectiveness of inspections completed. The following standards were included in the OIG’s policies and procedures and were implemented to some extent in the conduct of inspections. Competency. CIGIE’s competency standard states that inspection organizations need to ensure that the personnel conducting an inspection collectively have the knowledge, skills, abilities, and experience necessary for the assignment. The Commission OIG’s policies and procedures for competency adhered to CIGIE’s standards for inspections. They state that the Commission IG will, as a condition of employment, maintain his or her competency to multitask as a one-person OIG. In addition, the OIG’s policies and procedures state that the IG will take a minimum of 40 hours of training per fiscal year, which is in accordance with CIGIE standards. The Commission IG was a licensed attorney and certified public accountant, and he provided us documents of his current continuing professional education credits. Thus, we considered the Commission IG’s qualifications to be consistent with CIGIE inspection standards. Independence. The CIGIE inspection standard for independence states that in all matters relating to inspection work, the inspection organization and each individual inspector should be free both in fact and appearance from personal, external, and organizational impairments to independence. The Commission OIG’s policies and procedures adhered to CIGIE inspection standards for independence. They state the Commission IG will maintain strict political neutrality and an appropriate level of social detachment from the Commission’s management and beneficiaries as a critical element of OIG independence. We did not find any impairment, in fact or appearance, with the independence of the Commission OIG. Professional judgment. The CIGIE inspection standard for professional judgment states that due professional judgment should be used in planning and performing inspections and in reporting the results. The Commission OIG’s policies and procedures addressed professional judgment but did not address the broader intent of the CIGIE inspection standard for professional judgment. The OIG’s policy states that it will conduct interviews of agency officials through an inspection methodology that conforms to the CIGIE quality standards for that inspection procedure, which is in accordance with the CIGIE inspection standard for professional judgment. The OIG’s policy only addresses the intent to interview agency officials in accordance with these standards instead of the OIG’s intent to use professional judgment when performing all aspects of inspection procedures. This would include the intent to use professional judgment in selecting the type of inspections to perform, defining the scope and methodology, and determining the type and amount of evidence to gather. In addition, the problems with the OIG’s inspection plans and lack of evidence and analysis in the workpapers, as discussed in this report, are indications that the OIG’s professional judgment did not adhere to CIGIE standards. Quality control. CIGIE standard for quality control states that each OIG organization that conducts inspections should have internal quality controls for its processes and work. The Commission OIG’s policies and procedures addressed quality control but did not fully adhere to CIGIE’s inspection standards. The Commission OIG’s policy for quality control states that the OIG will arrange for feedback from an external expert for at least 50 percent of its published reports. However, the Commission OIG did not have procedures established to provide for an independent assessment of its inspection processes or inspection reports. Consequently, none of the 12 inspection reports we reviewed had an independent assessment for quality control completed. While the Commission OIG is an office of one full-time employee, which created challenges in instituting extensive quality control, the IG did not take the necessary steps to mitigate this challenge by implementing control procedures that provide an independent assessment of inspection processes and work. Planning. The CIGIE standard states that inspection planning is intended to ensure that appropriate care is given to selecting inspection topics and should be developed to clearly define the inspection objective, scope, and methodology. It may also include time frames and work assignments. Additionally, the CIGIE inspection standard for planning states that research, work planning, and coordination should be thorough enough to ensure that the inspection objectives are met. The Commission OIG’s policies and procedures addressed planning but did not fully adhere to CIGIE’s inspection standards. We found that the Commission OIG’s policy for planning inspections did not adhere to the CIGIE standards for inspections related to planning. The Commission OIG’s policy for planning states that the basic documentation for an inspection will include (1) an inspection plan, (2) a copy of the report with cross-references to the evidence workpapers, and (3) detailed footnotes in the report itself. This policy does not address the purpose or contents of the plan as described in the CIGIE inspection standard. Regarding implementation, we found that the OIG’s inspection plans were not adequately developed. Specifically, we found that none of the 12 inspections included clearly defined descriptions of the objective, scope, and methodology. In addition, 9 of the 12 inspection plans were not planned sufficiently to reach reasonable conclusions about the topic inspected because of a lack of detailed procedures in the inspection plan to perform the inspection. The remaining 3 inspections plans, despite not having documented the objective, scope, and methodology, did have sufficient planned steps to reach reasonable conclusions as reported in the inspection report. Reporting. The CIGIE standard states that inspection reporting shall present factual data accurately, fairly, and objectively, and present findings, conclusions, and recommendations in a persuasive manner. Additionally, the standard states that inspection reports must include the objective, scope, and methodology of the inspection and a statement that the inspection was conducted in accordance with CIGIE standards for inspection. The Commission OIG’s policies and procedures addressed reporting but did not fully adhere to CIGIE’s inspection standards. The Commission OIG’s policy for reporting states that published inspection reports will emphasize plain language, readability to a nationwide audience, and usefulness to decision makers. However, the OIG’s policies and procedures do not require that reports include the objective, scope, and methodology of the inspection or a statement that the inspection was conducted in accordance with CIGIE standards for inspections. Despite these omissions in the Commission OIG’s policies and procedures, we found that 1 of the 12 inspections clearly listed the objective, scope, and methodology, and 4 of 12 reports stated that the inspection was conducted in accordance with CIGIE standards for inspections. Working relationships and communication. The CIGIE standard for inspections related to working relationships and communication states that each inspection organization should seek to facilitate positive working relationships and effective communication with those entities inspected and other interested parties. The Commission OIG’s policies and procedures adhered to CIGIE’s inspection standards for working relationships and communication. The Commission OIG policy states that its key inspection procedure is management’s feedback regarding the draft report, which the Commission OIG seeks at several levels: (1) oral conversation, (2) e- mailed comments, and (3) a formal response letter for publication with the OIG’s final report. We found evidence of OIG communication with the Commission through e-mail correspondence for all published inspection reports. In addition, the OIG reported and communicated the results of OIG activities related to issued work products to agency management officials and the Congress. Section 5 of the IG Act requires that each IG shall, not later than April 30 and October 31 of each year, prepare and submit to the Congress semiannual reports summarizing the activities of the office during the immediately preceding 6-month periods ending March 31 and September 30. These reports are intended to keep the Congress informed by highlighting, among other things, the OIG’s review of existing and proposed legislation and regulations affecting an agency’s programs and operations to foster economy and efficiency and detect fraud, waste, and abuse. These reports are also intended to keep the Congress informed about significant problems, abuses, and deficiencies in an agency’s programs and operations and the status of recommendations for corrective actions. While the IG Act requires that semiannual reports include a summary of matters referred to prosecutive authorities and resulting convictions, the Commission IG told us that he is not aware of anyone who has been charged in a criminal court case as a result of his work. Section 5 of the IG Act also establishes a uniform set of statistical categories under which OIGs must report the quantitative results of their audit, investigation, inspection, and evaluation activities. The statistical information reported in an OIG’s semiannual report must show the total dollar value of questioned costs and the dollar value of recommendations that funds be put to better use. The Commission OIG submitted semiannual reports as required by the IG Act; however, we found that the reports did not fully comply with the reporting requirements of the IG Act. Specifically, we found that for the six semiannual reports we reviewed, the OIG did not provide statistical information showing the dollar value of recommendations that funds be put to better use or the total value of questioned costs (including a separate category for the dollar value of unsupported costs). We understand that that there may not have been any amounts identified by the OIG of funds that could be put to better use or questioned costs for the reporting period. However, if the OIG does not state this in the semiannual reports to the Congress, both management and the Congress do not have the necessary information to take appropriate actions to enhance management practices and procedures, which would result in more efficient and effective use of Commission funds. Furthermore, this statistical information is required by the IG Act and should be included in the OIG’s semiannual reports to the Congress. We also found that for five of the semiannual reports we reviewed, the OIG did not identify the significant recommendations described in previous semiannual reports for which corrective action had not been completed by agency management. While the OIG provided this information in its May 2011 semiannual report, the OIG did not provide the status of the 48 open recommendations identified in this report in subsequent semiannual reports. The IG Act requires the OIG to identify each significant recommendation described in previous semiannual reports on which corrective action has not been completed by management. Not knowing the current status of the recommendations for which corrective actions are needed limits both the agency’s and the Congress’s awareness of outstanding actions that may still need to be taken. We found that the OIG did not have written policies and procedures to guide the preparation of its semiannual reports to the Congress. We did find that for one of the semiannual reports we tested (the report for the first half of fiscal year 2011) at the request of the Federal Cochair, the OIG included an appendix that identified and provided the status of recommendations from all the semiannual reports issued by the OIG in fiscal year 2006 through the first half of fiscal year 2011. The information in the appendix identified 159 recommendations made by the OIG during fiscal years 2006 through 2010 and the first half of fiscal year 2011. While the IG provided the status of recommendations in fiscal year 2011, he did not provide updated information on the status of these recommendations in the semiannual reports issued going forward, in compliance with the IG Act. According to the IG, he received a request at least annually from the House Committee on Oversight and Government Reform requesting an update on the status of open recommendations. The IG also told us that a common focus of his meetings with OMB and congressional committee staff was to discuss the status of open recommendations. As we recently testified, GAO has long supported the creation of independent IG offices in appropriate federal departments, agencies, and entities, and we continue to believe that significant federal programs and entities should be subject to oversight by independent IGs. At the same time, we have reported some concerns about creating and maintaining small IG offices with limited resources, where an IG might not have the ability to obtain the technical skills and expertise needed to provide adequate and cost-effective oversight. Although the limitations of a single- person office can create challenges to developing and implementing policies and procedures to ensure effective oversight, if corrective actions are taken to address the issues identified in this report, the current DFE OIG structure can provide a viable option for oversight of the Commission. Nevertheless, there are alternative structures that may also facilitate effective OIG oversight of the Commission. We identified examples of alternative approaches that exist in other federal agencies that may also provide effective OIG oversight for the Commission. Three alternative IG oversight structures and their respective advantages and disadvantages are summarized in figure 4 and more fully described in the paragraphs that follow. The Commission OIG could be consolidated into a larger IG office. Specifically, OIGs with presidentially appointed IGs would assume the operational responsibilities of the Commission OIG as established under the IG Act. This includes reporting to the Congress semiannually; performing audits, investigations, inspections, and evaluations of program areas; as well as conducting and overseeing the agency’s annual financial statement audit. This alternative could strengthen the quality of work and use of resources through the implementation of best practices usually employed at larger, presidentially appointed and Senate- confirmed IGs and their related offices. This oversight structure exists at the Department of State OIG. For example, the Department of State OIG has oversight authority over the Broadcasting Board of Governors (BBG), which had a budget of $712 million for fiscal year 2013. The Department of State OIG had an average annual budget of $61 million for fiscal years 2011 through 2013 and employed approximately 270 full-time and 16 part-time employees. The Department of State OIG conducts independent performance and financial statement audits, inspections, and investigations that advance the missions of the Department of State and BBG. The Department of State OIG prepares an annual performance plan (including audits, inspections, and evaluations) and a 5-year strategic plan for oversight of the Department of State and BBG using Department of State management challenges as a baseline, along with input collected from the Department of State, BBG management, and other sources of information. The Department of State OIG also uses a risk-based approach to determine which posts and bureaus should be inspected based on the most recent inspection and other data collected during the course of its oversight work. In addition, when possible, the Department of State OIG performs a review of BBG foreign offices during Department of State site visits, allowing it to leverage efficiencies and resources when performing other oversight work. In another example, the U.S. Agency for International Development Office of Inspector General (USAID OIG) provides oversight to several small entities, including the Millennium Challenge Corporation, U.S. African Development Foundation, Inter-American Foundation, and Overseas Private Investment Corporation, with budgets of $898 million, $30 million, $22 million, and approximately $75 million to 100 million, respectively, for fiscal year 2013. USAID OIG has approximately 230 employees and had an average budget of approximately $45.6 million for fiscal years 2011 through 2013. USAID OIG prepares annual performance (i.e., audit) plans for oversight of these entities that are aligned with its 5-year strategic plan following consultations with stakeholders and OIG personnel. In addition to these consultations, annual performance plans are developed based on a risk assessment of the portfolios they monitor. USAID OIG audits activities relating to the worldwide foreign assistance programs and agency operations of these entities and considers several factors when assessing agency program risk, such as inherent risk, fraud and corruption risk, and control risk. Audit activities include performance audits and reviews of programs and management systems, financial statement audits, and audits related to financial accountability of grantees and contractors. The USAID OIG also investigates allegations of fraud, waste, and abuse relating to the foreign assistance programs and operations. The quality of an OIG’s work is a critical element of IG effectiveness. Consolidation with a larger OIG could improve the quality of work at the Commission OIG. This could be accomplished by using a strategic, risk- based approach for auditing and increasing staffing resources with the requisite technical auditing and accounting expertise necessary to improve program efficiency and effectiveness. As we noted earlier, audits performed in accordance with generally accepted government auditing standards (GAGAS) provide information used for oversight, accountability, transparency, and improvements of government programs and operations. When auditors comply with GAGAS in reporting the results, their work can lead to improved management, better decision making and oversight, effective and efficient operations, accountability, and transparency for resources. In addition, consolidation with a larger OIG could increase the OIG’s ability to effectively plan for work, including implementing a strategic and risk-based approach to auditing agency programs and operations of high risk. Routine access to staff resources with the requisite subject matter expertise, such as information technology personnel, payroll services personnel, and a highly trained financial management workforce, could also be an advantage of consolidating with a larger OIG. However, consolidation with larger OIGs could also result in disadvantages, such as limited contact with agency program management officials who have the institutional knowledge pertaining to agency missions and priorities. There may also be management challenges in determining the appropriate amount of resources to dedicate toward performing sufficient oversight of the Commission’s programs. For example, the Commission may not be a material entity when compared to the larger agency; therefore, when using a risk-based approach, the Commission may not get the necessary OIG oversight with respect to its critical programs and operations from the larger OIG. Consolidation with a single regional commission OIG could serve as another alternative structure. This option would consolidate the Commission OIG with a regional commission OIG. As under the consolidation with a larger IG office alternative, the regional commission OIG would assume the oversight responsibilities of the Commission OIG. There are currently seven regional commissions; however, only the Appalachian Regional Commission (ARC) and the Denali Commission have their own OIGs. Legislation enacted in 2008 directed that a single IG be appointed by the President, in accordance with the IG Act, for three of the other regional commissions, but it has not been implemented. The regional commissions are as follows: (1) Northern Border Regional Commission, (2) Southwest Border Regional Commission, (3) Southeast Crescent Regional Commission, (4) Delta Regional Authority, (5) Appalachian Regional Commission, (6) Northern Great Plains Regional Authority, and (7) Denali Commission. Regional commissions are regional development agencies that focus on developing infrastructure and targeting new resources to promote wealth generation and economic growth to distressed portions of specific geographical areas within their regions. For example, the ARC is a regional economic development agency that represents a partnership of federal, state, and local governments. Established by the Congress in the Appalachian Regional Development Act of 1965, the ARC was established to assist the region in promoting economic development and establishing a framework for joint federal and state efforts to provide the basic facilities essential to its growth on a coordinated and concerted regional basis. The ARC is composed of the governors of the 13 Appalachian states and a Federal Cochair, who is appointed by the President. Local participation is provided through multicounty local development districts. The ARC OIG reported that it has three full-time employees, has an annual budget of approximately $634,000, and has performed 81 audits and inspections during fiscal years 2011 to 2013. According to the ARC OIG website, the ARC OIG provides independent and objective audits, inspections, and evaluations relating to agency programs and operations. The ARC prepares a 5-year strategic plan and annual work plans to identify grant audits that represent the most significant aspect of the ARC’s programs. The ARC OIG’s grant audits are based on factors such as the value of the grant, location, type of grant, and prior history. The ARC OIG also provides a means for keeping the ARC Federal Cochair, the other commissioners, and the Congress fully informed about problems and deficiencies at the ARC. Consolidation of the Commission OIG with another regional commission OIG could serve to (1) strengthen institutional knowledge regarding agency programs and operations and (2) achieve economies of scale. Since regional commissions are focused on building the infrastructure and targeting economic growth to distressed areas in specific rural geographic locations, consolidation of the Commission OIG with another regional OIG could improve institutional knowledge at the Commission OIG. Given the similarities in their scope and mission, efficiencies may be achieved by leveraging resources between the two regional commissions. In addition, consolidation could serve to increase the availability of investigative resources to detect fraud, waste, and abuse while achieving other efficiencies. A disadvantage to this approach could be that resources become strained, limiting the effectiveness of the OIG to perform its duties for both agencies. The Commission IG stated that he spent approximately 25 percent of his time overseeing the contracted auditor for the Commission annual financial statement audit and therefore used inspections to leverage the time he had to perform oversight. Another alternative is to divide OIG oversight responsibilities for the agency performance audits, investigations, and inspections and the agency financial statement audits between two separate federal OIGs, such as a regional commission OIG or a larger OIG. The regional commission OIG would perform the audits, investigations, and inspections of agency programs and operations based on its similar mission and scope. The larger OIG would conduct and oversee the agency’s annual financial statement audit. A current example of this structure exists at the Department of Transportation (DOT) OIG. The DOT OIG has the authority to review the financial statement audit, property management, and business operations of the National Transportation Safety Board (NTSB), including internal accounting and administrative control systems, to determine whether they comply with applicable laws, rules, and regulations. GAO conducts broad management reviews on behalf of the NTSB. In addition, Amtrak is a DFE under the IG Act and has an OIG, but Amtrak itself, rather than the OIG, is required to engage an IPA to audit its annual financial statements. In fiscal year 2011, the Amtrak OIG began monitoring the IPA that performed the financial statement audit for Amtrak. Further, the DOT OIG is required by statute to conduct certain oversight of Amtrak operations, including an annual review of Amtrak’s budget and 5-year financial plan. This divided approach could reduce the strain of oversight responsibilities on one OIG by providing a shared responsibility between two OIGs while potentially providing sufficient agency oversight. In addition, dividing responsibilities between two OIGs would serve to leverage the OIGs’ expertise (i.e., similar mission, subject matter experts, etc.) in conducting performance audits, investigations, inspections, and evaluations for one OIG assuming oversight responsibilities. The other OIG’s expertise could also be leveraged for conducting the annual financial statement audit. However, disadvantages in this approach could be a lack of effective communication and coordination between the two OIGs. For example, internal control deficiencies and recommendations resulting from the financial statement audit may not be communicated in a timely manner to the OIG with program and operational oversight responsibilities of the agency. This could delay the implementation and preparation of corrective action plans to address and correct deficiencies found during the financial statement audit in a timely manner, which could also have a programmatic or operational impact. In addition, this approach could require the agencies to coordinate activities such as requests for financial statement audit documents and requests for documentation for performance audits and investigations. This could put additional stress on the smaller OIG to fulfill requests for documentation and meetings while still performing daily duties required at the agency. Figure 5 demonstrates how various responsibilities could be divided among various IG offices. While there is no clear-cut option with respect to the alternative OIG structures presented above, any specific decision concerning consolidations of IG offices should result from dialogue among the affected agencies, CIGIE, and the Congress. OIG’s are responsible for coordinating audits, inspections, and investigations. While the Commission OIG conducted limited oversight through inspections, it did not conduct performance audits or investigations and many of the critical standards in CIGIE’s Quality Standards for Federal Offices of Inspector General, such as planning and coordination, ensuring internal control, maintaining quality assurance, and receiving and reviewing allegations, were not addressed in the policies and procedures or the operations of the Commission OIG. For example, planning and coordination would include a risk-based approach to assessing the nature, scope, and inherent risk of Commission programs and operations. A risk-based approach for oversight would guide the general direction and focus of OIG work to ensure effective oversight of the Commission’s major programs and operations. Furthermore, it is important that OIG work products provide reliable information and adhere to CIGIE professional standards and the IG Act. However, we found no documented evidence in the OIG’s workpapers to support the inspection conclusions and recommendations for its reports. These OIG work products are used by the Congress and others to assess whether the Commission’s major programs and operations are achieving their desired results. We are making the following nine recommendations to the Commission IG, or to the individual or entity that ultimately assumes IG oversight responsibilities for the Commission under an alternate structure, in order to ensure that the Commission receives effective oversight of its major programs and operations. Develop and implement a risk-based approach that adheres to professional standards to help ensure effective oversight of the major Commission programs and operations in the form of audits and investigations. Develop policies and procedures for OIG office operations and management activities in accordance with CIGIE’s Quality Standards for Federal Offices of Inspector General. Implement the OIG’s policies and procedures developed in accordance with CIGIE’s Quality Standards for Federal Offices of Inspector General to ensure that the OIG’s management and operation of its office includes the following: annual work and strategic plans that identify goals, objectives, and performance measures to be accomplished by the OIG within a specific period; a quality assurance framework that includes both internal and external quality assurance reviews; an internal control structure that includes all elements of internal control, such as the control environment, risk assessment, control activities, information and communication, and monitoring; and an OIG hotline to receive and review anonymous tips, referrals, and allegations to help prevent and detect potential fraud, waste, and abuse. Update the OIG’s policies and procedures for inspections to ensure that they are fully in accordance with CIGIE’s Quality Standards for Inspection and Evaluation. Conduct inspections that are fully in accordance with CIGIE’s Quality Standards for Inspection and Evaluation and the OIG’s policies and procedures. Prepare semiannual reports to the Congress that fully comply with the reporting requirements of the IG Act. We provided a draft of this report to the Denali Commission for review and comment. The Commission concurred with the report’s conclusions and recommendations, and provided its perspective of the IG’s performance as well as the challenges for a one-person DFE OIG. The Commission’s letter is reprinted in appendix II. We are sending copies of this report to the appropriate congressional committees, the Federal Cochair and Commissioners of the Denali Commission, the Office of the Inspector General for the Department of Commerce, the Assistant Secretary for Economic Development for the Department of Commerce, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2623 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To determine the resources appropriated to and expensed by the Denali Commission’s (Commission) Office of Inspector General (OIG) for fiscal years 2011 through 2013, we reviewed OIG-related budget justification documents and expenditure reports for the OIG’s salary and benefits, contracts, training, and travel. We reviewed the cost elements used to develop the OIG’s annual budget estimate, as well as the contract types and contract payments made to assist with OIG-related activities. We interviewed the commissioners and agency management to determine whether the OIG obtained their input for program or operation areas of concern for which they wanted assistance. We also interviewed Commission staff to gain an understanding of the resources provided to the OIG from the Commission and from other federal agencies. To determine the number of work products issued by the OIG, we reviewed the Inspector General’s (IG) activity log and the OIG’s website to identify which publications were within our scope and provided the list to the IG for confirmation that the list was complete. We requested copies of the OIG’s annual work plan and strategic plan and interviewed commissioners and Commission staff to determine the extent to which they provided input to the OIG’s annual work and strategic plans. However, the IG did not prepare written annual work and strategic plans. Therefore, we had to rely on the interviews we conducted with the commissioners and Commission staff to determine the extent to which they provided input to the IG on areas the IG evaluated. To determine the extent to which the IG provided oversight of the Commission’s major programs and operations, we compared the grant funds awarded and disbursed by the Commission for fiscal years 2011 through 2013 to the work products issued by the OIG. We obtained the grant funds awarded and disbursed information from the Commission (including the program descriptions for these grants) and performed procedures that allowed us to determine that the grant information provided by the Commission was sufficient for our purposes. We did compare these grant amounts to the total grant funds reviewed by the OIG in its work products. We analyzed all of the OIG’s work products issued in fiscal years 2011 through 2013, noting the objectives, scope, and methodology of the reports to determine the extent to which these work products reviewed Commission programs or operations. We reviewed the Commission’s fiscal year 2015 budget justification to identify accomplishments by program, and we also reviewed the Commission’s annual financial report to identify the budgetary authority amounts by program. We compared the fiscal year budgeted amounts reported in the Commission’s audited annual financial statements with the amounts reported in the President’s budget, which allowed us to determine that the budget amounts provided by the Commission were sufficient for our purposes. To determine whether the design of the OIG’s policies and procedures adhered to applicable professional standards, we reviewed the Inspector General Act of 1978, as amended (IG Act), and the Council of the Inspectors General on Integrity and Efficiency’s (CIGIE) Quality Standards for Federal Offices of Inspector General and Quality Standards for Inspection and Evaluation, and compared the OIG’s inspection policies and procedures to these professional standards. To determine the extent to which the OIG implemented the CIGIE standards and its inspection policies and procedures, we prepared a data collection instrument using the CIGIE inspection standards and the OIG’s policies and procedures. We tested all of the OIG’s work products issued during fiscal years 2011 through 2013 to determine whether the OIG’s work products adhered to the CIGIE standards and were consistent with the OIG’s inspection policies and procedures. We reviewed the OIG’s inspection reports and supporting case files and compared them to the OIG’s policies and procedures and applicable CIGIE standards, including those related to quality control, planning, evidence, and reporting. We reviewed all of the semiannual reports issued by the OIG during fiscal years 2011 through 2013 to determine whether these reports were prepared in accordance with the reporting requirements of the IG Act. We reviewed the OIG’s semiannual reports and supporting case files and compared them to the IG Act reporting standards. To determine alternatives for OIG oversight structures that exist in federal agencies that could be applied at the Commission, we used previous GAO work to identify federal OIGs that provide (or have provided) OIG oversight for smaller agencies, and also identified other regional commissions with similar missions to that of the Commission. In addition, because the Denali Commission Federal Cochair is appointed by the Secretary of Commerce, we consulted with officials from the Department of Commerce to gain an understanding of their relationship and roles and responsibilities to the Commission. We conducted structured interviews with officials from these other OIGs with structures we considered to be potential alternative OIG oversight structures to gain an understanding of how they are organized and operate. We analyzed prior GAO reports to review recommendations made regarding alternatives for providing OIG oversight and Congressional Research Service reports and other relevant reports to identify applicable criteria for OIG oversight. We conducted this performance audit from May 2013 to 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. In addition to the contact named above, Chanetta Reed (Assistant Director), Matthew Frideres, Maxine Hattery, Jason Kirwan, Carroll M. Warfield Jr., and Doris Yanger made key contributions to this report. | The Commission was established to promote sustainable infrastructure improvement, job training, and other economic development services in Alaska. The Commission is a designated federal entity under the IG Act and is required to have an IG. IG oversight includes assessing the effectiveness and efficiency of agency programs and operations; providing leadership and coordination to detect fraud and abuse; and making recommendations to management to promote the economy, efficiency, and effectiveness of program and agency operations. GAO was asked to review the management and operations of the Commission's OIG. GAO's objectives were to (1) identify the resources appropriated to and expensed by the OIG and the OIG's work products reported for fiscal years 2011 through 2013, (2) assess the extent to which the OIG provided oversight of the Commission's programs and operations, (3) determine the extent to which the design and implementation of the OIG's policies and procedures and its work products were consistent with professional standards, and (4) identify alternatives for OIG oversight of the Commission. The Denali Commission (Commission) Office of Inspector General (OIG) received budgetary resources of approximately $1 million from fiscal years 2011 through 2013. OIG budgetary resources increased approximately 7 percent from fiscal years 2011 through 2013, from approximately $310,000 to $331,000. During this period, the OIG consisted of one full-time employee, the Inspector General (IG), who obtained additional support through contracts with auditors and others. The OIG issued six semiannual reports to the Congress and conducted 12 inspections during fiscal years 2011 through 2013. The OIG provided limited oversight of the Commission's major programs (energy, transportation, health facilities, and training) and operations. GAO's analysis of the 12 inspections completed by the OIG found that the OIG provided oversight for $150,000 of the $167 million in grant funds disbursed during fiscal years 2011 through 2013. The $150,000 of grant funds inspected by the OIG represented less than 1 percent of total grants awarded by the Commission during this period. The $167 million in disbursed grant funds are subject to the Single Audit Act, as applicable. While the OIG oversaw the Commission's annual financial statement audit, it did not conduct any performance audits or investigations related to the Commission's major programs and operations. The OIG did not have documented policies and procedures for its office operations and management that adhered to the Council of the Inspectors General on Integrity and Efficiency's Quality Standards for Federal Offices of Inspector General . The OIG did not implement the following four quality standards that are critical for the management and operations of the OIG: planning and coordinating; maintaining quality assurance; ensuring internal control; and receiving and reviewing allegations of potential fraud, waste, and abuse. For example, the OIG did not conduct any investigations for potential criminal prosecution. Also, the OIG did not prepare an annual work or strategic plan to document the office's planned activities. Additionally, the OIG's work products were not fully consistent with applicable professional standards, its own policies and procedures for inspections, or section 5 of the Inspector General Act of 1978, as amended (IG Act). For example, there was insufficient evidence in the OIG's inspection case files to support the conclusions and recommendations reported, and the semiannual reports prepared by the OIG did not provide information on the status of OIG recommendations as required by the act. If corrective actions are taken to mitigate the challenges faced by a one-person office, the current structure of the Commission OIG is one option for OIG oversight. GAO has also identified three alternative OIG oversight structures that could be applied to the Commission: (1) consolidation into a larger OIG; (2) consolidation into a regional commission OIG; and (3) division of OIG oversight responsibilities between two separate federal OIGs, such as a regional commission OIG or a larger OIG. The Commission IG resigned on December 28, 2013. On May 28, 2014, the Commission entered into an agreement with the Department of Commerce's OIG to provide oversight services pursuant to the IG Act. The agreement expires on September 30, 2014, but may be extended or amended by mutual written consent of the parties. GAO is making nine recommendations to the OIG to improve the operating effectiveness and efficiency of the OIG, including steps that the OIG should take to develop and implement policies and procedures consistent with professional standards to provide oversight of Commission programs and operations. The Commission concurred with the report's conclusions and recommendations. |
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The U.S. Army has traditionally employed civilian contractors in noncombat roles to augment military forces. For example, civilian contractors were used extensively in the Korean and Vietnam Wars to augment logistical support provided to U.S. forces. LOGCAP was established by the Army in 1985 as a means to (1) preplan for the use of contractor support in contingencies or crises and (2) take advantage of existing civilian resources in the United States and overseas to augment active and reserve forces. Initially, the program concept was that each Army component of a unified command would individually plan and contract for its own logistics and engineering services. In 1992, the concept was changed to provide a single, centrally managed worldwide planning and services contract. Although it originated as an Army program, LOGCAP is available to the other services. Since 1992, the U.S. Army Corps of Engineers has been responsible for the program’s management and contract administration. When LOGCAP is used in support of a mission, the operational commander becomes responsible for defining services to be provided by the contractor, integrating contractor personnel into the mission, and ensuring that funding is provided. The contractor is paid from the operational command’s operations and maintenance appropriation account. On October 1, 1996, LOGCAP management transferred to the U.S. Army Materiel Command (AMC). However, the Corps of Engineers will remain responsible for LOGCAP management in Bosnia for the duration of that mission. The original LOGCAP contractor, Brown and Root Services Corporation of Houston, Texas, was competitively awarded a cost-plus-award-feecontract for 1 year with 4 option years on August 3, 1992. According to Army documents, a notice regarding the contract in the Commerce Business Daily elicited 37 requests for copies of the solicitation. Four companies competed for the contract. The 1992 LOGCAP contract required the contractor to (1) develop a worldwide management plan and 13 regional plans, (2) participate in planning and exercises, and (3) be prepared to execute the plans upon notification. The worldwide management plan is a general description of the equipment, personnel, and supporting services required to support a force of up to 20,000 troops in 5 base camps for up to 180 days and up to 50,000 troops beyond 180 days. The regional plans use the worldwide management plan as a baseline to provide detailed logistics and engineering support plans for a geographic region based on a specific planning scenario prescribed by the requiring commander. The Army decided to use the LOGCAP contract in December 1995 to augment its forces that are part of the Bosnian peacekeeping mission. The United States provides a major portion of the mission’s implementing force as set forth in the Dayton Peace Accords and occupies key leadership positions responsible for the mission. The U.S. Army, Europe provides most of the U.S. force and is the major command responsible for the mission’s logistics planning and funding. U.S. forces deployed in support of the implementation force were located in 4 countries and numbered approximately 22,200: about 16,200 in Bosnia, about 1,400 in Croatia, and about 4,600 in Hungary and Italy. Several factors created unique challenges for the Army as it implemented LOGCAP during the Bosnian mission. These factors related to the uncertainty of the U.S. role, the need for rapid deployment once the role was defined, and the harsh weather environment. (See app. II for more detail on these matters.) U.S. Army, Europe is using LOGCAP to provide a range of logistics and engineering services, including troop housing and facilities, food service, and laundry operations, as well as base camp and equipment maintenance, shuttle bus services within camps, and cargo handling services throughout the area of operations. The Army’s December 1995 estimate of the cost to provide these services for 1 year, which was developed by the contractor based on the Army’s tasking, was $350.2 million. However, when the Department of Defense submitted its estimate of incremental costs for the Bosnia peacekeeping mission to Congress on February 23, 1996, it reduced the estimate to $191.6 million. The estimate was reduced because officials in the Office of the Secretary of Defense believed there was duplication between the services the contractor would provide and the services military personnel would provide. However, Defense Department officials had no documentation supporting the $191.6 million estimate. Thus, we used the Army’s estimate of $350.2 million as the basis for analyzing LOGCAP cost increases in Bosnia. As shown in table 1, since 1992, the Army has used a contractor instead of force structure to meet some of its combat support and combat service support needs in six major peacekeeping and humanitarian assistance missions. Although using LOGCAP is the choice of last resort, Army officials stated it is often necessary to use LOGCAP in these missions because of planning considerations such as the ability to respond to a major regional conflict, the political sensitivity of activating guard and reserve forces, the lack of host nation support agreements in undeveloped countries, and the desire to maintain a relatively low U.S. presence. The use of the contract by far has been the most extensive for the Bosnian mission and that mission provides a good illustration of how the factors come into play in deciding whether to use the contract. The Army has established a decision-making process for determining when it will use LOGCAP. The following discussion describes the decision-making process and illustrates how it worked in the Bosnian mission. The Army’s LOGCAP regulation states that LOGCAP is one of several options available to commanders for meeting combat support and combat service support shortfalls in their operational plans. It is intended to be the option of last resort, and it was primarily designed to be used in areas where host nation support agreements do not exist. Other options to be considered by commanders before selecting LOGCAP include the other military services, allied support, and local contracting. In addition, commanders must consider other factors such as risk to personnel, lift availability, quality of life, and mission duration. The key planning and resource considerations that led to the Army’s decision to use LOGCAP were (1) troop ceilings for active and reserve forces, (2) engineering resources available in the Army force structure, (3) host nation support agreements, and (4) quality of life issues. According to U.S. Army, Europe officials responsible for planning the Bosnian mission, they initially identified a need for a force of 38,000 troops, including 20,000 combat troops. This number of combat troops was considered necessary because U.S. forces had to patrol a 1,200-mile zone between the formerly warring factions. Also, the Joint Chiefs of Staff told U.S. Army, Europe not to expect authorization for more than 25,000 troops: 20,000 in Bosnia and 5,000 in Croatia. U.S. Army, Europe also had a ceiling on the reserve forces it could use. For Bosnia, the President authorized the call-up of 4,300 reservists for all the services, 3,888 of which the Defense Department allocated to the Army. The Army used its allocation to activate key support capabilities such as civil affairs and psychological operations units that existed primarily in the reserve forces and could not be contracted. Once these units were activated, most of the 3,888-reserve ceiling had been used, leaving little opportunity to call up other types of support units. Many of the Army’s combat support and combat service support units were in the guard and reserve. An Army planner told us they could have asked the national command authority to increase the force ceiling and reserve call-up authority; however, because they had LOGCAP as an option, it was not necessary to seek these increases to meet support needs. The Army also used some units from the other services. According to U.S. Army, Europe officials, the Army did not have enough engineering resources available for deployment to build all the required base camps in the time allotted and received assistance from Air Force and Navy engineering units. By managing the flow of forces into the theater to remain below the 25,000-force ceiling, they were able to use these units and Army engineer units to construct 15 of the base camps. When the initial construction was completed, these units left the area of operations and the remainder of the Army’s force deployed. U.S. Army, Europe officials also told us that because the former Yugoslav Republic was not a part of the North Atlantic Treaty Organization, U.S. Army, Europe had no preexisting support agreements in the region. Therefore, little consideration was given to obtaining host nation support to meet the requirements in excess of force ceilings. Army officials further stated that quality of life considerations and the fact that the Army lacked the capability to provide some services also favored the use of LOGCAP. For example, the Army’s Deputy Commander for Support in Bosnia cited food and laundry services as areas where the contractor is able to provide a higher standard of service than Army units typically provide during deployments. LOGCAP also was able to provide services, such as sewage and solid waste disposal and janitorial services, that the Army routinely contracts for because the capability is not in the force structure. The estimated costs for LOGCAP implementation in Bosnia have increased substantially. The Army’s latest revised estimate of $461.5 million exceeds its initial estimate of $350.2 million by $111.3 million, or 32 percent. Our review shows that the difference in the Army’s estimates was largely driven by changes in operational requirements once the forces arrived in Bosnia. Specifically, the Commander in Chief of U.S. Army, Europe decided to increase the number of base camps from 14 large camps to 34 smaller ones and to accelerate the schedule for upgrading troop housing. Associated management and administrative costs and an unanticipated value added tax imposed on the contractor by the Hungarian government also contributed significantly to the difference. Table 2 presents a comparison by seven broad functional areas of the estimated costs for LOGCAP in Bosnia as of December 1995 and December 1996. A direct comparison of the two estimates was not possible because of significant differences in (1) the scope of work covered by the estimates and (2) the way costs are reported. For example, in the December 1995 estimate, the contractor estimated the cost to establish and operate an intermediate staging base. This estimate included costs for building the camp; providing laundry, food, and bus service; and operating a construction supply storage yard, a retail fuel section, and an aviation fuel section. The estimate also included costs for mobilizing and demobilizing personnel, material, and equipment and recurring maintenance costs. However, later estimates use 52 separate work categories that do not directly link to the requirements in the original estimate. Consequently, we reviewed available cost data and discussed the differences with contractor and Army officials to determine the primary reasons for the increases in estimated costs. We did not attempt to determine whether the estimated costs were reasonable. This function covers costs for preparing lodging, offices, and dining facilities for troops. The work consisted of repairing designated government acquired facilities, as well as new tent or modular unit construction. Basic facilities included billeting, shower/latrine, dining, office, and recreation areas. Estimated costs for troop housing and facilities rose from an original estimate of $56.5 million to $150.4 million. Our analysis of available data, discussions with Army and contractor officials, and observations of facilities indicated that costs increased largely because the scope of work performed by the contractor increased. The number of camps and facilities increased from the 14 large base camps originally planned to 34 smaller camps. In the original plan, the contractor was to build six base camps, one in Hungary and five in Bosnia, and upgrade the eight remaining camps. However, given the change in operational requirements, the contractor built 19 of the 34 camps and upgraded all 34 camps. Our discussions with the Commander in Chief of U.S. Army, Europe and his staff revealed that the commander decided to increase the number of camps required because of several factors. Two factors were the size of the U.S. area of responsibility (the United States had to patrol a 1,200-mile zone of separation between the warring factions), and the condition of the soil and limited infrastructure (a very wet and mine-filled terrain and devastated power, water, and communication systems). Other factors were the (1) need to balance force presence in each former warring factor’s sector, (2) condition of the roads leading to potential base camp sites (the construction of new and long roads to potential sites was considered too expensive and raw materials were not available in sufficient quantities at the time), and (3) challenge of relocating former U.N. forces from fixed facilities and into their new areas of operation. A U.S. Army, Europe planner told us that conditions on the ground were not well known prior to deployment because U.S. personnel were not allowed into Bosnia until shortly before the operation started. The harsh weather conditions under which the construction took place and the increased requirement for equipment to provide services at the additional camps also increased cost. (See fig. 1 for U.S. base camps in the Balkan peninsula.) Estimated troop housing costs also increased because some services were not considered in the original estimate. For example, the contractor’s initial cost estimate assumed that some of the camp sites selected by the Army would need only minimal site preparation. At one site alone, however, approximately 200 railcars of crushed rock were needed to prepare the ground before construction could begin. Many other sites also required significant engineering preparation. (See fig. 2.) Additionally, the initial estimate did not include all costs for the contractor to upgrade camps built by military engineer units. The contractor upgraded 15 of these camps. The decision to accelerate the schedule for improving the camps also increased estimated costs. The Army’s December 1995 cost estimate was based on a plan in which both the contractor and the military engineer units would initially erect tents and construct rudimentary support facilities. The camps would then be upgraded by the contractor in two follow-on efforts. (See fig. 3.) In the first effort, the contractor would add wooden floors to the tents; provide lighting, heating, latrines, showers, electric power, and water; and build kitchen and dining facilities. In the second effort, the contractor would provide for level tent pads and tent frames with insulated walls and ceilings. However, a U.S. Army, Europe official told us that because of the harsh weather conditions, which included flooding and mud, the Commander in Chief decided to have the contractor go straight to the end-state standard for all camps and to increase the standard to modular housing units at several camps where conditions were particularly harsh. Because the contractor was not given additional time to meet the higher standards, significantly more equipment and material had to be commercially air transported into the area of operations. The contractor also had to hire additional workers and purchase and transport modular units. The management and administration function provides for centralized project management, contract administration, project controls and reporting, procurement and subcontracting, financial management, personnel and payroll activities, property management, and life support for contractor personnel engaged in mission support. It also includes the contractor’s overhead costs, general and administrative costs, and award fees. Costs for this function increased from $85.4 million to $154.2 million. This cost function increases as estimated contract costs increase. For example, a $100-million increase in the estimated cost of services adds about $14.7 million to cover overhead, general and administration costs, and potential award fees. According to a U.S. Army, Europe official, the increase in the amount of services required and greater involvement by the contractor’s home office in procuring and shipping material and equipment, also contributed to the increase. This function also covers taxes, duties, and fees paid by the contractor. The contractor prepared the original estimate with the expectation that it would be included in any Status of Forces Agreements covering the mission. It was not included in the agreement with Hungary, however, and the U.S. government paid approximately $18 million in value added tax to the Hungarian government that is included in this function. Transportation covers costs for providing (1) transportation services throughout the area of operations and (2) providing railhead and container handling services in Hungary, Croatia, and Bosnia. It also includes airfreight charges for equipment and material brought in from Europe and the United States. Estimated costs for this function increased from $9.8 million to $48.4 million. Our analysis and discussions with Army officials indicated that these estimated costs increased because the Army expanded the amount of contract service it wanted and airfreight charges were much higher than anticipated. In the original estimate, the contractor’s cost to provide container handling services was included, but the estimate did not include costs for other transportation services. From January through March 1996, however, contractor trucks logged over 55,000 miles and moved over 9,800 tons of material and equipment. Estimated airfreight costs increased from $5 million to $25.1 million because winter conditions made it difficult to transport supplies and equipment by road, and accelerating the camp construction schedule required the contractor to fly in more supplies and equipment. Maintenance covers the cost of providing mechanical service and maintenance for dedicated government equipment such as generators, refrigerators, and all contractor procured vehicles in the area of operation. According to the Army’s schedule, these estimated costs increased from $200 thousand to $11 million. Part of the increase is due to differences in how equipment maintenance costs were reported in the two estimates. In the original estimate, maintenance costs were included as part of the estimate for an associated piece of equipment or vehicle. For example, the estimate for a generator reflected both the acquisition and maintenance costs. In the later estimate, the estimated cost for maintenance of equipment and vehicles was reported separately. Laundry covers the cost associated with providing personal and medical laundry service and clothing repair to soldiers and Defense Department civilians on a daily basis. Estimated costs for this function decreased from $10.1 million to $6.6 million. Contractor officials told us the original estimate was based on a “worst case scenario” that did not develop. Food service covers costs for providing meals to the troops and Defense Department civilians. According to the original cost estimate, the contractor was to supply, prepare, serve, and distribute food. Estimated costs for this function decreased from an estimated $64.1 million to $22.8 million. U.S. Army, Europe officials told us they believed that the contractor’s estimate for food supply and distribution services was too high and they contracted elsewhere for these services at a lower price. Additionally, the contractor operated fewer dining facilities because more Army cooks were used than originally planned, further reducing estimated contract costs for this service. Base camp maintenance covers costs for maintaining troop housing and facilities, latrine/shower units, kitchen and dining facilities, and utility systems at the 34 camps. It also includes road repair and maintenance, water production, storage and distribution, fire protection, and hazardous waste management. The original estimate included $30 million for minefield clearing, as well as costs for the other services. Estimated costs for this function decreased from $124.1 million to $65.2 million. Our analysis and discussions with Army and contractor officials indicated that costs for this function decreased largely because the Army did not use the contractor for minefield clearing, saving $30 million. Also, part of the decrease was due to differences in how equipment maintenance costs were reported in the two estimates. A U.S. Army, Europe official attributes the remaining decrease in estimated costs to their efforts to reduce contractor services and to a lower requirement for some services, such as snow removal. Our review of the Bosnian operation shows that there are opportunities to improve the program’s effectiveness. Areas that need improvement include doctrine and guidance, cost reporting, and contract monitoring. At the start of the Bosnia mission, little written doctrine and guidancewas available for planners on how to effectively use LOGCAP. The Army’s Office of the Deputy Chief of Staff for Logistics had prepared a desk guide to provide background and direction in the use of LOGCAP, but the guide lacked detail, and several key U.S. Army, Europe planners were unaware of its existence. As a result, U.S. Army, Europe officials had to develop ad hoc procedures and systems to ensure they were effectively managing LOGCAP. The desk guide discusses the decision-making process for LOGCAP and states the need to make the contractor part of the logistics support team and include it in staff meetings and other activities related to a mission. However, the guide provides little information on the type of management structure to establish, financial control and oversight requirements, and mission planning considerations. For example, even though a combat support or combat service support function may be replaced by LOGCAP, the Army still has a need for staff supervision of the function. According to Army officials, doctrine and guidance on the use of LOGCAP are critical because using a contractor to support a deploying force represents a significant change from the experiences of most Army personnel. Typically, Army practice has been to make the force self-sustaining for the first 30 days in a contingency theater. In this environment, troops live under field conditions. Housing might consist of multiperson tents, toilets are primitive and shared, shower facilities are often nonexistent, and food is often a prepackaged ration. One official likened the employment of LOGCAP without doctrine and guidance to giving the Army a new weapon system without instructions on how to use it. Directly related to the doctrine and guidance problem was the lack of LOGCAP training and experience among U.S. Army, Europe commanders and staff. Some of the key logistics planners for the Bosnian operation had little knowledge or experience with LOGCAP prior to the operation. Despite significant efforts to effectively manage LOGCAP, U.S. Army, Europe officials’ inexperience and lack of understanding of the contract, the contractor’s capabilities, and program management created problems during the deployment and resulted in unnecessary costs. Examples of management problems during the mission follow: The contractor and the contract administrators were sometimes not included as part of U.S. Army, Europe’s planning and management team, even though they were responsible for critical parts of the mission. In the early days of the mission, U.S. Army, Europe officials believed the contractor was not responsive to their needs. Contractor officials and contract administrators said that once the mission began, significant operational changes were made and they had little input despite being responsible for executing the changes. U.S. Army, Europe did not initially have a LOGCAP focal point to review tasks, assess options for performing these tasks, establish priorities, and resolve contractor problems. The lack of a focal point sometimes resulted in conflicting directions and a feeling on the part of some U.S. Army, Europe officials that the contractor was not being responsive. Commanders were sometimes unaware of the cost ramifications of their decisions. For example, the decision to accelerate the camp construction schedule required the contractor to fly plywood from the United States into the area of operations because sufficient stores were not available in Europe, which increased costs. For example, the contractor reported that the cost of a 3/4-inch sheet of plywood, 4’ x 8’, purchased in the United States was $14.06. Flying that sheet of plywood to the area of operations from the United States increased the cost to $85.98 per sheet, and shipping by boat increases the cost to $27.31 per sheet. According to a U.S. Army, Europe official, his commander “was shocked” to find the contractor was flying plywood from the United States. The contractor was not included in the Status of Forces Agreement with the Hungarian government. The result was the contractor paid about $18 million in value added tax to the Hungarian government, which was subsequently billed to the U.S. government as a contract cost. The Army is working to recoup these taxes from the Hungarian government. Given the absence of detailed program guidance, U.S. Army, Europe worked to resolve these problems and developed many ideas and ad hoc systems that the Army plans to incorporate into program doctrine and guidance that AMC is developing. For example, U.S. Army, Europe established Joint Acquisition Boards to prioritize work and determine the best available resources for accomplishing the work. It also developed the concept of appointing base camp “mayors” to serve as focal points for the contractor and improved the cost data provided by the contractor. Our discussions with members of the acquisition review boards and camp mayors revealed that, once established, these systems were effective in setting criteria and priorities for using LOGCAP services. However, as discussed later in this report, the boards only reviewed about 5 percent of estimated LOGCAP costs for Bosnia. The LOGCAP financial reporting systems were not sufficient to provide U.S. Army, Europe commanders with adequate information on how much money had been spent for LOGCAP and for what purpose. They were generally aware that changing operational requirements had increased LOGCAP costs beyond the contractor’s original estimate, but they were surprised by the amount of the increase. As a result of inadequacies in the government-required and approved LOGCAP financial reporting systems, U.S. Army, Europe officials developed ad hoc systems to provide stewardship over the funds. The contractor’s estimate for each assigned task is intended to provide the basis for monitoring and reporting LOGCAP costs. Weekly cost reports submitted by the contractor identify what has been spent against the estimate for each assigned task and provide a means of tracking costs and assessing variances. However, given the change in operational requirements, U.S. Army, Europe did not receive a cost estimate for its revised operational requirements until May 1996, and the Corps of Engineers and the contractor did not agree on estimated costs until August 1996. Weekly cost status reports using the government-required and approved system were submitted by the contractor from the onset of the operation. However, a U.S. Army, Europe resource manager stated that these reports were not particularly useful because (1) the data were generally not current, (2) there was no baseline estimate with which to compare the data, and (3) the reports did not explain variances from prior reports. As a result, through the early days of the mission, when the bulk of contract support money was spent, U.S. Army, Europe commanders could not determine the cost-effectiveness of alternative support approaches, nor could they determine if changes in the level of service being provided were warranted. They also had difficulty responding to Defense Department and congressional inquires about cost. A similar problem was experienced in Somalia, where a senior official expressed his concern about the command’s inability to verify expenditures and tie those expenditures to specific tasks. U.S. Army, Europe officials were concerned about the rising estimates for LOGCAP and in late March 1996, they took several steps to reduce estimated cost and limit future growth. One action was to dispatch a team to Hungary, Croatia, and Bosnia to review all LOGCAP work orders to determine if (1) the requirement was still valid and (2) contracting was the most economical means of meeting the requirement or if the work could be done more economically by alternate means such as military manpower, alternate contractors, or adjusting the level of service. To limit growth in the cost estimate, the U.S. Army, Europe Chief of Staff restricted approval authority for new work estimated to cost over $5,000. According to a U.S. Army, Europe resource manager, efforts to improve financial reporting began in December 1995, and by the end of March the data were sufficient to meet the command’s reporting and analysis needs. The improved financial data reporting format developed by U.S. Army, Europe, with assistance from the contractor, has been shared with AMC personnel who indicate they will improve the financial reporting requirements. Reviews by several agencies criticized the Army’s administration and monitoring of LOGCAP contract activities in Bosnia, noting, among other things, that the Army did not negotiate the estimated costs in a timely manner and implement a systematic method to ensure that performed work was in accordance with contract provisions. As a result, they were unable to ensure that the contractor adequately controlled costs and furnished the appropriate level of support. Similar criticisms were raised regarding LOGCAP implementation in Somalia and Haiti. The Army Corps of Engineers was responsible for LOGCAP contract administration in Bosnia. One responsibility was to develop the policies and procedures to guide the execution of LOGCAP contract activities, including property administration, contractor compliance with contractual quality assurance and safety requirements, and reviews and analyses of contractor cost proposals. Specifically, the Corps turned LOGCAP work on and off, performed quality control studies on the contractor’s services, and provided liaison support to Army field commanders. During the construction phase in Bosnia, these tasks were performed by a team from the Corps’ Transatlantic Program Center in Winchester, Virginia. During the sustainment phase, which was from about March 1996 to November 1996, the Corps delegated contract administration to the Defense Contract Management District, International, who deployed a team of 30 personnel, along with a 2-person team from the Defense Contract Audit Agency, to monitor contractor performance. According to the Army Audit Agency, timely actions were not initiated to negotiate the estimated project costs with the contractor and modify the logistical support contract. As a result, contract provisions that give the contractor major incentives to contain project costs were not effective. Moreover, delays in negotiating estimated costs greatly hindered the Army’s ability to evaluate the amount of award fee that the contractor had earned based on quality of performance. The Army Audit Agency explained that the Federal Acquisition Regulation prohibits contract provisions whereby a contractor’s profits are based on the percentage of costs incurred (or costs plus a percentage of costs). For this reason, the regulation requires the contracting officer to negotiate the estimated costs of services being furnished by the contractor. The audit agency also noted that negotiating contract costs in a timely manner is important because (1) once the estimated costs are negotiated with the contractor, the award fee pool is limited to costs that do not exceed those that were negotiated and (2) until the estimate is formalized, the contractor has no real incentive to control costs because increased project costs potentially mean a higher award fee. According to the contractor, under the terms of the contract cost control constitutes 35 percent of the award fee and that factor alone is a clear incentive. The contractor also noted that the lack of a definitized estimate precludes the submission of invoices for base or award fee to the government. In the case of Bosnia, Brown and Root Services Corporation reported that it received no fee during the first 10 months of operation. The revised statement of work for the Bosnian mission was not approved until March 7, 1996, and the contractor provided a revised estimate on May 24, 1996. By that point, the estimated cost to complete work requested by U.S. Army, Europe stood at $477.4 million. Of this amount, about $325.7 million, or 68 percent, had already been spent. The Corps of Engineers and the contractor reached agreement on an estimated cost for Bosnia on August 12, 1996. The Army Audit Agency also found that the Corps and the Defense Contract Management District, International did not implement a systematic method of inspections to monitor contract performance. As a result, they could not ensure that the contractor performed work in accordance with contract provisions, used the minimum number of resources to meet the Army’s requirements, and furnished the appropriate level of support. The Army Contracting Support Agency similarly concluded that not enough people were deployed in the early stages of the operation to monitor contractor performance for the same reasons. Contract oversight was similarly criticized in Somalia and Haiti. For example, a December 1994 Army Audit Agency report on LOGCAP operations in Haiti criticized quality control. On October 1, 1996, the Army transferred LOGCAP management responsibilities from the Corps to AMC. AMC officials have worked with U.S. Army, Europe to identify problems experienced in Bosnia and they intend to make several program changes to improve planning and management and reduce costs. Specifically, they are taking or plan actions, including changing the planning scenarios, developing doctrine and guidance on LOGCAP and senior level training and education, and providing assistance to operating commands when LOGCAP is implemented. AMC awarded a new LOGCAP contract on January 30, 1997. The contract is for 1 year with the option of extending it for 4 more years, making the program available until 2002. One major change is that the contract pricing arrangement for the planning portion of the contract has been changed from cost-plus-award-fee to a firm-fixed price. According to the AMC program officer, this change was made because planning costs are easier to estimate than execution costs. AMC officials also said that, to improve planning, the new contractor will be required to prepare worldwide and regional plans under two specific hypothetical scenarios: (1) an underdeveloped country with little or no infrastructure and a weak or nonexistent government and (2) a developed country with infrastructure and a viable and diplomatically recognized government. AMC expects that tailoring these plans will enhance execution and improve cost controls during an actual event by better defining LOGCAP requirements. AMC has also undertaken several initiatives to address other LOGCAP problems experienced in Bosnia. To improve LOGCAP doctrine and training, AMC directed the U.S. Army Combined Arms Support Command to review and revise Army regulations and field manuals so they properly reflect the program’s goals. The command is revising about 20 Army regulations and field manuals, and it expects to complete this task early in fiscal year 1998. One revised field manual, which was released in September 1996, contains an entire appendix that discusses only LOGCAP. In addition, AMC has asked the Combined Arms Support Command, the Army Command and General Staff College, the Sergeants Major Academy, and the Warrant Officer Career Center to create LOGCAP training courses. The Army hopes to begin providing this training to its senior level staff by the end of fiscal year 1997. To address the LOGCAP implementation problems experienced in Bosnia, AMC established logistics support teams to act as the single focal point with operational commands for LOGCAP planning and execution. The teams are to be located in the United States, Korea, and Germany and are to provide command staff advice on LOGCAP and its capabilities and help develop LOGCAP augmentation requirements when an operation is being planned. AMC expects that improving the planning process in this way will enhance cost controls by establishing more precise needs determinations, which will result in better planning and cost estimating to support these needs. In addition, AMC plans to establish and deploy a fully trained group of experts during the initial phases of an operation to provide technical and contractual support to commanders. The size and makeup of this team are flexible, however, and can include LOGCAP technical advisors; personnel, real estate, and communication/automation specialists; contracting and legal officers; pay agents; and planning and operations personnel. The Navy and the Air Force recently created programs to preplan for contractor support, similar in many respects to the Army’s program. According to Navy and Air Force officials, LOGCAP can meet each service’s requirements, but they see contractor responsiveness and control as benefits of separate programs. However, the programs may result in unnecessary duplication and costs. Although the size and primary purpose of the three programs differ somewhat, the contracts will require similar engineering, logistics, and planning services. For example, under all three programs, the contractors will be required to provide construction services and supplies and, in the Army and the Air Force programs, contractors are asked to identify potential civilian resources that can be relied on in contingencies. Before creating these programs, the Navy and the Air Force relied on LOGCAP for support during operations other than war such as in Somalia and Aviano, Italy. The Navy’s program is known as the Navy Emergency Construction Capabilities Program and is designed to support contingencies such as regional conflicts, humanitarian aid, and natural disasters. The Navy program consists of two geographic contracts—one covering the Atlantic and one covering the Pacific—that are identical in scope. Atlantic and Pacific contracts are managed by the Naval Facilities Engineering Commands in Norfolk, Virginia, and Pearl Harbor, Hawaii, respectively. The contracts were awarded in August 1995, for 1 year with 4 option years and provides for an annual fee of $100,000. The Atlantic contract has been used several times for services such as providing natural disaster assistance at Camp Lejeune, North Carolina, following a hurricane and preparing engineering studies to rebuild Haiti’s infrastructure. We were told that the total cost of initiatives taken under the Atlantic contract as of November 1996 was about $32 million. The Pacific contract has not been used. The Air Force’s program is known as the Air Force Contract Augmentation Program. The Air Force solicitation process began on September 13, 1996, and contract award is expected during February 1997. The contract will also be awarded for 1 year with 4 option years. The basic contract calls for a worldwide management plan, a program management team, and contractor participation in two validation exercises a year. According to program officials, their program differs from LOGCAP because Air Force engineering and support assets will be used to construct and maintain facilities during the initial stages of any contingency. The contractor will then be deployed to sustain this existing infrastructure. The contractor is, however, expected to have the capability to deploy and set up an infrastructure if requested. For planning services and exercise participation, the contractor could earn, under contract provisions, fees totaling $4,439,168 over the full 5 years of the contract. To avoid duplication of effort and improve economy and efficiency of programs that are used by all three services, the Defense Department has, on occasion, designated one service as the lead manager. For example, the Army manages the wholesale stockpile of conventional ammunition for all the services. The Army is also the lead service for the Defense Department’s program to dispose of the chemical weapon stockpile. As mentioned, we discussed many of our observations on the changes that are needed to improve the efficiency and effectiveness of LOGCAP with AMC officials, and they have initiated or plan actions critical to improving the effective delivery of services using LOGCAP. As part of this effort to improve LOGCAP, we recommend that the Secretary of Defense direct the Secretary of the Army to include specific changes to LOGCAP that incorporate lessons learned from the Bosnian operation and other missions, including developing doctrine and guidance for implementing LOGCAP that identify the way to use the contractor effectively, the type of management structure to establish, financial control and oversight requirements, and mission planning considerations; providing training to commanders on using LOGCAP, including information on contractor capabilities and roles and responsibilities in planning and execution; providing assistance to commands when LOGCAP is implemented to include deployable management teams; and developing improved financial reporting and internal controls mechanisms that provide commanders with the assurance that LOGCAP services are necessary and reasonably priced. We also recommend that the Secretary of Defense determine whether the Department’s needs for civilian augmentation support during operations are met most effectively and efficiently through individual programs or some other means such as one service acting as a single manager for the others. We received written comments on a draft of this report from the Defense Department and they appear in their entirety in appendix III. The Defense Department concurred with the report and both recommendations, noting that it will continue initiatives to further improve the effectiveness and efficiency of LOGCAP. The Department also stated that they considered the actions in the recommendation to include specific changes to LOGCAP that incorporate lessons learned to be complete. While we recognize that various actions are planned or have been taken, all are not complete. For example, the revision of Army regulations and field manuals is not planned to be completed until early in fiscal year 1998. Consequently, we will continue to follow up on the Department’s actions in each of the areas. We also received comments from Brown and Root Services Corporation. Brown and Root provided clarifying technical and editorial suggestions that have been incorporated into this report where appropriate. Brown and Root objected to the use of the term estimate on the basis that the dollar figure it provided to the Army in December 1995 was a rough order of magnitude. We revised the report to reflect Brown and Root’s position and clarify why we used the term. We are providing copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force and the Commandant, U.S. Marine Corps. Copies will be made available to others on request. If you or your staff have any questions on this report, please call me on (202) 512-8412. The major contributors to this report are listed in appendix IV. As agreed with your staffs, the scope of our work was limited to issues related to how well the Logistics Civil Augmentation Program (LOGCAP) worked once the decision was made to use the contract. It was also agreed that other issues such as the program’s force structure implications and the cost-effectiveness of using contractors versus military personnel may be the subject of future reviews. To obtain information on how the Army has used LOGCAP in recent peacekeeping operations, we reviewed the Army’s LOGCAP regulation and implementing guidance. We discussed how this regulation and guidance were applied with officials from the Army’s Office of the Deputy Chief of Staff for Logistics, Office of the Deputy Chief of Staff for Operations and Plans, Corps of Engineers, Corps of Engineers’ Transatlantic Program Center, and Office of the Chief of Army Reserves. Because Bosnia was by far the largest use of LOGCAP and provided a first-hand opportunity to observe the contract’s implementation, our review focused primarily on that operation. However, we did generally review information related to the other operations where it was used. We also visited the U.S. Army, Europe, the U.S. European Command, and the U.S. forces deployed in Hungary, Croatia, and Bosnia to observe operations, talk with Army and contractor officials, and review records related to the implementation of the contract. To determine the LOGCAP cost for Bosnia and the primary reasons for its growth, we obtained the Army’s initial cost estimate, prepared by the contractor, from the LOGCAP program manager at the Corps of Engineers’ Transatlantic Program Center. We discussed the assumptions that were used in developing the estimate with officials from the Corps of Engineers and the Brown and Root Services Corporation. We also analyzed the revised cost estimate submitted by the contractor in May 1996 and attempted to compare that cost estimate with the original. A direct comparison of the two estimates was not possible because of significant differences in (1) the scope of work covered by the estimates and (2) the way costs were reported. We discussed the results of this comparison with military leaders responsible for the operation in Hungary, Croatia, and Bosnia and with representatives from the Brown and Root Services Corporation and obtained their views on the factors that contributed to the cost increase. We did not attempt to determine whether the estimated costs were reasonable. Our information on the Defense Department’s estimate of $191.6 million was obtained from our prior work on the cost of the Bosnian peacekeeping mission. To identify opportunities to improve LOGCAP, we interviewed officials from U.S. Army, Europe responsible for logistics planning for the Bosnian peacekeeping mission and visited U.S. Army, Europe base camps in Hungary, Croatia, and Bosnia. We interviewed resource managers, base camp mayors, members of the Joint Acquisition Boards, administrative contracting officers, quality assurance representatives, and contracting officer representatives from the Defense Contract Management District, International, who oversaw the contract. We also reviewed minutes of meetings at which LOGCAP was discussed and analyzed copies of weekly cost status reports submitted to U.S. Army, Europe. We discussed the adequacy of cost data with resource managers at U.S. Army, Europe and the way they used the contractor’s cost reports to monitor costs. We did not independently test internal controls but relied on the work of other independent audit agencies, including the Defense Contract Audit Agency and the Army Audit Agency. We interviewed auditors from the Defense Contract Agency in Hungary and Croatia and at the contractor’s home office in Houston, Texas, and discussed the scope of their work and the tests they conducted of contract controls. We interviewed Army Audit Agency auditors who tested the Army’s contract controls at their home office in Wiesbaden, Germany, and reviewed all of their supporting documents. We also spoke with Army Audit Agency managers responsible for the review at their headquarters in Alexandria, Virginia. We also analyzed lessons learned from the use of LOGCAP in prior missions from the Defense Contract Management District, International, and the Army’s Center for Army Lessons Learned. To identify Army plans to award a new LOGCAP contract, we held discussions with the new LOGCAP office at the Army Materiel Command. We obtained information on the time frame for awarding the contract and discussed changes needed to overcome problems experienced in Bosnia. Our information on the Air Force Contract Augmentation Program was obtained from Air Force officials in Washington, D.C., and its program office at Tyndall Air Force Base, Panama City, Florida. Information on the Navy Emergency Construction Capabilities Program was obtained from Navy contracting officials in Alexandria and Norfolk, Virginia, and Honolulu, Hawaii. We conducted our review from April 1996 to December 1996 in accordance with generally accepted government auditing standards. Several factors created unique challenges for the Army as it implemented LOGCAP during the Bosnia mission. These factors related to the uncertainty of the U.S. role, the need for rapid deployment once the role was defined, and the harsh weather environment. The role that U.S. forces would play in Bosnia was uncertain until the Dayton Accords were signed on December 14, 1995. The Accords called for an implementation force to provide a secure environment for approximately 1 year to allow “breathing space” or a “cooling off period” after several years of conflict. The United States is a major force provider to the implementation force and occupies North American Treaty Organization military leadership positions that are responsible for the operation. The U.S. Army, Europe provided most of the force and is the major command responsible for the mission’s logistics planning and funding. As of July 19, 1996, about 22,200 U.S. troops were deployed in support of the implementation force—about 16,200 to Bosnia, 1,400 to Croatia, and about 4,600 to Hungary and Italy. The Accords required that U.S. forces deploy rapidly, and the implementation forces had until January 19, 1996, to be in place and begin enforcement. U.S. troops entered Hungary on December 12, 1995, to establish a staging base for the deployment and on December 16, 1995, they entered Croatia and Bosnia. The key military tasks in Bosnia have been to (1) mark and monitor a 4-kilometer wide zone of separation between the three warring factions, (2) patrol the zone of separation, and (3) oversee the withdrawal of forces and weapons away from the zone and back to their cantonment areas. Deployment of the U.S. force occurred during one of the harshest winters on record in the Balkans. Weather conditions, for example, affected construction of a bridge over the Sava River to conduct the deployment operation. An unexpected winter thaw resulted in major flooding, and this bridge project became much larger than originally envisioned. The Army had to use construction material intended to build two spans over the Sava River to build the first span. Also, because of the holiday time of the year, the European rail system was heavily involved in holiday passenger and commercial traffic and rail employees were taking holiday vacations. European rail did not respond to the deployment, which it did not view as a wartime operation, with the sense of urgency it would have for a wartime operation. A rail strike in France further complicated ground transportation because many large railcars needed for the deployment could not be moved from France to Germany. Each of these factors affected the manner and extent to which LOGCAP was used. For example, originally the contractor was to build, operate, and maintain a support base in Hungary, while military engineer units were to build the necessary base camps in Bosnia. Later, the contractor was to upgrade the military-built camps. Because of the operational requirements and the harsh winter weather, however, a decision was made to increase the number of camps and to immediately upgrade the camps. Military engineer units could not meet the full construction requirement, and the contractor was brought in to assist with camp construction. The contractor also provided building materials to the military engineer units because it was able to procure and deploy supplies faster than the military could. Thomas J. Howard Glenn D. Furbish David F. Combs Robert R. Poetta The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Army's Logistics Civil Augmentation Program (LOGCAP), focusing on: (1) the extent to which the Army is using the program; (2) reasons for increases in the program's cost for the Bosnia peacekeeping mission; (3) opportunities to improve program implementation from a doctrine, cost control, and contract oversight standpoint; (4) the use of LOGCAP in Somalia, Rwanda, and Haiti; and (5) the potential for inefficiency by having similar support contract programs in the Navy and the Air Force. GAO found that: (1) over the last 4 years, the Army has relied on LOGCAP to help support various contingency operations and plans to maintain the capability as an option for providing support in the future; (2) since 1992, the Army has used LOGCAP to provide logistics and engineering support services to U.S. forces in six operations and, on January 30, 1997, awarded a new contract that will keep the program available until 2002; (3) as of December 7, 1996, estimated program costs were about $674.2 million, with the vast majority, about $461.5 million, going to the Bosnian mission; (4) according to the Army, use of the contractor is the choice of last resort but necessary in these missions because of troop ceilings, unavailability of host nation support, and the need to keep military units available to respond to a major regional conflict; (5) LOGCAP cost estimates for the Bosnian mission have increased substantially; (6) the Army's latest revised estimate of $461.5 million exceeds its original estimate of $350.2 million by $111.3 million or 32 percent; (7) GAO's review shows that the difference in the estimates was largely driven by changes in operational requirements once the forces arrived in the Balkan peninsula; (8) weaknesses in financial reporting and contract monitoring systems also contributed to cost increases; (9) GAO's analysis of LOGCAP implementation during the Bosnian peacekeeping mission shows that there are opportunities to make the program more efficient and effective; (10) little doctrine on how to manage contractor resources and effectively integrate them with force structure units exists; (11) the financial reporting and contract monitoring systems during the early phases of the Bosnian mission were not sufficient to provide U.S. Army, Europe officials with information they needed to track the cost of the operation, report on how LOGCAP funds were spent, or monitor contractor performance; (12) Army Materiel Command officials have worked with U.S. Army, Europe to identify problems experienced in Bosnia, and they are taking actions intended to improve program planning and management and reduce costs for future operations; and (13) the Air Force and the Navy recently initiated programs similar to LOGCAP, which may result in unnecessary overhead costs and duplication. |
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Definition: When ll people ll timeve oth phyicnd economic ccess to sufficient food to meet their dietry need for prodctive nd helthy life. Food ilability—chieved when sufficient uantitie of food (supplied throgh household prodction, other dometic otpt, commercil import, or food assnce) re contently ilable to ll individua within contry. Food insecurity—the lack of access of all people at all times to sufficient, nutritionally adequate, and safe food, without undue risk of losing such access—results in hunger and malnutrition, according to FAO. FAO estimates that 90 percent of the hungry suffer from chronic malnutrition. About 80 percent of the hungry worldwide live in rural areas—about half of them are smallholder peasants; 22 percent are landless laborers; and 8 percent live by using natural resources, such as pastoralists. Inadequate food and nutrition have profound impacts. Undernourished children have a smaller chance of survival and suffer lasting damage to their mental and physical development. In addition, work productivity is often impaired among undernourished adults. Food aid has helped to address the immediate nutritional requirements of some vulnerable people in the short term, but food aid has not addressed the underlying causes of persistent food insecurity. Food ccess—ensured when household nd ll individua within them hve dequate rerce to oin pproprite food for tritious diet. World leaders have agreed upon two different goals to halve world hunger by 2015: the first, established at the 1996 WFS in Rome, is to halve the total number of undernourished people worldwide; while the second, the first of eight UN MDGs set in 2000, also referred to as MDG-1, aims to eradicate extreme poverty and hunger by halving the proportion of undernourished people from the 1990 level by 2015. Both of these goals apply not only globally but also at the country and regional levels. Although both the WFS and MDG targets to cut hunger are based on FAO’s estimates of the number of undernourished people, because the MDG target is defined as the ratio of the number of undernourished people to the total population, it may appear that progress is being made when population increases even though there may have been no reduction in the number of undernourished people, according to FAO. Figure 1 is a timeline of some of the key events related to food security and the WFS and MDG targets. To reach the goal set at the 1996 WFS, world leaders approved a Plan of Action, the focus of which is to assist developing countries in becoming more self-reliant in meeting their food needs by promoting broad-based economic, political, and social reforms at the local, national, regional, and international levels. The WFS participants endorsed various actions but did not enter into any binding commitments. They agreed to review and revise their national plans, programs, and strategies, where appropriate, to achieve food security that is consistent with the WFS Plan of Action. Participants also agreed to submit periodic reports to FAO’s Committee on World Food Security (CFS) on the implementation of the Plan of Action to track progress on food security. To monitor progress toward the target of halving the number of undernourished people worldwide, FAO periodically updates its estimates of the undernourished population at the global level as well as at the country level. FAO publishes these estimates in its annual report on The State of Food Insecurity in the World (SOFI), which was first issued in 1999. The same estimates are used by the UN to track progress toward the MDG hunger goal. As shown in figure 2, food insecurity in sub-Saharan Africa is severe and widespread. According to FAO’s estimates, one out of every four undernourished people in the developing countries lives in sub-Saharan Africa. This region also has the highest prevalence of food insecurity, with one out of every three people considered undernourished. In April 2008, FAO reported that 21 countries in sub-Saharan Africa, out of 37 countries worldwide, were critically food-insecure and required external assistance. Sub-Saharan Africa has not made much progress toward the WFS and MDG hunger goals to halve, respectively, the total number of and the proportion (or the percentage) of undernourished people by 2015. Between the periods of 1990 to 1992 and 2001 to 2003, the number of undernourished people in the region increased from 169 million to 206 million, and decreased in only 15 of the 39 countries for which data were reported. The prevalence of hunger, or the proportion of undernourished people in the population, has declined slightly, from 35 percent in 1990 to 1992 to 32 percent in 2001 to 2003—but this change is due to population growth. According to FAO’s projections, the prevalence of hunger in sub- Saharan Africa will decline by 2015, but the number of hungry people will not fall below the 1990 to 1992 levels. By 2015, FAO estimates that sub- Saharan Africa will have 30 percent of the undernourished population in developing countries, compared with 20 percent in 1990 to 1992. These data suggest that sub-Saharan Africa needs to substantially accelerate progress if it is to meet the WFS and MDG targets by 2015. Figure 2 shows the prevalence of undernourishment around the world and also shows, for each of the four selected countries in East Africa and southern Africa that we focused on in our review, the progress needed to reduce the number of undernourished people to meet the WFS and MDG targets by 2015. The principal development partners that implement programs to advance agriculture and food security in sub-Saharan Africa are as follows: Regional organizations and host governments: At the regional level, the primary vehicle for addressing agricultural development in sub-Saharan Africa is the New Partnership for Africa’s Development (NEPAD) and its Comprehensive Africa Agriculture Development Program (CAADP). The African Union (AU) established NEPAD in July 2001 as a strategic policy framework for the revitalization and development of Africa. In 2003, AU members endorsed the implementation of CAADP, a framework that is aimed to guide agricultural development efforts in African countries, and agreed to allocate 10 percent of government spending to agriculture by 2008. Subsequently, member states established a regionally supported, country-driven CAADP roundtable process, which defines the programs and policies that require increased investment and support by host governments; multilateral organizations, including international financial institutions; bilateral donors; and private foundations. According to USAID officials, the CAADP roundtable process is designed to increase productivity and market access for large numbers of smallholders and promote broad-based economic growth. At the country level, host governments are expected to lead the development of a strategy for the agricultural sector, the coordination of donor assistance, and the implementation of projects and programs, as appropriate. Multilateral organizations: Several multilateral organizations and international financial institutions implement programs that contribute to agricultural development and food security—providing about half of the donor assistance to African agriculture in 2006. These entities include the following Rome-based UN food and agriculture agencies: FAO, whose stated mandate is to achieve food security for all and lead international efforts to defeat hunger; WFP, which is the food aid arm of the UN; and IFAD, which finances (through loans and grants) efforts in developing countries to reduce rural poverty, primarily through increased agricultural productivity, with an emphasis on food production. IFAD and other international financial institutions, such as the World Bank and the African Development Bank, play a large role in providing funding support for agriculture. For example, the World Bank also provides Secretariat support for the Consultative Group on International Agricultural Research (CGIAR), a partnership of countries, international and regional organizations, and private foundations supporting the work of 15 international agricultural research centers, whose work has played an important role in improving agricultural productivity and reducing hunger in the developing countries. Together, the World Bank, IFAD, and the African Development Bank account for about 73 percent of multilateral ODA to agriculture for Africa from 1974 to 2006. In addition, the New York-based UNDP is responsible for supporting the implementation of the MDG targets and houses the UN MDG Support Team. Bilateral donors, including the United States: The major bilateral donors have focused on issues of importance to Africa at every Group of Eight (G8) summit since the late 1990s. In 2005, these donors reiterated their commitment to focus on Africa as the only continent not on track to meet the MDG targets by 2015 and further committed themselves to supporting a comprehensive set of actions to raise agricultural productivity, strengthen urban-rural linkages, and empower the poor, based on national initiatives and in cooperation with NEPAD, CAADP, and other African initiatives. At that time, the commitments of the G8 and other donors were expected to lead to an increase in ODA to Africa of $25 billion a year by 2010, more than twice the amount provided in 2004. (See app. V for a summary discussion of the role of other development partners, such as NGOs and private foundations.) In the wake of the 1996 WFS, the United States adopted a number of development initiatives for Africa. These initiatives—including the Africa Food Security Initiative in 1998, the Africa Seeds of Hope Act in 1998, and the African Growth and Opportunity Act of 2000—reflect U.S. efforts to improve the deteriorating food security situation in sub-Saharan Africa. The consistent U.S. positions at the summit were that the primary responsibility for reducing food insecurity rests with the host governments, and that it is critical that all countries promote self-reliance and facilitate food security at all levels. (See app. II for a summary of U.S. participation in the 1996 summit.) In 2002, the United States launched IEHA, which represents the U.S. strategy to help fulfill the MDG of halving hunger in Africa by 2015. In 2005, USAID, the primary agency that implements IEHA, committed to providing an estimated $200 million per year for 5 years through the initiative, using existing funds from Title II of Public Law 480 food for development and assorted USAID Development Assistance and other accounts. IEHA is intended to build an African-led partnership to cut hunger and poverty by investing in efforts to promote agricultural growth that is market-oriented and focused on small-scale farmers. IEHA is currently implemented in three regional missions in Africa as well as in eight bilateral missions: Kenya, Tanzania, and Uganda in East Africa; Malawi, Mozambique, and Zambia in southern Africa; and Ghana and Mali in West Africa. Low agricultural productivity, limited rural development, government policy disincentives, and poor health are among the main factors contributing to persistent food insecurity in sub-Saharan Africa. Additional factors, including rising global commodity prices and climate change, will likely further exacerbate food insecurity in the region (see fig. 3). (For further discussions of factors and interventions affecting food security, including a framework for addressing food security issues, see table 2 in app. III. Additional examples of the interventions, as well as the summary results of our structured panel discussions with donors and NGOs during fieldwork, are discussed in app. IV.) One of the most important factors that contribute to food insecurity in sub-Saharan Africa is its low agricultural productivity. Raising agricultural productivity is vital to all elements of food security: food availability, food access, and food utilization. Although imports can be used to supplement domestic agricultural production in some countries, importing staple foods may not be practical because some main staples, such as cassava, are generally not traded in the international market. In addition, poor infrastructure in many African countries makes it extremely costly to transport imported foods to remote areas. Furthermore, because the income of the majority of people in developing countries depends directly or indirectly on agriculture, growth in this sector would have widespread poverty-reducing benefits and improve food access for the poor. The World Bank pointed out in its 2008 World Development Report that agriculture’s ability to generate income for the poor, particularly for women, is more important for food security than its ability to increase local food supplies. According to FAO, poverty is a main immediate cause of food insecurity in sub-Saharan Africa. Agriculture can also help enhance diet quality and diversity through new and improved crop varieties, thereby improving food utilization and nutritional status. Sub-Saharan Africa has lagged behind other developing countries in improving agricultural productivity. Since the early 1960s, grain yield in the rest of the world has increased almost 2.5 percent annually (see fig. 4). In contrast, grain yield in sub-Saharan Africa has stagnated, with an annual increase of only approximately 1 percent. As a result, yield of basic food staples in sub-Saharan Africa, such as maize, is much lower than that of other countries. For example, Zambia produces about 1,800 kilograms of maize on a hectare of land, while China produces almost 3 times as much on the same amount of land. Overall, the gap between the average grain yield in sub-Saharan Africa compared with the rest of the world’s developing countries has widened over the years. By 2006, the average grain yield in sub-Saharan Africa was only about 40 percent of the rest of the world’s developing countries. Research has also shown that the expansion of food production has taken a very different course in Asia than in sub-Saharan Africa, where increases in food staples were achieved largely by expanding the area cultivated, not by increasing the yield on existing acreage. Low agricultural productivity growth in sub-Saharan Africa is partially due to inadequate investment and the limited use of modern inputs and farming practice. Panelists in all four countries we visited reported difficulty in accessing critical inputs, such as land, seed, fertilizer, and water, due to their high costs and limited availability. The panelists also noted that farm management practices were weak in all four countries. FAO data show that the investment per hectare of land in sub-Saharan Africa is about one third of the world’s average. Less than 1 percent of the agricultural land in sub-Saharan Africa is irrigated, thereby making agricultural production prone to natural disasters, such as droughts. Sub- Saharan Africa uses far less inputs, such as fertilizer and pesticide, than other parts of the world. For example, its pesticide use is only about 5 percent of the world’s average, which was 0.39 kilograms per hectare in 1998 to 2000 (see table 1). The World Bank reports that while scientific plant breeding has improved agricultural production throughout much of the world, sub-Saharan Africa lags behind in adoption of these new varieties. For example, while at least 80 percent of the crop area in Asia was planted with improved varieties of rice, maize, sorghum, and potatoes, only about 20 percent to 40 percent of the crop area in sub-Saharan Africa used new varieties in these categories. According to several USAID officials, agricultural productivity has also lagged in sub-Saharan Africa, in part because innovations in science and technologies, such as improved seed and soil fertility systems, have not been transferred and adapted to each country’s unique agro-ecosystem. Limited rural development has also been a primary factor aggravating food insecurity in sub-Saharan Africa. The majority of the population, as well as the majority of the poor, lives in the rural areas of the region. Weak rural infrastructure and lack of rural investment, among other factors, limit the potential for agricultural development and opportunities for nonfarm income. Panels in all four countries we visited cited poor infrastructure and farmers’ lack of access to microcredit as challenges. Rural development in sub-Saharan Africa has suffered from weak infrastructure, such as lack of rural telecommunications, electricity, and roads. Although the development community has recognized the importance of improving rural infrastructure for poverty reduction and agricultural growth, infrastructure in the region is generally in a frail condition. For example, IFPRI reported that progress in paved roads is almost nonexistent in sub-Saharan Africa, and the World Bank reported that less than half of the rural population in this region lives next to an all- season road. The lack of adequate rural roads increases distribution costs, adds to postharvest food spoilage, and inhibits the development of local and regional markets as well as access to those markets. Many rural households also do not have access to safe drinking water, electricity, modern communication services, or good transportation. For example, in Burkina Faso, Uganda, and Zambia, walking is the principal means of transportation for 87 percent of rural residents. IFPRI concluded that it is the poor households within the rural areas that have the least access to infrastructure. Farmers’ lack of access to credit also hinders rural development. The World Bank noted that almost all countries in Africa have a large unmet demand for agricultural credit and rural finance. With inadequate financing in the short term, farmers find it difficult to buy inputs and seeds. In the long term, they are unable to invest in land improvement, better technology, or irrigation development. The International Monetary Fund (IMF) noted that rural credit in sub-Saharan Africa is hampered by land tenure systems that prevent the use of land as collateral, the absence of physical collateral, the high risk associated with rain-fed agriculture and sharp commodity price fluctuations, and poor transport and communication facilities. Banks that specialize in agricultural lending have become insolvent in many sub-Saharan African countries, or have had to be rescued at large public cost, with many of these banks collapsing through the 1980s. Each of the panels we conducted in the four countries we visited cited weak governance or deficient agricultural policies as challenges, with one panelist noting that government policies can be a disincentive to agricultural growth. These policies can have a detrimental impact on the rural poor. While Asia has fostered growth in agriculture by providing credit to support prices and input subsidies to farmers, sub-Saharan African governments have taxed agriculture more than the governments of other regions. For example, according to the government of Tanzania’s 2007/2008 Agricultural Sector Review, Tanzanian farmers must pay about 55 taxes, levies, and fees to sell their agricultural products, which is equivalent to 50 percent of the products’ price. The World Bank noted that efforts by local governments to raise local revenue in Tanzania have occasionally added a significant tax burden to agriculture, with little benefit. A World Bank study found that of the 18 countries studied, the 3 with the highest tax rates on the agricultural sector were all in sub- Saharan Africa—Côte d’Ivoire (49 percent), Ghana (60 percent), and Zambia (46 percent). While progress has been made over the past two decades by numerous developing countries in reducing these policy biases, many welfare- and trade-reducing price distortions remain. These policies continue to provide disincentives for agricultural development and investment. Other government policies, such as subsidies to agriculture, if used improperly, can also negatively affect agriculture and food security. For example, a World Bank report notes that the government of Zambia’s policy of subsidizing smallholders’ maize production has had a number of long-term effects, including a loss of farmers’ skills and knowledge and increased dietary concentration on subsidized maize meal among Zambian people. We met with officials in Zambia who also expressed concern that Zambian maize subsidies led to overreliance on maize meal for nutrition and underreliance on other sources of food, such as vegetables. Poor health also exacerbates food insecurity in sub-Saharan Africa, according to panels in the four countries we visited, through its adverse impact on the agricultural workforce. For example, HIV has taken a heavy toll on the population and agricultural production of sub-Saharan Africa, because two thirds of those in the world who have HIV live in that region. HIV is concentrated in the most economically productive groups, those aged 15 to 45 years, with slightly more women infected than men. UNDP noted that more than one quarter of Africans are directly affected by the HIV epidemic. HIV/acquired immunodeficiency syndrome (AIDS) has a profound impact on poverty by reducing adults’ capability to work and raising mortality among young adults. In addition, malaria kills over 1 million people each year, according to the World Health Organization (WHO), mostly in Africa. The World Bank notes that there is a two-way relationship between malaria and agriculture. Specifically, on one hand, when farmers become ill or die from malaria, agricultural production decreases because of lost labor, knowledge, and assets. On the other hand, some methods that farmers use to increase agricultural production, such as increased irrigation, can increase the risk of malaria by increasing the population of mosquitoes. Furthermore, WHO estimates that there were 14.4 million cases of tuberculosis worldwide in 2006, and that Africa has the highest incidence of the disease—363 cases per 100,000 people. Tuberculosis spreads particularly rapidly in areas with high concentrations of livestock. Global prices for fuel and agricultural commodities have been rising significantly due to various factors, further exacerbating food insecurity. From 2000 to 2008, oil prices are estimated to increase by 238 percent, grain prices by 175 percent, and vegetable oil prices by 184 percent (see fig. 5). The growing use of agricultural products, such as soybeans and corn, for biofuels has raised the price of these commodities and reduced the amount of land available for production of other food commodities. (See app. VI for further discussion of biofuels and their impacts on food security.) Economic growth in large countries, such as China and India, has also raised demand for food—through both increased incomes and shifting dietary patterns. Droughts in major grain-producing countries, such as Australia, and record-low grain reserves have further constrained world supplies and increased the prices of agricultural goods. Experts suggest that rising fuel and commodity prices are negatively impacting African food security efforts through several channels, as follows: Higher fuel prices increase the prices of fertilizer and other inputs for farmers and make harvesting, storage, and transportation of agricultural production more expensive. Higher fuel import costs also limit available foreign exchange for imports of food. USDA reports that official development assistance has fallen well short of rising energy import bills. Twenty-two countries—15 of which are in sub-Saharan Africa—depend on imported fuel, import grain, and report a prevalence of undernourishment exceeding 30 percent, according to FAO. Higher agricultural prices hurt many of Africa’s food-insecure, including low-income consumers who spend a large share of their income on grains and farmers who buy more food than they produce. Food-insecure populations are likely to be net buyers of food, and many sub-Saharan African countries are, in fact, net importers of food. In February 2008, FAO announced that 21 African countries are in crisis as a result, in part, of higher food prices, while nutritional studies estimate that 16 million additional people would be affected by food insecurity for every 1 percent increase in staple food prices, with many of these people being in Africa. In the long term, while higher grain prices provide incentives to expand agricultural production, complementary policies and investments in technology and market development may be required. Higher fuel and commodity prices increase delivery costs for emergency food aid programs to Africa’s most food-insecure. For the largest U.S. emergency food aid program, USAID has reported that commodity costs increased by 41 percent and transportation costs increased by 26 percent in the first half of fiscal year 2008. As a result, USAID projects a $265 million shortfall in this year’s food aid budget. According to our estimates, that $265 million could provide enough food aid to reach about 4.5 million vulnerable people in sub-Saharan Africa during a typical peak hungry season lasting 3 months. Similarly, in March 2008, WFP appealed to the international community, including the United States, to compensate for the growing shortfall in its food aid budget. Climate change is also an important emerging challenge that is expected to worsen African food insecurity. Key climate change models conclude that global warming has occurred and, since the mid-twentieth century, has been largely attributable to human activities, such as the burning of fossil fuels and deforestation. Several models predict further global warming, changed precipitation patterns, and increased frequency and severity of damaging weather-related events for this century. IFPRI reports that sub- Saharan Africa may be hardest hit by climate change, with one estimate predicting that temperature increases for certain areas may double those of the global average. Since sub-Saharan African countries have a lower capacity to adapt to variable weather, models also predict that climate change will further reduce African agricultural yields and will increase the number of people at risk of hunger. Climate change affects agriculture in several ways: higher temperatures shorten the growing season and adversely affect grain formation; reduced precipitation levels limit the availability of water to grow rain-fed crops; variable climates shift production to marginal lands and intensify soil erosion; rising sea levels threaten coastal agricultural land; and climate extremes, such as floods and droughts, result in crop failure and livestock deaths. Accounting for these effects, numerous studies seek to estimate the impact of climate change on African agricultural yields. By 2060, for example, the United Nations Environment Program projects a 33 percent reduction in grain yield in sub-Saharan Africa, while FAO predicts that the number of Africans at risk of hunger will increase to 415 million. (For further discussion of climate change, see app. VI, which also includes a compendium of the results of several studies that project adverse impacts from climate change on African agriculture.) Despite their commitment to halve hunger in sub-Saharan Africa by 2015, efforts of host governments and donors, including the United States, to accelerate progress toward that goal have been insufficient. First, host governments have not prioritized food security as a development goal, and few have met their 2003 pledge to direct 10 percent of government spending to agriculture. Second, donors reduced the priority given to agriculture, and their efforts have been hampered by difficulties in coordination and deficiencies in estimates of undernourishment used to measure progress toward attaining the goals to halve hunger by 2015. Third, limited agricultural development resources, increased demand for emergency food aid, and a fragmented approach impair U.S. efforts to end hunger in sub-Saharan Africa. Host government efforts in sub-Saharan Africa have been hampered by limited prioritization of food security in poverty reduction strategies and slow follow-through on CAADP goals, low agricultural spending levels, and weak capacity of government institutions to sustain food security interventions and to report on progress toward goals to halve hunger by 2015. Despite their commitment in the November 1996 Rome Declaration on World Food Security and the World Food Summit Plan of Action to achieve food security for all, some host governments have not prioritized food security in their strategies and use of resources. An FAO- commissioned review of the PRSP process found a lack of consistency among policies, strategies, and interventions for alleviating food insecurity and poverty. Developing countries prepare a PRSP every 3 to 5 years through a participatory process with civil society and donors. As country-owned documents that establish development priorities and serve as the basis for assistance from the World Bank and other donors, PRSPs are to include a country poverty assessment and clearly present the priorities for macroeconomic, structural, and social policies. Of 10 African PRSPs reviewed in the FAO-commissioned review, only half included policies to address food insecurity and less than half included interventions to address food insecurity. Furthermore, several delegates who attended the 2004 Committee on World Food Security meeting expressed concern that food security and rural development issues were not adequately reflected in PRSPs of many countries. Similarly, our analysis of World Bank and IMF joint assessments of current PRSPs for eight countries in East Africa and southern Africa found that food security and agricultural development require greater prioritization in more than half of the strategies examined. Although African leaders pledged their commitment to prioritize agricultural development in the CAADP framework, both the initial planning process and the actual implementation of the CAADP framework at the country level have been slow. According to a World Bank official, CAADP’s initial planning process did not begin until 2005, 2 years after the framework was developed, because it involved (1) forming stakeholder groups at the regional and continental levels and (2) establishing credibility within the development community. Thus, country-level implementation did not start until 2007. Regional entities representing 40 countries in East Africa, West Africa, and southern Africa have continued to encourage the implementation and acceleration of CAADP. However, by the end of 2008, only 13 of the 40 countries are expected to have completed the initial planning process and organized a roundtable to formally adopt a CAADP compact. The remaining 27 countries are scheduled to complete the entire process by the summer of 2009. However, for those countries that will formally adopt a CAADP compact, it is unclear whether concrete results will follow. According to an IFPRI official, because CAADP is still in the early stages of implementation, it is difficult to demonstrate the impact of CAADP efforts to date. Although African leaders in 2003 pledged to devote 10 percent of government spending on agriculture, according to an IFPRI study issued in 2008, most countries in Africa—with the exception of four countries: Ethiopia, Malawi, Mali, and Burkina Faso—had not reached this goal as of 2005. Of the four countries we reviewed—Kenya, Mozambique, Tanzania, and Zambia—none had met the goal as of 2005. Mozambique was close to reaching the goal, and government spending for agriculture in Zambia has shown an upward trend since 2002. However, as shown in figure 6, government spending for agriculture in Kenya and Tanzania from 2002 to 2005 was well below the CAADP goal. According to estimates by several research organizations, the total financial investment required for agricultural development and to halve hunger in sub-Saharan Africa by 2015 is significant, and experts conclude that the majority of African countries will need to substantially scale up spending for their agricultural sectors. IFPRI estimated that annual investments of $32 billion to $39 billion per year would be required for agriculture in sub-Saharan Africa, more than 3 to 4 times the level in 2004. Specifically, Kenya’s spending would need to increase by up to 12 times its 2004 levels; Mozambique spending would need to double; Tanzania would need to triple its 2004 spending levels; and Zambia would need to spend up to 9 times its 2004 total. (See fig. 6 for a comparison of actual 2004 agricultural sector spending and the annual agricultural sector spending required under different scenarios to halve hunger by 2015 in Kenya, Mozambique, Tanzania, and Zambia.) Host governments’ institutional capacity affects whether they can eventually take over development activities at the conclusion of donor assistance, and some lack the capacity to sustain donor-assisted food security interventions over time. In a 2007 review of World Bank assistance to the agricultural sector in Africa, the World Bank Independent Evaluation Group reported that only 40 percent of the bank’s agriculture- related projects in sub-Saharan Africa had been sustainable, compared with 53 percent for its projects in other sectors. For example, the World Bank found the expected sustainability of two agriculture projects in Tanzania to be unrealistic, given the government’s limited capacity to generate the projected public sector resources. Similarly, IFAD maintains that sustainability remains one of the most challenging areas that require priority attention. An annual report, issued by IFAD’s independent Office of Evaluation, on the results and impact of IFAD operations between 2002 and 2006 rated 45 percent of its agricultural development projects satisfactory for sustainability. Donors’ exit strategies vary depending on host governments’ capacity to continue their assistance activities. For some sub-Saharan African countries, the handover may be progressive—that is, a relevant government ministry gradually takes over the responsibilities of certain food security interventions in specific geographic regions as the government’s capacity improves. For example, because the government of Lesotho currently lacks the capacity to run the WFP-funded school-feeding program throughout the country, WFP has targeted schools in remote, inaccessible mountainous areas and expects to hand over full responsibility to the government by 2010. Political instability can also impact the sustainability of food security, even when the handover is expected to be successful. For example, although the director of the UN Millennium Village in Sauri, Kenya, has been relying on effective coordination with several Kenyan government ministries to enable the village to continue its operations after the UN’s departure, recent postelection turmoil in the country has raised uncertainties about the project’s long-term sustainability. All participating governments and international organizations agreed to submit a biannual national progress report to FAO’s Committee on World Food Security on the implementation of the WFS Plan of Action. However, many governments have not submitted reports, and the quality of the reports that have been submitted has varied. Successful reporting requires a lengthy consultation process with government officials and other stakeholders to answer several questions about indicators of progress that cover 7 commitments and 27 objectives. To make the process easier, FAO revised its reporting requirements in 2004, but the reporting rate has remained low. In 2006, the last time that the reports were due, only 79 member states and organizations, such as the World Bank and WFP, had submitted progress reports on the WFS Plan of Action to FAO’s Committee on World Food Security, according to FAO. Of these 79 member states and organizations, only 17 were from sub-Saharan Africa. FAO cited the limited capacity of government institutions as one of the main reasons for low reporting rates on progress toward hunger targets. According to FAO, government officials working within ministries of agriculture are responsible for reporting on their country’s national food security action plan. However, some government ministries that are responsible for reporting lack the capacity to prepare a comprehensive report on all seven commitments because they do not have the support they require from other domestic institutions and agencies. According to FAO, the poor quality and inconsistency of the national progress reports have not allowed FAO to draw general substantive conclusions. While most national progress reports provide information on policies, programs, and actions being taken to reduce undernourishment, few of the reports provide information on the actual results of actions taken to reduce the number of undernourished people. In addition, the content of the reports varies. Specifically, some countries either (1) provide only selective information on certain aspects of food security that they consider most relevant, such as food stocks or reserve policies; (2) provide variable emphasis on past, ongoing, and future food security plans and programs; (3) focus on irrelevant issues; or (4) provide more description than analysis. Despite these concerns, providing feedback or critical assessments on the submitted reports is beyond the mandate and the staff capacity of the Committee on World Food Security Secretariat, according to FAO officials. As a result, the usefulness of the information submitted and the potential to improve the quality of reporting are limited. FAO officials acknowledged these limitations and the usefulness of the information submitted for monitoring and is investigating ways to improve the WFS monitoring process. For some sub-Saharan Africa countries, a large portion of food security assistance comes from multilateral and bilateral donors through ODA provided to the country’s agriculture sector. However, the share of multilateral and bilateral ODA provided to agriculture for Africa has declined steadily since peaking in the 1980s. Specifically, ODA data show that the worldwide share of ODA to the agricultural sector for Africa has significantly declined, from about 15 percent in the early 1980s to about 4 percent in 2006. According to a World Bank official, in the 1980s, the bank directed considerable funding toward agricultural development programs in sub-Saharan Africa that ultimately proved unsustainable. In the 1990s, the World Bank prioritized health and sanitation programs in the region over agricultural development programs. By 2005, the bank had started shifting its priorities back to African agricultural development, investing approximately $500 million per year in the sector. Bank officials expect that total to increase by 30 percent by the end of 2008. According to the UN, the international community needs to increase external financing for African agriculture from the current $1 to $2 billion per year to about $8 billion by 2010. Figure 7 shows the overall declining trend of multilateral and bilateral ODA to agriculture for Africa and the percentages of bilateral and multilateral donor contributions from 1974 to 2006. The decline of donor support to agriculture in Africa is due to competing priorities for funding and a lack of results from past unsuccessful interventions. According to the 2008 World Development Report, many of the large-scale integrated rural development interventions promoted heavily by the World Bank suffered from mismanagement and weak governance and did not produce the claimed benefits. In the 1990s, donors started prioritizing social sectors, such as health and education, over agriculture. For example, one of the United States’ top priorities for development assistance is the treatment, prevention, and care of HIV/AIDS through the President’s Emergency Plan for AIDS Relief, which is receiving billions of dollars every year. The increasing number of emergencies and response required from international donors has also diverted ODA that could have been spent on agricultural development. (See fig. 8 for the increasing trend of ODA to Africa for emergencies compared with ODA to agriculture for Africa.) Donor and NGO panels that we convened in the four countries we visited—Kenya, Mozambique, Tanzania, and Zambia—reported a general lack of donor coordination as a challenge, despite efforts to better align donor support with national development priorities, such as those that the international community agreed upon in the Paris Declaration on Aid Effectiveness in March 2005. Improved donor coordination was recommended seven times in four panels that we convened during our fieldwork. Coordination of agricultural development programs has been difficult at the country level due, in part, to the large number of simultaneous agricultural development projects that have not been adequately aligned. According to the 2008 World Development Report, in Ethiopia, almost 20 donors were supporting more than 100 agriculture projects in 2005. Similarly, government efforts in Tanzania have been fragmented among some 17 multilateral and bilateral donors in agriculture. A study of the United Kingdom National Audit Office reported that British country teams are not sure about specific activities, geographical focus, and donors’ comparative advantage due, in part, to the large number of donors and projects ongoing at the country level. In addition, bilateral donor assistance is often not adequately aligned with the strategies and programs of international financial institutions and private foundations. Specifically, according to the UN Millennium Project, UN agencies are frequently not well-linked to the local activities of the large financial institutions and regional development banks that tend to have the most access in advising a government, since they provide the greatest resources. The World Bank in its 2008 World Development Report was critical of the lack of complementary investments made by other donors at different stages of the food production and supply process. In an attempt to address inadequate division of labor among donors, the UN agencies have established new coordination mechanisms. In September 2007, the UN Secretary-General first convened the UN MDG Africa Steering Group to identify strategic ways in which the international community could better coordinate and support national governments’ implementation of MDG programs, including the implementation of agriculture and food security. The steering group met again in March 2008, where it identified the unpredictability of aid, poor alignment with country systems, and inadequate division of labor among donors as major challenges to African food security. The group expects to publish its recommendations for achieving MDGs in Africa by the end of May 2008. In addition, the UN has recently established the One UN initiative at the country level to facilitate coordination. The purpose of this initiative is to shift from several individual agency programs to a single UN program in each country with specific focus areas, one of which could be food security. Two countries we visited—Tanzania and Mozambique—were among the eight countries worldwide to pilot the One UN initiative in 2007 and 2008. In addition, to accelerate progress toward MDGs— particularly MDG-1—WFP, FAO, and IFAD recently agreed to establish joint Food Security Theme Groups at the country level. The main purpose of these groups is to enhance interagency collaboration and coordination to support countries’ development efforts in the areas of food security, agriculture, and rural development. Between June 2007 and August 2007, a review of the status of the Food Security Theme Groups showed that they are present in 55 countries (29 in sub-Saharan Africa). However, according to the UN Millennium Project, efforts through UN country teams are more of a forum for dialogue, rather than a vehicle for real coordination. It is difficult to accurately assess progress toward the hunger goals because of deficiencies in FAO’s estimates of undernourishment, which are considered the authoritative statistics on food security. These deficiencies stem from methodological weaknesses and poor data quality and reliability, as follows: Weaknesses in methodology: FAO’s methodology has been criticized on several grounds. First, FAO relies on total calories available from food supplies and ignores dietary deficiencies that can occur due to the lack of adequate amounts of protein and essential micronutrients. Second, FAO underestimates per capita food availability in Africa, and, according to several FAO officials in Rome, coverage of noncereal crops, such as cassava—a main staple food for sub-Saharan Africa—has been inadequate. Third, FAO estimates are more subject to changes in the availability of food and less so to changes in the distribution of food, which leads to the underestimation of undernourishment in regions with relatively better food availability but relatively worse distribution of food, such as South Asia. Even when food is available, poor people may not have access to it, which leads to undernourishment. Lastly, FAO relies on food consumption data from outdated household surveys to measure inequality in food distribution. According to FAO, some of these surveys are over 10 years old. Poor data quality and reliability: According to FAO officials, the quality and reliability of food production, trade, and population data, which FAO relies on for its estimates of undernourishment, vary from country to country. For many developing countries, the data are either inaccurate or incomplete, which directly impacts FAO’s final estimate of undernourishment. For example, FAO officials told us that the estimated prevalence of undernourishment in Myanmar was 5 percent, but the officials questioned the reliability and accuracy of the data reported by the government of Myanmar. In addition, FAO lacks estimates of undernourishment for some countries to which a substantial amount of food aid has been delivered, such as Afghanistan, Iraq, and Somalia. Since data on production, trade, and consumption of food in some countries are not available, FAO makes one undernourishment estimate for these countries as a group and takes this estimate into account to determine total undernourishment worldwide. Furthermore, FAO’s undernourishment estimates are outdated, with its most recent published estimates covering the 3-year period of 2001 to 2003. In 2007, FAO suspended publication of The State of Food Insecurity in the World (SOFI) report, which it had been issuing annually since 1999. FAO also did not submit hunger data for the UN Millennium Development Report in 2006, and, according to an official from the UN Statistics Division, FAO is unlikely to do so for 2007 as well. FAO did not publish the 2007 SOFI report or contribute data for the Millennium Development Report because it is presently revising the minimum caloric requirements, a key component in FAO’s methodology for estimating undernourishment to measure progress toward the 2015 hunger goals. FAO has acknowledged that it needs to improve its methodology and consider other indicators to accurately portray progress toward hunger targets. As part of this effort, FAO sponsored an “International Scientific Symposium” in 2002 for scientists and practitioners to discuss various measures and assessment methods on food deprivation and undernourishment. According to FAO, efforts to improve food security and nutrition measures are a continuous activity of the agency, which has also been involved in strengthening data collection and reporting capacity at the regional and country levels. FAO is also developing a new set of indicators for measuring food security and nutrition status. In recent years, the levels of USAID funding for development in sub-Saharan Africa have not changed significantly compared with the substantial increase in funding for emergencies (see fig. 9). Funding for the emergency portion of Title II of Public Law 480—the largest U.S. food aid program—has increased from about 70 percent a decade ago to over 85 percent in recent years. After rising slightly from 2003 to 2005, the development portion of USAID’S food aid funding fell below the 2003 level in 2006 and 2007. While emergency food aid has been crucial in helping to alleviate the growing number of food crises, it does not address the underlying factors that contributed to the recurrence and severity of these crises. Despite repeated attempts from 2003 to 2005, the former Administrator of USAID was unsuccessful in significantly increasing long-term agricultural development funding in the face of increased emergency needs and other priorities. Specifically, USAID and several other officials noted that budget restrictions and other priorities, such as health and education, have limited the U.S. government’s ability to fund long-term agricultural development programs in sub-Saharan Africa. The United States, consistent with other multilateral and bilateral donors, has steadily reduced its ODA to agriculture for Africa since the late 1980s, from about $500 million in 1988 to less than $100 million in 2006 (see fig. 10). The U.S. Presidential Initiative to End Hunger in Africa (IEHA)—the principal U.S. strategy to meet its commitment toward halving hunger in sub-Saharan Africa—has undertaken a variety of efforts that, according to USAID officials, aim to increase rural income by improving agricultural productivity, increasing agricultural trade, and advancing a favorable policy environment, including building partnerships with donors and African leaders. However, USAID officials acknowledged that IEHA lacks a political mandate to align the U.S. government food aid, emergency, and development agendas to address the root causes of food insecurity. Despite purporting to be a governmentwide presidential strategy, IEHA is limited to only some of USAID’s agricultural development activities and does not integrate with other agencies in terms of plans, programs, resources, and activities to address food insecurity in Africa. For example, because only eight USAID missions have fully committed to IEHA and the rest of the missions have not attributed funding to the initiative, USAID has been unable to leverage all of the agricultural development funding it provides to end hunger in Africa. This lack of a comprehensive strategy has likely led to missed opportunities to leverage expertise and minimize overlap and duplication. Our meetings with officials of other agencies demonstrated that there was no significant effort to coordinate their food security programs. A U.S. interagency working group that had attempted to address food security issues since the mid-1990s disbanded in 2003. In April 2008, USAID established a new Food Security and Food Price Increase Task Force, but it is not a governmentwide interagency working group. Although both MCC and USDA are making efforts to address agriculture and food insecurity in sub-Saharan Africa, IEHA’s decision-making process does not take these efforts into consideration. In addition, IEHA does not leverage the full extent of the United States’ assistance to African agriculture through its contributions to multilateral organizations and international financial institutions, which are managed by State and Treasury. Some of the U.S. agencies’ plans and programs for addressing food insecurity in Africa involve significant amounts of assistance. For example, as of June 2007, MCC had committed $1.5 billion for multiyear compacts in sub-Saharan Africa, of which $605 million (39 percent) was for agriculture and rural development programs and another $575 million (37 percent) was for transportation and other infrastructure. Only recently, USAID has provided MCC with assistance in the development and implementation of country compacts. USDA, which administers several food aid programs, also administers a wide range of agricultural technical assistance, training, and research programs in sub-Saharan Africa to support the African Growth and Opportunity Act, NEPAD/CAADP, and the regional economic organizations. However, according to USAID Mission officials in Zambia, coordination difficulties arise when U.S.-based officials from other government agencies, such as USDA, plan and implement food security projects at the country level with little or no consultation with the U.S. Mission staff. Most donors, including the United States, have committed to halving global hunger by 2015, but meeting this goal in sub-Saharan Africa is increasingly unlikely. Although host governments and donors share responsibility for this failure, especially with regard to devoting resources to support sub-Saharan Africa’s agricultural sector, host governments play a primary role in reducing hunger in their own countries. Without adequate efforts by the host governments coupled with sufficient donor support, it is difficult to break the cycle of low agricultural productivity, high poverty, and food insecurity that has contributed to an increase in emergency needs. The United States’ approach to addressing food insecurity has traditionally relied on the U.S. food aid programs. However, in recent years, the resources of these programs have focused on the rising number of acute food and humanitarian emergencies, to the detriment of actions designed to address the fundamental causes of these emergencies, such as low agricultural productivity. Moreover, IEHA does not comprehensively address the underlying causes of food insecurity, nor does it leverage the full extent of U.S. assistance to sub-Saharan Africa. Consequently, the U.S. approach does not constitute an integrated governmentwide food security strategy. In implementing its food security efforts, the United States has not adequately collaborated with host governments and other donors, which has contributed to further fragmentation of these efforts. Finally, without reliable data on the nature and extent of hunger, it is difficult to target appropriate interventions to the most vulnerable populations and to monitor and evaluate their effectiveness. Sustained progress in reducing sub-Saharan Africa’s persistent food insecurity will require concerted efforts by host governments and donors, including the United States, in all of these areas. To enhance efforts to address global food insecurity and accelerate progress toward halving world hunger by 2015, particularly in sub-Saharan Africa, we recommend that the Administrator of USAID take the following two actions: work in collaboration with the Secretaries of State, Agriculture, and the Treasury to develop an integrated governmentwide U.S. strategy that defines each agency’s actions and resource commitments toward achieving food security in sub-Saharan Africa, including improving collaboration with host governments and other donors and developing improved measures to monitor and evaluate progress toward the implementation of this strategy, and prepare and submit, as part of the annual U.S. International Food Assistance Report, an annual report to Congress on progress toward the implementation of the first recommendation. USAID and the Departments of Agriculture and State provided written comments on a draft of our report. We have reprinted these agencies’ comments in appendixes VII, VIII, and IX, respectively, along with our responses to specific points. In addition to these agencies, several other entities—including MCC, Treasury, FAO, IFAD, IFPRI, UNDP, and WFP— provided technical comments on a draft of our report, which we have incorporated as appropriate. USAID concurred with our first recommendation—noting that the responsibility for halving hunger by 2015 lies with the respective countries while mentioning activities that the United States, through efforts such as IEHA, and the international community are undertaking to address the issue of food security. However, USAID expressed concern with our conclusion that the shift in its focus from emergency food aid to long-term agricultural development has not been successful. We recognize the challenges of addressing an increasing number of emergencies within tight resource constraints. However, it is equally important to recognize that addressing emergencies—to the detriment of long-term agricultural development—does not break the cycle of low agricultural productivity, high poverty, and food insecurity that has persisted in many sub-Saharan African countries. Regarding our second recommendation, USAID asserted that the International Food Assistance Report (IFAR) is not the appropriate vehicle for reporting on progress on the implementation of our first recommendation. USAID suggested that a report such as the annual progress report on IEHA (which is not congressionally required) would be more appropriate. We disagree. We believe that the congressionally required annual IFAR, in fact, would be an appropriate vehicle for reporting on USAID’s and other U.S. agencies’ implementation of our first recommendation. Public Law 480, section 407(f) (codified at 7 U.S.C. 1736a(f)) requires that the President prepare an annual report that “shall include. . .an assessment of the progress toward achieving food security in each country receiving food assistance from the United States Government.” This report is intended to contain a discussion of food security efforts by U.S. agencies. In addition, USDA stated that our report was timely and provided useful information and recommendations. Noting its participation in an interagency food aid policy coordinating process, USDA reaffirmed its commitment to using its full range of authorities and programs to address the need for and improve the effectiveness of global food assistance and development. Although we recognize that an interagency Food Assistance Policy Council provides a forum for the discussion and coordination of U.S. food aid programs, a similar forum to address food security issues had not been established until May 2008 following the release of a draft of this report. Finally, although USDA administers food assistance programs, including food aid programs for development, we note that these are not included in IEHA. State identified additional issues for consideration, which we have addressed as appropriate. Specifically, State disagreed with our statement that U.S. agencies had made no significant effort to coordinate their food security programs, citing its ongoing coordination with USAID and USDA on food security issues. For example, State indicated that several of its offices and bureaus—such as as the Office of the Director of Foreign Assistance; the Bureaus of Population, Refugees, and Migration; Economic, Energy, and Business Affairs; African Affairs; International Organization Affairs, and others—work closely with USAID and USDA to coordinate food security issues. However, as we noted in this report, these efforts, to date, have been focused primarily on food aid, as opposed to food security, and there is no comprehensive U.S. governmentwide strategy for addressing food insecurity in sub-Saharan Africa. Treasury generally concurred with our findings and provided additional comments for consideration, which we have addressed as appropriate. We are sending copies of this report to interested Members of Congress; the Administrator of USAID; and the Secretaries of Agriculture, State, and the Treasury. 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 staffs have any questions about this report, please contact me at (202) 512-9601 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix X. Our objectives were to examine (1) factors that contributed to persistent food insecurity in sub-Saharan Africa and (2) the extent to which host governments and donors, including the United States, are working toward halving hunger in the region by 2015. To examine factors that have contributed to continued food insecurity in sub-Saharan Africa, we relied on the United Nations (UN) Food and Agriculture Organization’s (FAO) estimates on the number of undernourished people, and the prevalence of undernourishment, which is one of two progress indicators in the Millennium Development Goals (MDG) target of halving hunger, to illustrate the lack of progress in reducing hunger in sub-Saharan Africa as compared with other parts of the developing world. Although we recognize the limitations of FAO’s estimates (such as the lack of up-to-date information), they are the official basis of the World Food Summit (WFS) and MDG targets and are largely consistent with the trends reported by other sources, such as the U.S. Department of Agriculture’s (USDA) estimates on global hunger. We discussed the reliability of FAO’s undernourishment data with several cognizant FAO officials and various U.S. government officials in Washington and in sub-Saharan Africa. We determined that these estimates are sufficiently reliable for our purpose, which is to show overall trends over time at the aggregate level. We also analyzed FAO’s data on input use, grain production, and grain planting areas to compare agricultural input use and productivity in sub-Saharan Africa with that of other parts of the world. We determined that these data are sufficiently reliable for our purposes. To assess the reliability of the International Monetary Fund (IMF) data on commodity prices, we reviewed (1) existing documentation related to the data sources and (2) documents from other agencies reporting on commodity prices and found collaborating support. Accordingly, we determined that the data were sufficiently reliable for the purposes of this report. We selected four countries for fieldwork—Kenya and Tanzania in East Africa, and Mozambique and Zambia in southern Africa—on the basis of geographic region, data on undernourished people, and U.S. Agency for International Development (USAID) programs in-country. We selected countries in east and southern Africa because those regions have high prevalence rates of undernourishment and excluded countries with current conflict. While this selection is not representative in any statistical sense, it ensured that we had variation in the key factors we considered. We do not generalize the results of our fieldwork beyond that selection, using fieldwork primarily to provide illustrative examples. In addition, we reviewed economic literature on the factors that influence food security and recent reports, studies, and papers issued by U.S. agencies, multilateral organizations, and bilateral donors. We reviewed the Rome Declaration on World Food Security and the World Food Summit Plan of Action, which included 7 commitments, 27 objectives, and 181 specific actions. We recognize the multifaceted nature of factors affecting food security, but some of them, such as conflict and trade reforms, were beyond the scope of our study. We reviewed economic studies and recent reports on the factors that influence food security. These included articles from leading authors published in established journals, such as World Development. We also included studies by such organizations as the International Food Policy and Research Institute (IFPRI), FAO, IMF, USDA’s Economic Research Service, World Food Program (WFP), and the World Bank. These sources were chosen because they represent a wide cross section of the discussion on food security and are written by the leading authorities and institutions working in the field. To summarize and organize meaningfully the many factors and interventions that impact and can address global food security, we created a framework. To ensure that the framework was comprehensive and rigorous, we based it on relevant literature and the input of practitioners and experts. Specifically, our first step was to review relevant research on global food security from multilateral institutions and academia and consider key policy documents, such as the Rome Declaration. We presented the first draft of the framework to a panel of nongovernmental organizations (NGO) and government representatives in Washington, D.C., and subsequently used the framework during our panels in the four African countries to help stimulate discussion. We refined the framework on the basis of preliminary analysis of the panel results and finalized it on the basis of the input of a roundtable of food security experts in Washington, D.C. In the four African countries that we selected for fieldwork, we conducted structured discussions with groups of NGOs and donors, organizing them into 9 panels with about 80 participants representing more than 60 entities. To identify the panelists’ views on key recommendations for improvement and lessons learned, we posed the same questions to each of the 9 panels and recorded their answers. Subsequently, we coded their recommendations and lessons according to the factors that were further refined and are shown in figure 3. We also coded some recommendations and lessons according to a few additional topics that occurred with some frequency in the panels but that fell outside the scope of our framework, such as donor coordination and the targeting of U.S. food aid. Two staff members performed the initial coding independently and then met to reconcile any differences in their coding. These lessons and recommendations that we coded represent the most frequently expressed views and perspectives of in-country NGOs, donors, and regional representatives that we met with, and cannot be generalized beyond that population. To examine the extent to which host governments and donors, including the United States, are working toward halving hunger by 2015, we analyzed data on official development assistance (ODA) to developing countries published by the Organization for Economic Cooperation and Development (OECD), Development Assistance Committee (DAC). Specifically, we analyzed the trends in the share of ODA going to agriculture and to emergencies from multilateral and bilateral donors, from 1974 to 2006. The DAC Secretariat assesses the quality of aid activity data each year by verifying both the coverage (completeness) of each donor’s reporting and the conformity of reporting with DAC’s definitions to ensure the comparability of data among donors. These data are widely used by researchers and institutions in studying development assistance resource flows. OECD’s classification of agriculture may underreport funding to agriculture. OECD’s ODA to agriculture excludes rural development and development food aid. For example, the International Fund for Agricultural Development (IFAD) believes that some of its multisectoral lending may not have counted as ODA to agriculture. However, since OECD has consistently used the same classification, we determined that the data are sufficiently reliable for our purpose, which is to track trends over time. To determine whether African governments have fulfilled their pledge to devote 10 percent of their budgets to agriculture, we relied on the government expenditure data provided by IFPRI, which is the same data source on which USAID relies. We determined that these data are sufficiently reliable for the purposes of a broad comparison of countries’ agricultural spending to the Comprehensive Africa Agriculture Development Program (CAADP) targets in the aggregate. IFPRI recognizes that data on government sectoral spending are weak in many developing countries and is working with some of these countries to improve data quality. We also analyzed USAID budget for the Presidential Initiative to End Hunger in Africa (IEHA). We determined that these data are sufficiently reliable for our purposes. The information on foreign law in this report does not reflect our independent legal analysis but is based on interviews and secondary sources. In Washington, D.C., we interviewed officials from U.S. agencies, including USAID, USDA, the Departments of State and the Treasury, and the Millennium Challenge Corporation (MCC). We also met with IFPRI and the World Bank. In New York, we met with UNDP, the Rockefeller Foundation, the Alliance for a Green Revolution in Africa (AGRA), and Columbia University; and in Seattle, Washington, we met with the Bill and Melinda Gates Foundation. In Rome, we met with FAO, WFP, IFAD, and the Consultative Group on International Agricultural Research (CGIAR). We also met with the U.S. Mission to the United Nations in Rome and several bilateral donors’ permanent representatives to the Rome-based UN food and agriculture agencies. In addition, in Washington, D.C., we convened a roundtable of 12 experts and practitioners—including representatives from academia, research organizations, multilateral organizations, NGOs, and others—to further delineate, on the basis of our initial work, some of the factors that have contributed to food insecurity in sub-Saharan Africa and challenges that hamper accelerating progress toward food security. We conducted this performance audit from April 2007 to May 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As a major participant in the 1996 WFS, the United States supported the summit’s goal of halving the number of undernourished people in the world by 2015. During the summit and over the last decade, the U.S. position on global food security has been predicated on a strong belief that the primary responsibility for reducing food insecurity rests with each country, and that it is critical that all countries adopt policies that promote self-reliance and facilitate food security at all levels, including food availability, access, and utilization. U.S. policy as represented at the summit advocated the following national policies and actions to improve food security: Governments should act as facilitators rather than intervenors. National policies that facilitate the development of markets and expand the individual’s freedom of action are the best guarantor of food security. Emphasis is placed on democratic institutions, transparency in government, opposition to graft and corruption, and full participation by the private sector. All countries should work to promote liberalized trade to maximize the potential for economic growth (within the context of sustainable development) and realize the benefits of comparative advantage. Governments should invest in a public goods infrastructure that includes transportation, communication, education, and social safety nets; and governments should provide basic health and sanitary services, maintain basic levels of nutrition, and facilitate the stabilization of vulnerable populations. Governments should ensure a political system that does not discriminate against women. All countries must recognize the essential role of women, who work to produce more than half of the food in developing countries. Governments should establish a general development policy that (1) neither discriminates against agricultural or fisheries sectors nor against rural or coastal areas and (2) recognizes that poverty alleviation requires an integrated approach to rural development. All countries should promote the critical role of sustainable development in agriculture, forestry, and fisheries sectors, and these policies must be environmentally sound. Greater emphasis needs to be placed on agricultural research and extension services. Governments should emphasize investment in agricultural research and technical education. During negotiations on the summit policy statement and Plan of Action, the United States opposed any agreement that supported additional resource pledges by the developed countries or the creation of new financial mechanisms, institutions, or bureaucracies. Although the United States was not prepared to commit increased resources for food security, U.S. government representatives at the summit indicated that the United States intended to play a major role in promoting food security around the world. According to a U.S. position paper, the United States planned to accomplish this objective by enhancing U.S. government support for research and technology development in agriculture and related sectors; employing an integrated approach to sustainable development, with a strong emphasis on those countries that show a good-faith willingness to address policy reforms; continuing support for food security through the use of agriculture programs, development assistance, and food aid; continuing support for international efforts to respond to and prevent humanitarian crises that create a need for emergency food; continuing efforts to encourage and facilitate implementations of food security-related actions adopted at international conferences or agreed-to conventions; working within the multilateral system to enhance global approaches to working with all countries to achieve freer trade and ensure that the benefits are equitably realized, and urging all countries to open their markets in the interest of achieving greater stability and participation in the world market. An interagency governmentwide Working Group on Food Security that was established to prepare for the 1996 summit continued to operate until 2003, issuing two annual reports on a U.S. Food Security Plan of Action in 1999 and 2000. This group was assisted by a Food Security Advisory Committee composed of representatives from the private agribusiness sector, NGOs, and educational institutions. (These groups were disbanded in 2003.) These reports indicated some limited progress in addressing food security, primarily through the use of existing U.S. food aid and limited agricultural development and trade initiatives. The establishment of the African Food Security Initiative in 1998, the Greater Horn of Africa Initiative, the Africa Seeds of Hope Act in 1998, and the African Growth and Opportunity Act of 2000 all reflected some limited U.S. government initiative to improve a deteriorating food security situation in sub-Saharan Africa. This appendix provides greater detail and explains the importance of the factors we used to develop a framework to evaluate findings obtained during the in-country interviews in Kenya, Tanzania, Mozambique, and Zambia and the literature on food security, including the 2008 World Bank Development report and the Rome Declaration. The factors listed in the framework shown in table 2 are areas on which development efforts can be focused. They include such areas as agricultural productivity and development; rural development; governance; and health, education, and social welfare. All of these factors contribute to food security. For example, actions to improve agricultural productivity are most effective in conjunction with rural development, good governance, and good health and welfare. The framework also identifies actions or interventions that can be taken to address these development factors. They include such actions or interventions as increasing access to inputs, improving infrastructure, and strengthening rural communities. Successful agricultural development requires coordination of these interventions across a range of activities. For example, farmers cannot buy inputs unless there are functioning credit institutions. Also, farmers cannot access markets if there are no roads. Given that achieving food security is an extremely difficult and complex process and that there are many different ways in which to categorize these factors, this list should not be construed as exhaustive. Nonetheless, this categorization provides a framework with which to identify the issues on which to base discussion on food security and summarize the range of programs implemented in various African countries. On the basis of a content analysis of the results from our nine structured panel discussions in Kenya, Mozambique, Tanzania, and Zambia, we identified key recommendations for improving food security (see table 3). For example, the first row of this table indicates that all 9 panels mentioned the recommendation to improve marketing, and that the recommendation was mentioned 35 times across all 9 panels. The next several sections of this appendix provides some examples of interventions that governments, research organizations, NGOs, private foundations, and other donors have undertaken to address the factors underlying food insecurity. Our panelists noted that improving markets and farmers’ access to them is key to improving their food security. Well-functioning markets at all levels of the marketing chain, among other things, provide accurate price information, buyer contacts, distribution channels, and buyer and producer trends. They can be facilitated by encouraging private investment and establishing private/public partnerships and developing the capacity of agrobusiness and processing focused on value-added production. As an early action under CAADP, an Alliance for Commodity Trade in East and Southern Africa is being developed to open up national and regional market opportunities for staple foods produced by millions of smallholder farmers. Agribusiness, in particular, has an economic interest in a vibrant agricultural sector. For this reason, USAID supports private agribusiness development in Africa, working directly with about 900 public/private partnerships to build capacity and leverage additional resources in 2006. These include producers, exporters, and their associations, such as the East African Fine Coffees Association, which is linking buyers from companies like Starbucks in the United States with producers and exports of high-value coffee, and the African Cotton and Textile Industry Federation, which is improving the links of African farmers to the U.S. market through the African Growth and Opportunity Act. To facilitate market access in arid and semi-arid areas, USAID’s Famine Fund has been supporting a pastoral livelihood program. Weak rural development contributes to food insecurity throughout sub- Saharan Africa. Agricultural productivity growth requires fostering linkages between the agricultural and nonagricultural sections. Growth in agriculture is more effective if the proper infrastructure is in place, rural communities are strong and effective and financial systems are able to provide credit to producers to buy, among other things, inputs for production. The experts we interviewed noted that efforts to strengthen rural communities and economies are essential to increasing food security. Interventions that help to increase rural farmers’ incomes help to strengthen rural economies. We observed the UN Millennium Villages helping farmers increase their incomes by using the value chain approach to link farmers to markets. For example, in Kenya, a local business called HoneyCare Africa trained farmers in beekeeping. The farmers were financed to start beekeeping, provide honey, and ensure quality control and collection. Beekeepers bring their honey to the company’s collection center where the honey is weighed and is prepared for shipment from Nairobi. After being processed and packaged in a Nairobi facility, HoneyCare Africa products are sold in Kenyan and overseas retail outlets. The program trained 44 farmers, who produced an average of 800 kilograms of honey, generating $1,500 per farmer per year. The focus of U.S. assistance on commodities creates some problems for NGOs and donors that would like to see U.S. Title II assistance better managed. The panelists noted that this food aid can be better managed by targeting those communities that can absorb the commodities that are provided by the United States, so that the commodities do not distort markets. Despite the inherent inefficiency of monetization, there are some examples of the successful use of monetized Title II funding for food security. An external evaluation of IEHA’s use of food aid noted that Title II monetization proceeds have a large realm of possible uses, including financing small business start-ups; paying the costs of training programs; locally purchasing commodities, rather than using imported food in particular situations, where there is a particularly high potential for disincentives for local producers; and providing start-up capital for initiating farmer association-based thrift and savings societies. As we have previously noted, improving infrastructure, such as roads and power, is key to helping rural farmers. Investment in infrastructure links the local economy to broader markets. Infrastructure, particularly roads, is important in making technology available to farmers and is key to getting commodities to markets. Good roads and port facilities reduce the costs of moving products to markets. Telecommunications bring consumers and farmers into contact and transmit market signals on prices helping markets operate efficiently. MCC provides funding to African countries to improve their infrastructure. As of February 2008, MCC had signed 16 compacts totaling $5.5 billion. Nine of the 16 compacts were with African countries, and about 70 percent of MCC compacts ($3.8 billion) funded projects in Africa. This includes two of the four countries that we reviewed—Tanzania and Mozambique. MCC signed a compact with Tanzania in 2008 that will provide $698 million in funding for infrastructure investments in energy, water, and transportation, with the largest portion (about half) dedicated to transportation. In Mozambique, the MCC compact signed in July 2007 will include funds to improve water systems, sanitation, agribusiness, roads, land tenure, and agriculture. In addition, according to State, while the short-term goal of a WFP road- building operation was to facilitate food aid delivery in southern Sudan, it also helped contribute to the long-term food security by reducing the cost of access to food and markets. Sustainable production increases require resource management. Soil fertility, water management, and water use efficiency are important for raising agriculture productivity in a sustainable manner. Natural resource management, particularly water resources, is key to helping farmers maintain productivity, even during times of drought and flood. The Ethiopian government’s Productive Safety Net Program (PSNP) provided food and cash assistance to 7.2 million people in 2006, and includes water resources development projects. In Tigray, Ethiopia, we visited a program focusing on the construction of deep hand-dug wells that provide accessible and safe water for rural communities. An irrigation program also focuses on harvesting methods and irrigation development activities. An IFPRI evaluation of PSNP found that while there were some delays in payments made to beneficiaries, the well construction and soil and water conservation projects were valuable. Increasing access to inputs, such as improved seed and fertilizer, helps farmers boost their productivity, which is essential for food security. A number of research organizations support African agricultural development, including CGIAR, which was established in 1971 to help achieve sustainable worldwide food security by promoting agricultural science and research-related activities. CGIAR has 15 research centers under its umbrella, including IFPRI, the International Livestock Research Institute, and the International Institute for Tropical Agriculture (IITA). IITA and 40 NGO partners, including Catholic Relief Service, worked on a U.S. government-funded $4.5 million, 19-month project in 6 countries called the Crop Crisis Control Project (C3P). Officials from this program said that they have introduced 1,400 varieties of cassava and provided 5,000 farmers with seeds for growing banana trees. In Kenya, beneficiaries of the C3P project, especially women, said that the project has directly led to more profitable cassava growth and increased banana production. In addition, USAID, USDA, and other donors have also been providing direct support to African Research Institutions at both the national and regional levels, promoting collective action on problems that cut across borders, like pests and diseases. In addition to the efforts of host governments, multilateral organizations, and bilateral donors, NGOs and private foundations play an active role in advancing food security in sub-Saharan Africa. Nongovernmental organizations. NGOs or not-for-profit organizations may design and implement development-related projects. They are particularly engaged in community mobilization activities and extension support services. NGOs include community-based self-help groups, research institutes, churches, and professional associations. Examples include implementing partners for USAID and USDA, such as Cooperative for Assistance and Relief Everywhere, Inc.; Catholic Relief Services; and Land O’Lakes International Development. Additional examples also include advocacy groups such as the International Alliance Against Hunger, founded by the Rome-based food and agriculture agencies and international NGOs in 2003 to advocate for the elimination of hunger, malnutrition, and poverty; the National Alliances Against Hunger, including a U.S. alliance, which brings together civil society and governments in developed and developing countries to raise the level of political commitment to end hunger and malnutrition; and the Partnership to Cut Hunger and Poverty in Africa, which is a coalition of U.S. and African organizations formed in 2000 to advocate support for efforts to end hunger and poverty in Africa. Private foundations. A number of philanthropic private organizations, such as the Rockefeller Foundation and the Bill and Melinda Gates Foundation, provide support for African agricultural development. The Gates Foundation recently became one of the largest funding sources for agriculture in Africa, announcing in January 2008 a $306 million package of agricultural development grants to boost the productivity and incomes of farmers in Africa and developing countries in other parts of the world. Among the most prominent efforts funded by philanthropic private organizations is AGRA, headquartered in Nairobi (Kenya) and established in 2007 with an initial grant of $150 million from the Gates Foundation and the Rockefeller Foundation to help small-scale farmers lift themselves out of hunger and poverty through increased farm productivity and incomes. Rising global commodity prices and climate change are emerging challenges that will likely exacerbate food insecurity in sub-Saharan Africa. Rising commodity prices are in part due to the growing global demand for biofuels, and this appendix provides further information on how biofuels impact food security. This appendix also provides further information on how climate change is predicted to affect food security in sub-Saharan Africa, primarily through its impact on agricultural yields. Driven by environmental concerns and the high price of oil, global demand for biofuels is rapidly rising. Total biofuel production has been recently growing at a rate of about 15 percent per year, such that, between 2000 and 2005, production more than doubled to nearly equal 650,000 barrels per day or about 1 percent of global transportation fuel use. In the United States, ethanol production will consume more than one third of the country’s corn crop in 2009, according to USDA. The United States and other key producers of biofuels have pledged to pursue further growth in production. In the Energy Independence and Security Act of 2007, the United States pledged to increase ethanol production nearly five-fold over current levels by 2022. Similarly, the European Commission has announced its intentions to expand biofuel production to 10 percent of its transportation fuel use by 2020. Although potential growth in biofuel production is uncertain, various estimates suggest that global biofuel production could grow to supply over 5 percent of the world’s transportation energy needs. Growth in biofuel demand potentially creates both positive and negative impacts for African agriculture and food security. For example: Rural development opportunities could exist for African communities that are able to produce biofuels. Countries with biofuel production could also qualify for emission-reduction credits through the international market for greenhouse gas emission reductions under the Kyoto Protocol. Such credits would allow these countries to attract additional investment through the Clean Development Mechanism that could assist them in further developing their biofuel industries. However, while several African countries are pursuing biofuel production, commercial production is not yet widely developed and experts suggest that such production risks excluding smallholder farmers. African biofuel production may compete with food production through competition for land, water, and other agricultural inputs. The UN reports concern that commercial biofuel production in sub-Saharan Africa will target high-quality lands and push food production to less productive lands. The World Bank reports that 75 percent of the farmland in sub- Saharan Africa is already characterized by soils that are degraded and lack nutrients. Rapid growth in demand for grains to produce biofuels has contributed to rising agricultural prices. Between 2005 and 2007 alone, world prices of grains rose 43 percent. Biofuel growth has also triggered increases in the prices of other agricultural commodities as the use of land to grow biofuels has decreased land available for other crops. Higher grain prices reduce resources for low-income consumers who spend a large share of their income on food, farmers who buy more food than they produce, and food aid programs. In the long term, while higher grain prices provide incentives to expand agricultural production, complementary policies and investments in technology and market development may be required. On a net basis, IFPRI has concluded that current growth in biofuels will result in an increase in African food insecurity. Using their IMPACT model, IFPRI projects that world prices for maize will rise 26 percent and world prices for oilseeds will rise 18 percent by 2020 under the assumption that current biofuel investment plans are realized. In this case, total net calorie availability in sub-Saharan Africa will decline by about 4 percent. Worldwide, FAO projects a 15 percent net increase in the 2007 grain import bills of developing countries, partly as a result of growing biofuel demand. Concern over the negative impacts of biofuels has also been widely noted by organizations such as FAO; the World Bank; and the UN Special Rapporteur on the Right to Food, who has called for a 5-year moratorium on the production of biofuels. Although global temperatures have varied throughout history, key scientific studies have found that higher temperatures during the past century are largely attributable to human activities, and that, as such, temperatures are likely to rise further during this century. The National Academy of Sciences has found that global temperatures have been warmer during the last few decades of the twentieth century than during any comparable period of the preceding 400 years. These assessments also predict rising global temperatures for this century, resulting in changed precipitation patterns and increased frequency and severity of damaging weather-related events. The Intergovernmental Panel on Climate Change (IPCC), for example, has predicted a rise in global mean temperatures of between 1.8 and 4.0 degrees Celsius, depending upon human and economic behavior. Assuming no fundamental change in that behavior, a comprehensive review of climate change models finds a 77 to 99 percent likelihood that global average temperatures will rise in excess of 2 degrees Celsius. Regarding climates in Africa, key studies also conclude that warming has taken place. For example, according to the IPCC, southern Africa has had higher minimum temperatures and more frequent warm spells since the 1960s, as well as increased interannual precipitation variability since the 1970s. The IPCC also reports that both East Africa and southern Africa have had more intense and widespread droughts. In the future, IFPRI reports that Africa may be the continent hardest hit by climate change, with one estimate predicting temperature increases for certain areas in Africa that are double those of the global average. One climate study predicts future annual warming across the continent ranging from 0.2 to 0.5 degrees Celsius, per decade. Climate is an important factor affecting agricultural productivity and experts report that Africa’s agricultural sector is particularly sensitive to climate change due, in part, to low adaptive capacity. Experts find that climate change will likely significantly limit agricultural production in sub- Saharan Africa in various ways: Higher temperatures shorten the growing season and adversely affect grain formation at night. As a result of climate change, FAO states that the quantity of African land with a growing season of less than 120 days could increase by 5 to 8 percent and the World Resources Institute describes projected future declines in the length of the growing season by 50 to 113 days in certain areas in Africa. Reduced precipitation limits the availability of water to grow crops. The World Wildlife Fund reports that water constraints have already reduced agricultural productivity, as 95 percent of cropland in sub-Saharan Africa is used for low-input, rain-fed agriculture rather than for irrigated production. Models referenced by the United Nations Framework on Climate Change (UNFCC) estimate that more than an additional 600,000 square kilometers of agricultural land in sub-Saharan Africa will become severely water-constrained with global climate change. Variable climates lead farmers to shift agricultural production sites, often onto marginal lands, exacerbating soil erosion. According to the World Bank’s 2008 World Development Report, soil erosion can result in agricultural productivity losses for the east African highlands of 2 to 3 percent a year. Rising sea levels threaten coastal agricultural land. In its national communication to the UNFCC, for example, Kenya predicted losses of more than $470 million for damage to crops from a 1-meter rise in sea levels. Climate extremes aggravate crop diseases and result in crop failures and livestock deaths. FAO reports that both floods and droughts have increased the incidence of food emergencies in sub-Saharan Africa. To quantify expected climate change impacts on African agricultural production and food security, a number of studies employ climate models that estimate changes in temperature, precipitation, and agricultural yields. Results vary widely due to the large degree of uncertainty entailed in climate modeling, as well as differences in assumptions about adaptive capacity. Despite the wide variation in results, these studies generally conclude that climate change will increase African food insecurity in both the short and long term. For example, one study predicts that agricultural revenues in Kenya could decline between 27 and 34 percent by 2030. FAO reports a projected increase in the number of Africans at risk of hunger from 116 million in 1980 to 415 million in 2060. To illustrate potential food security impacts from climate change, results from several studies are shown in table 4. (The full citation of the sources in table 4 follow the table.) Agoumi, Ali. Vulnerability of North African Countries to Climatic Changes: Adaptation and Implementation Strategies for Climate Change. International Institute for Sustainable Development, 2003. Arnell, N.W, M.G.R. Cannell, M. Hulme, R.S. Kovats, J.F.B. Mitchell, R.J. Nicholls, M.L. Parry, M.T.J. Livermore, and A. White. “The Consequences of COMaddison, David, Marita Manley, and Pradeep Kurukulasuriya. The Impact of Climate Change on African Agriculture: A Ricardian Approach. CEEPA Discussion Paper No. 15, Centre for Environmental Economics and Policy in Africa, University of Pretoria, July 2006. Tubiello, Francesco N. and Günther Fischer. “Reducing Climate Change Impacts on Agriculture: Global and Regional Effects of Mitigation, 2000- 2080.” Technological Forecasting and Social Change, vol. 74, 2007. United Nations Environment Programme. African Regional Implementation Review for the 14th Session of the Commission on Sustainable Development: Report on Climate Change. Nairobi, Kenya, 2006. Warren, Rachel, Nigel Arnell, Robert Nicholls, Peter Levy, and Jeff Price. Understanding the Regional Impacts of Climate Change: Research Report Prepared for the Stern Review on the Economics of Climate Change. Tyndall Center for Climate Change Research Working Paper 90, September 2006. Following are GAO’s comments on the U.S. Agency for International Development letter dated May 16, 2008. 1. Although some African countries have had robust economic growth in recent years, to achieve the WFS and MDG-1 goals, the growth, especially in agriculture, needs to be sustained. As we note in our report, concerted efforts and sustained growth are needed for many years to overcome the numerous challenges facing host governments and donors to halve hunger in sub-Saharan Africa by 2015. 2. While GAO recognizes the various ongoing coordination efforts at the international and U.S. government level, our work revealed that coordination on improving food security in sub-Saharan Africa has thus far been insufficient. In May 2008, following the release of a draft of this report, USAID initiated the creation of a sub-Principals Coordinating Committee on Food Price Increases and Global Food Security to help facilitate interagency coordination. In addition to USAID, USDA, State, and Treasury, participating agencies include the Central Intelligence Agency, the Department of Commerce, MCC, the National Security Council, the Office of Management and Budget, the Peace Corps, the U.S. Trade and Development Agency, and the U.S. Trade Representative. 3. As we note in our report, while IEHA has undertaken a variety of efforts to address food insecurity in Africa, these efforts have thus far been limited in scale and scope. IEHA does not integrate with other agencies in terms of plans, programs, resources, and activities. In addition, many IEHA projects are limited in their impact because they may not necessarily address the root causes of food insecurity. For example, projects distributing treadle pumps benefit only the farmers who receive them, but do not address the larger issue of the underdevelopment of agricultural input markets. 4. While we recognize that clean water and sanitation are important to nutrition and food utilization, these issues were outside the scope of our study. 5. We recognize the importance of emergency assistance. However, to break the cycle of poverty, food insecurity, and emergencies, agricultural development needs to increase in priority. We agree with USAID that a shift in focus from relief to development should not translate into reduced emergency food aid in the short term. 6. We disagree with USAID’s comment that a report such as the annual progress report on IEHA (which is not congressionally required), instead of the congressionally required International Food Assistance Report (IFAR), be used to report on USAID’s and other agencies’ implementation of our first recommendation. Public Law 480, section 407 (f)(codified at 7.U.S.C. 1736a(f) requires that the President prepare an annual report that “shall include…an assessment of the progress toward achieving food security in each country receiving food assistance from the United States Government.” Expanding the scope of current reporting to include progress on achieving food security would enhance the usefulness of IFAR, while making it unnecessary to recommend the promulgation of a separate report. Following is GAO’s comment on the U.S. Department of Agriculture letter dated May 14, 2008. 1. We acknowledge the role that USDA plays in meeting short- and long- term food needs in sub-Saharan Africa. Although an interagency Food Assistance Policy Council provides a forum for the discussion and coordination of U.S. food aid programs, a similar forum to address food security issues had not been established until May 2008 after the issuance of a draft of this report. Finally, although USDA administers food assistance programs, including food aid programs for development, we note in this report that these are not included in IEHA. Following are GAO’s comments on the Department of State letter dated May 16, 2008. 1. We maintain that U.S. agencies’ efforts to coordinate food security programs have thus far been insufficient. Efforts to date are focused primarily on food aid, as opposed to food security, and there is no comprehensive U.S. governmentwide strategy for addressing food insecurity in sub-Saharan Africa. 2. A major reason for food spoilage and poor market delivery is poor infrastructure, as we note in our discussion of rural development. 3. As we note in our discussion of our objectives, scope, and methodology (see app. I), although we recognize the multifaceted nature of factors affecting food security, we excluded some factors, such as international trade, from the scope of our study. While international trade is important to global food security, its relative importance to sub-Saharan Africa is considerably lower. Many smallholder farmers in sub-Saharan Africa are not in a position to benefit from international trade due to high transaction costs, and they generally produce products, such as cassava, that are not traded internationally. 4. We did not generate data from FAO’s original estimates of undernourishment. We relied on FAO’s estimates to assess progress toward the WFS and MDG goals. As we note in our previously mentioned objectives, scope, and methodology, we discussed the reliability of FAO’s undernourishment estimates with cognizant FAO and U.S. government officials in Washington and in sub-Saharan Africa, and we determined that these estimates are sufficiently reliable for our purpose, which is to show overall trends over time at the aggregate level. 5. FAO’s estimates are the official indicators used to track progress toward the WFS and MDG-1 goals. In addition, they are the only estimates available to assess undernourishment at the global level. Other UN agencies, such as WFP, conduct assessments and collect other data on food supply and nutrition for their respective missions. However, they do not do so at the global level, and their data cannot replace FAO’s estimates on undernourishment to track long-term progress toward the WFS and MDG-1 goals. 6. We added language in appendix IV to reflect the recent experiences in southern Sudan. 7. As we previously mentioned in our objectives, scope, and methodology, although we recognize the multifaceted nature of factors affecting food security, some factors, such as conflicts, were excluded from the scope of our study. We disagree with State’s assertion that we did not adequately address host government issues. Our report points out that host government policy disincentives are a main factor in food insecurity. We also note that the lack of the sufficient investment in agriculture by the host government is one of the challenges hindering progress to halving hunger by 2015. 8. In May 2008, the President announced a $770 million initiative that aims to (1) increase food assistance to meet the immediate needs of the most vulnerable ($620 million); (2) augment agricultural productivity programs, especially in Africa and other key agricultural regions, to boost food staple supplies ($150 million); and (3) promote an international policy environment that addresses the systemic causes of the food crisis. However, as of the time of this report, Congress had not passed legislation implementing this proposal. In addition to the person named above, Phillip J. Thomas (Assistant Director), Carol Bray, Ming Chen, Debbie Chung, Martin De Alteriis, Leah DeWolf, Mark Dowling, Etana Finkler, Melinda Hudson, Joy Labez, Julia A. Roberts, Kendall Schaefer, and Elizabeth Singer made key contributions to this report. Somalia: Several Challenges Limit U.S. and International Stabilization, Humanitarian, and Development Efforts. GAO-08-351. Washington, D.C.: February 19, 2008. The Democratic Republic of the Congo: Systematic Assessment Is Needed to Determine Agencies’ Progress Toward U.S. Policy Objectives. GAO-08-188. Washington, D.C.: December 14, 2007. Foreign Assistance: Various Challenges Limit the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-905T. Washington, D.C.: May 24, 2007. Foreign Assistance: Various Challenges Impede the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-560. Washington, D.C.: April 13, 2007. Foreign Assistance: U.S. Agencies Face Challenges to Improving the Efficiency and Effectiveness of Food Aid. GAO-07-616T. Washington, D.C.: March 21, 2007. Darfur Crisis: Progress in Aid and Peace Monitoring Threatened by Ongoing Violence and Operational Challenges. GAO-07-9. Washington, D.C.: November 9, 2006. Foreign Assistance: Lack of Strategic Focus and Obstacles to Agricultural Recovery Threaten Afghanistan’s Stability. GAO-03-607. Washington, D.C.: June 30, 2003. Foreign Assistance: Sustained Efforts Needed to Help Southern Africa Recover from Food Crisis. GAO-03-644. Washington, D.C.: June 25, 2003. Food Aid: Experience of U.S. Programs Suggest Opportunities for Improvement. GAO-02-801T. Washington, D.C.: June 4, 2002. Foreign Assistance: Global Food for Education Initiative Faces Challenges for Successful Implementation. GAO-02-328. Washington, D.C.: February 28, 2002. Foreign Assistance: U.S. Bilateral Food Assistance to North Korea Had Mixed Results. GAO/NSIAD-00-175. Washington, D.C.: June 15, 2000. Foreign Assistance: Donation of U.S. Planting Seed to Russia in 1999 Had Weaknesses. GAO/NSIAD-00-91. Washington, D.C.: March 9, 2000. Food Security: Factors That Could Affect Progress toward Meeting World Food Summit Goals. GAO/NSIAD-99-15. Washington, D.C.: March 22, 1999. Food Security: Preparations for the 1996 World Food Summit. GAO/NSIAD-97-44. Washington, D.C.: November 7, 1996. International Relations: Food Security in Africa. GAO-T-NSIAD-96-217. Washington, D.C.: July 31, 1996. | In 1996, the United States and more than 180 world leaders pledged to halve the number of undernourished people globally by 2015 from the 1990 level. The global number has not decreased significantly--remaining at about 850 million in 2001-2003--and the number in sub-Saharan Africa has increased from about 170 million in 1990-1992 to over 200 million in 2001-2003. On the basis of analyses of U.S. and international agency documents, structured panel discussions with experts and practitioners, and fieldwork in four African countries, GAO was asked to examine (1) factors that contribute to persistent food insecurity in sub-Saharan Africa and (2) the extent to which host governments and donors, including the United States, are working toward halving hunger in the region by 2015. Chronic undernourishment (food insecurity) in sub-Saharan Africa persists primarily due to low agricultural productivity, limited rural development, government policy disincentives, and the impact of poor health on the agricultural workforce. Additional factors, including rising global commodity prices and climate change, will likely further exacerbate food insecurity in the region. Agricultural productivity in sub-Saharan Africa, as measured by grain yield, is only about 40 percent of that of the rest of the world's developing countries, and the gap has widened over the years. Low agricultural productivity in sub-Saharan Africa is due, in part, to the limited use of agricultural inputs, such as fertilizer and improved seed varieties, and the lack of modern farming practices. The efforts of host governments and donors, including the United States, to achieve the goal of halving hunger in sub-Saharan Africa by 2015 have thus far been insufficient. First, some host governments have not prioritized food security as a development goal, and, according to a 2008 report of the International Food Policy Research Institute, as of 2005, only a few countries had fulfilled a 2003 pledge to direct 10 percent of government spending to agriculture. Second, donors have reduced the priority given to agriculture, and their efforts have been further hampered by difficulties in coordination and deficiencies in measuring and monitoring progress. Third, limited agricultural development resources and a fragmented approach have impaired U.S. efforts to reduce hunger in Africa. The U.S. Agency for International Development (USAID) funding to address food insecurity in Africa has been primarily for emergency food aid, which has been crucial in helping to alleviate food crises but has not addressed the underlying factors that contributed to the recurrence and severity of these crises. Also, the United States' principal strategy for meeting its commitment to halve hunger in Africa is limited to some of USAID's agricultural development activities and does not integrate other U.S. agencies' agricultural development assistance to the region. |
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In November 1996, Maine voters approved a citizen’s initiative—the Maine Clean Election Act (Maine’s Act)—establishing a full public financing program to fund with public moneys the campaigns of participating candidates for the state legislature and governor. Similarly, in November 1998, Arizona voters passed the Citizens Clean Elections Act (Arizona’s Act), establishing a full public financing program for participating candidates for the state legislature and various statewide offices, such as governor or secretary of state. Maine’s Commission on Governmental Ethics and Election Practices and Arizona’s Citizens Clean Elections Commission administer the respective state’s public financing program, including certifying that candidates have met qualifications for receiving public funds. Legislative candidates who wish to participate in the respective public financing programs must be certified as a participating candidate. Certified candidates, among other things must (1) forgo self-financing and all private contributions, except for a limited amount of “seed money” prior to certification, and (2) demonstrate citizen support by collecting a minimum number of $5 contributions from registered voters. After being certified by the state as having met qualifying requirements, participating candidates receive initial distributions (predetermined amounts) of public funding and are also eligible for additional matching funds from public moneys based on spending by or for privately funded opponents. These matching funds, up to predetermined limits, are given to participating candidates when an opposing nonparticipating candidate exceeds the initial distribution of funds provided to the participating candidate during the primary or general election. Table 1 shows the public funding available to each participating candidate in the 2008 election cycle in Maine and Arizona. The calculation to assess whether matching funds for participating candidates are triggered is to include reported independent expenditures that, in general, are made on behalf of a nonparticipating or another participating candidate in the race by individuals, corporations, political action committees, or other groups. Various revenue sources are used to support the public financing programs. In Maine, state appropriations were the largest funding source, contributing 82 percent of total revenue in 2008. In Arizona, a surcharge on civil and criminal fines and penalties was the largest funding source, accounting for 59 percent of total revenue in 2008. In addition, funding for public financing programs comes from state income tax checkoff donations in both states. During the 2008 primary and general elections, participating legislative candidates in Maine received a total of almost $3 million, and participating legislative candidates in Arizona received a total of about $6 million. Before the passage of Maine’s Act in 1996 and Arizona’s Act in 1998, political campaigns in the two states were financed completely with private funds. There were no limitations placed on expenditures by candidates from their personal wealth. Under Maine’s and Arizona’s public financing laws, nonparticipating candidates are not limited in the amount they may spend from their personal financial resources on their own campaigns. While not faced with limits on the total amount of money that they can raise or spend, nonparticipating candidates are subject to certain limitations on the amount that an individual, corporation, or political committee can contribute to the campaigns of nonparticipating candidates, and nonparticipating candidates have additional reporting requirements. For example, in Maine, a nonparticipating candidate in the 2008 legislative elections could accept individual contributions of up to $250 per election, and in Arizona, a nonparticipating candidate could accept individual contributions of up to $488 per election. In both states, nonparticipating candidates must file certain reports with the state when their campaigns exceed certain statutory thresholds relating to, for example, expenditures or contributions. Appendix II provides information about the design and implementation of Maine’s and Arizona’s public financing programs. While there is widespread agreement among researchers and state officials in Maine and Arizona with the goals of the public financing programs, there is little consensus about how to assess progress toward these goals and the effects of these programs. For example, research on the effects of state public financing programs in general has been limited because the programs vary widely and were implemented at different times, hindering comparability. With regard to Maine’s and Arizona’s public financing programs, research tends to be limited to a single state or a limited number of years, or produced by groups that support or oppose public financing. Thus, in revisiting our 2003 report, we describe the five goals of the public financing programs and include a discussion of proponents’ and opponents’ views on the effects of these programs. One goal of the public financing programs in Maine and Arizona was to increase electoral competition, which refers to the level of competition for elected positions as demonstrated by whether races were contested (that is, involved more candidates than available positions) and by the percentage of the vote candidates received. For example, levels of electoral competition can vary from none at all in the case of an uncontested race, in which the sole candidate receives 100 percent of the vote (less any write-in votes), to an election in which several candidates vie competitively for a position, each winning a significant portion of the votes. Proponents of public financing for campaigns contended that public funding could increase electoral competition by allowing candidates, especially candidates challenging incumbents, to overcome the financial hurdles that would otherwise prevent them from entering a race. Further, proponents argued that public financing promotes competition by giving more candidates the opportunity to effectively communicate with the electorate once they have entered the race. Additionally, some proponents asserted that increasing the pool of challengers would also increase the diversity of the candidate pool and consequently make some races more competitive by offering candidates that appeal to a broader range of voters. On the other hand, opponents asserted that public financing does not necessarily attract candidates who have a broad base of constituency support and therefore, even though more new candidates may enter races and win, the quality of representation these candidates offer may be questionable. Increasing voter choice, as measured by changes in the number of candidates per race and changes in the breadth of political party affiliations, such as third-party and independent candidates, represented in races, was a goal of public financing programs. Proponents of the public financing programs in Maine and Arizona contended that public funding of campaigns would encourage more individuals to run for office, thereby giving voters more choices on the ballot. Opponents asserted that an increase in the number of candidates on the ballot alone would not necessarily result in a more diverse selection of candidates, representation of a wider range of political views, or the guarantee that a broader array of issues would be debated in campaigns. The public financing programs in Maine and Arizona each were designed to have a two-pronged approach for the third goal—curbing increases in the costs of campaign spending. Each program imposed spending limits and certain other requirements on candidates who chose to participate in the public financing program, and reduced the total amount of money that nonparticipating candidates were allowed to accept from each campaign contributor. Proponents of the public financing programs in Maine and Arizona contended that escalating campaign costs helped deter candidates from running for office. The intended outcome of this approach was to lower the cost of running for office by reducing and capping the amount of money available for campaign spending. Opponents argued that worthy candidates will garner public support and therefore do not need public financing to run their campaigns. Opponents also cited concerns that rising campaign costs are overstated and that most campaign fundraising comes from individuals who give less than the legal limit. A fourth goal of the public financing programs in Maine and Arizona was to enhance the confidence of citizens in government by reducing the influence of interest groups in the political process. The public financing programs in Maine and Arizona imposed campaign contribution limits on participating candidates and reduced the need for participating candidates to raise funds from private donors, such as interest groups, with the intent of eliminating any undue influence, or the perception of influence, large campaign contributors may have on participating candidates. For instance, the “findings and declarations” section of Arizona’s 1998 Act stated, among other things, that the then current election-financing system “effectively suppresses the voices and influence of the vast majority of Arizona citizens in favor of a small number of wealthy special interests” and “undermines public confidence in the integrity of public officials.” From an overall perspective, proponents asserted that public financing programs should enhance the confidence of citizens in government by increasing the integrity of the political process and the accountability of officials. On the other hand, opponents asserted that, under the traditional campaign financing system, the voices of citizens are represented through competing interest groups. Opponents further asserted there is no evidence that government-financed campaigns attract more worthy candidates than do the traditional system or that, once elected, the publicly financed candidates vote any differently as legislators than do traditionally financed candidates. Moreover, some opponents argued that interest groups can still assert influence on the political process through means other than contributing directly to candidates’ political campaigns, such as contributions to political parties, independent expenditures on behalf of or for opposing candidates, as well as providing nonfinancial resources such as mobilizing members to volunteer for grassroots activities. Increasing voter participation, as indicated by increases in voter turnout, was the fifth goal of public financing programs in Maine and Arizona. Proponents asserted that public financing increases voter participation by encouraging citizens to become involved in the political process and by increasing electoral competition. Proponents contended that the public financing programs increase communication between candidates and voters and encourage participating candidates or volunteers to go door-to- door to meet with voters and to collect $5 qualifying contributions. As a result, citizens would feel more involved in the political process and would be more likely to vote in legislative elections. Further, proponents argued that increased competition resulting from public financing would also increase voter turnout because more voters would be attracted by a more diverse set of candidates. Opponents stated that research on public financing programs and their effect on voter turnout is limited or anecdotal, and there is no evidence that citizens will become more engaged in the political process and be more likely to vote. Further, opponents cited the declining number of taxpayers who voluntarily provide contributions to the presidential and state public financing programs on their income tax forms as a reflection of the public’s waning participation and support. Since the 1970s, states and localities have offered a variety of programs providing public funds directly to candidates’ campaigns for statewide and legislative races. A July 2009 Congressional Research Service report identified 16 states offering direct public funding to candidates using two major types of public financing frameworks. According to this report, 10 of these states offered public financing programs that were primarily designed to match candidates’ private campaign contributions, thereby reducing the need for private fundraising. These programs varied widely, but generally the amount of public funds candidates received in this type of program depended on the amount the candidates raised and provided partial funding for candidates’ campaigns. Seven of these 16 states, including Maine and Arizona, offered full public financing programs for certain offices that provided fixed subsidies to candidates once they met basic qualifications. During the 2007 and 2008 election cycle, these 7 states offered full public financing programs for candidates running for those statewide and legislative offices shown in table 2. Appendix III describes full public financing programs available in the 2007 and 2008 legislative elections in the two states other than Maine and Arizona that offer them—Connecticut and New Jersey. In nearly every session since 1956, Congress has considered legislation for public financing of congressional elections, although no law has been enacted. There are several bills pending in the current 111th session of Congress addressing public financing of congressional elections. Two of these are companion bills (H.R. 1826 and S.752) respectively addressing elections to the House of Representatives and the Senate by proposing voluntary public funding systems with a mix of predetermined funding amounts, matching funds, and vouchers for the purchase of airtime on broadcast stations for political advertisements. Two other bills propose variations for funding House elections—H.R. 2056 proposes a voluntary public funding system for House elections, and H.R. 158 proposes a grant system to exclusively fully fund House campaigns during general elections. In July 2009 the House Administration Committee held hearings on H.R. 1826. These bills were referred to committees in 2009 and as of April 2010 were pending. Many factors, such as the popularity and experience of the candidates, can influence the competitiveness and outcomes of elections and the interpretation of the effects of public financing programs. For example, term limits—limits on the number of terms elected officials such as legislators can serve—and redistricting—the redrawing of state electoral boundaries such as those for legislative districts in response to the decennial census—are factors that complicate the interpretation of available data. Other factors not directly related to public or private financing can also affect electoral campaigns and outcomes, such as economic conditions or particularly controversial ballot initiatives. In Maine and Arizona, legislative candidates’ participation in the public financing programs (measured by the percentage of candidates participating and the proportion of races with a participating candidate) increased from 2000 to 2008; although limited data on candidates’ characteristics are available. Specifically, Maine candidates’ participation rates more than doubled in the primary and general elections from 2000 to 2004 and remained high through 2008 (over 70 percent); among incumbents, the majority participated from 2002 through 2008; and more Democrats (rather than Republicans) participated. In Maine, participating candidates were more likely to win their races. In Arizona, candidates’ participation rates more than doubled in the primary and general elections from 2000 to 2008, with higher percentages of challengers (rather than incumbents) and Democrats (rather than Republicans) participating. In Arizona, nonparticipating candidates were more likely to win their races than were participating candidates. Other than incumbency status and political party affiliation, states did not maintain data that would allow us to assess candidates’ characteristics, such as their experience or demographic characteristics. The participation rate of legislative candidates (i.e., percentage of legislative candidates participating in the public financing program) in Maine’s primary elections more than doubled in the first three election cycles after public financing became available. As shown in figure 1, the participation rate increased from 32 percent in 2000 to 72 percent in 2004 and remained over 70 percent from 2004 to 2008. Similarly, the participation rate of legislative candidates in Maine’s general elections more than doubled from 33 percent in 2000 to 79 percent in 2004 and then remained over 80 percent for the 2006 and 2008 elections. When asked the main reasons for choosing to run their campaign with or without public funds in the 2008 election, the 11 candidates we interviewed in Maine offered a range of reasons why they chose to participate or not participate in the public financing program. Five of the 6 participating candidates cited difficulties associated with raising enough private funds to run a competitive campaign. Among the difficulties mentioned were the amount of time and energy required to fundraise, as well as the amount of funds needed to compete with a well-financed opponent. In addition, 4 of the 6 participating candidates said that participating in the public financing program allowed them to spend more time focusing on communicating with voters. For example, one candidate said that participating in the public financing program freed him up so he could focus on meeting with constituents and learning what issues were important to them, rather than having to spend his time asking for money. Further, 3 of the 6 participating candidates said that they wanted to be free of the influence of interest groups or other campaign contributors, and 2 of these candidates felt that it was strategically advantageous to participate in the public financing program. One of these candidates explained that he did not want to have to spend time raising funds while his opponent could use the time to campaign and still receive the same amount of money. We also asked candidates about specific factors they may have considered when choosing to run their campaign with public funds. Table 3 presents the number of participating candidates who said that they had considered each of the following factors when they decided to participate in the public financing program. The 5 nonparticipating candidates we interviewed in Maine most frequently mentioned opposition to using public funds for election campaigns as one of the main reasons they chose not to participate in the public financing program in 2008. For example, 4 of the 5 nonparticipating candidates said they were opposed to public financing of elections for a range of reasons, including concern over the state’s fiscal situation. One nonparticipating candidate said he chose not to participate because he did not want restrictions on how he ran his campaign. He explained that he had more flexibility with private funds and could donate excess campaign funds to nonprofit organizations after the election. In addition, one candidate told us that he was not opposed to the public financing program, but did not participate because he did not intend to run a campaign and anticipated that another candidate would take his place before the general election. We also asked the 5 nonparticipating candidates if they considered any of the factors listed in table 4 when they chose not to participate in the public financing program; their responses appear alongside each factor in the table. Incumbent candidates’ participation in the public financing program in general elections in Maine generally increased from 2000 to 2008, with the majority of incumbent candidates participating in the program from 2002 through 2008. As shown in figure 2, participating incumbent candidates, as a percentage of all candidates, increased from 10 percent in 2000 to 29 percent in 2008. Further, the percentage of participating incumbents grew from 27 percent of incumbent candidates in 2000 to 80 percent of incumbent candidates in 2008. Participating incumbents and challengers in Maine’s legislative races were generally slightly more likely to win than nonparticipating incumbents and challengers who ran in general elections held from 2000 through 2008, as shown in table 5. Since 2000, more Democrats than Republicans participated in the public financing program in Maine primary and general elections, in terms of the proportion of candidates who participated. For example, while the rate at which Republican legislative candidates in the primary elections participated in the public financing program increased by about 41 percentage points from 2000 to 2008 (from 22 percent to 63 percent), the participation rate remains below that of Democrats, whose participation rate increased by about 48 percentage points in the primary election during the same period (from 39 percent to 87 percent), as shown in figure 3. For both Democrats and Republicans, most of the growth in participation rates occurred between the 2000 and 2004 legislative elections, whereas participation rates have been relatively stable over the past three election cycles (2004, 2006, and 2008) in both the primary and general elections. For example, participation rates increased in the primary elections by about 4 percentage points among Democrats (from 83 percent to 87 percent), and by 1 percentage point among Republicans (from 62 percent to 63 percent) between the 2004 and 2008 election cycles. In all election years, more Democrats participated in the public financing program than Republicans did, in terms of the proportion of candidates who participated. In Arizona, the participation rate of legislative candidates in primary elections doubled after the first election cycle when public financing became available, from 24 percent in 2000 to 50 percent in 2002. The participation rate then steadily increased over the next three elections to 59 percent in 2008, as shown in figure 4. Similarly, the participation rate of legislative candidates in Arizona’s general elections almost doubled after 2000, when it was 26 percent, to 49 percent in 2002, and then steadily increased over the next three elections to 64 percent in 2008. The 11 candidates we interviewed in Arizona offered a range of reasons why they chose to participate or not participate in the public financing program when asked the main reasons for choosing to run their campaign with or without public funds in the 2008 election. Four of the 5 participating candidates we interviewed cited wanting more time to focus on interaction with voters when asked the main reasons for choosing to run their campaign with public funds in the 2008 elections. One of these candidates explained that collecting the $5 contributions strengthens candidates’ connections to voters at the grass roots level. Candidates cited other reasons for participation. The desire to be free of the influence of interest groups or other campaign contributors was among the reasons 3 of the 5 candidates gave for participating in the public financing program. One candidate explained that participating candidates are not reliant on interest groups and are only beholden to their constituents. Three candidates said difficulties associated with raising adequate private funds to run a competitive election campaign was one of the reasons they chose to participate. For example, one candidate said that as a first-time candidate, he did not know how to raise money, so without the public financing program he would not have been able to compete against the incumbent candidate. Two candidates said it was strategically advantageous to participate in the public financing program. One of these candidates told us that he decided to participate in the public financing program because he would feel like he was funding his opponents if he raised private funds and the participating candidates in his race received matching funds based upon his spending. We also asked candidates about specific factors they may have considered when choosing to run their campaigns with public funds. Table 6 presents the number of participating candidates who said that they had considered each of the following factors when they decided to participate in the public financing program. The 6 nonparticipating candidates we interviewed most frequently cited opposition to using public funds for election campaigns as one of the main reasons they chose to use private rather than public funds for their campaigns. Five of the 6 nonparticipating candidates said that they were opposed to using public funds for election campaigns for various reasons, which included the belief that public financing program forces taxpayers to fund candidates that they may not support, and the belief that funds could be better spent on government services, such as healthcare for children, or to reduce the state’s deficit. In addition, 2 candidates said they did not participate because they did not want restrictions on how they ran their campaigns, such as the limit on the amount of money candidates may raise. Another candidate told us that he is opposed to the public financing program because he does not believe that the Citizens Clean Elections Commission should have the authority to remove legislators from office for violating the rules of the public financing program. Additionally, 1 nonparticipating candidate said that she did not participate because her primary race was uncontested, so the public financing program would provide meager resources and not enough for her to communicate with voters. We also asked the 6 nonparticipating candidates if they considered any of the factors listed in table 7 when they chose not to participate in the public financing program; their responses appear alongside each factor in the table. Incumbent candidates’ participation in the public financing program in general elections in Arizona increased from 2000 to 2008; however, the majority of incumbent candidates did not participate in the program over these five election cycles. Figure 5 shows that participating incumbent candidates, as a percentage of all candidates, generally increased from 4 percent in 2000 to 18 percent in the 2008 general elections. Nonparticipating legislative incumbents and challengers in Arizona were generally more likely to win than participating incumbents and challengers who ran in elections held from 2000 through 2008, as shown in table 8. In Arizona primary and general legislative elections, more Democrats than Republicans participated in the public financing program, in terms of the proportion of candidates who participated, although, as shown in figure 6, the participation gap between Democrats and Republicans has narrowed since 2000. For example, the percentage of Democrats who participated in the public financing program during the primary election increased by about 30 percentage points (from 42 percent to 72 percent) from 2000 to 2008, while the rate of participation among Republican candidates increased by about 41 percentage points (from 9 percent to 50 percent) over the same period. The majority of general election races in both Maine and Arizona had at least one participating candidate in 2008, and the proportion of races with a participating candidate has generally increased from 2000 through 2008 in both states. In Maine, the proportion of races with at least one participating candidate doubled over the five election cycles, from 47 percent in 2000 to 96 percent in 2008, as shown in figure 7. In Arizona, the proportion of races with at least one participating candidate increased steadily over the five election cycles from 53 percent in 2000 to 82 percent in 2008. Data limitations preclude providing additional information about legislative candidates or the districts in which they ran for office. For example, Maine and Arizona state officials did not maintain data to analyze candidates’ experience (e.g., whether they had previously held public office with the exception of whether a candidate was an incumbent in a given election and political party affiliation); qualifications (e.g., education or work experience); wealth; or demographics (e.g., sex, age, race, or ethnicity). Additionally, data were not available to address issues specific to individual legislative districts, such as partisan composition, local ballot initiatives and candidates, as well as economic or demographic factors that could affect a candidate’s participation in the public financing programs. We used a variety of statistical techniques to measure changes in five goals of public financing before and after the implementation of public financing and found some evidence of statistically significant changes in one measure of electoral competition. For the rest, we found either no overall changes or data limitations precluded any analysis of changes. Specifically, there were differences in one of the measures used for the goal of increased electoral competition—the winners’ margin of victory decreased—but we could not attribute these differences directly to the public financing programs because needed data were limited or unavailable and there are certain factors that we could not measure, such as candidate popularity, which affect electoral outcomes. There were no statistically significant differences observed for the other measures of electoral competition: contestedness (number of candidates per race) and incumbent reelection rates. For three of the remaining four goals— increasing voter choice, curbing increases in campaign spending, and reducing the influence of interest groups and enhancing citizens’ confidence in government—the measurable differences were not statistically significant overall. While there is no indication that the programs have decreased interest group influence, some candidates and interest group officials GAO interviewed said that campaign tactics have changed. We could not measure differences for the fifth goal—increasing voter participation—because of data limitations, including differences in how voter turnout has been measured over time for Maine and Arizona. Overall, the margin of victory in legislative races decreased significantly in both Maine and Arizona compared to their respective comparison states after the public financing programs were implemented; however, we could not attribute these decreases directly to the public financing programs due to factors such as candidate popularity and changing economic conditions, which affect electoral outcomes. On the other hand, contestedness and incumbent reelection rates did not significantly change over time in Maine and Arizona. The candidates and interest group representatives we interviewed from Maine and Arizona provided various perspectives on the effect of the public financing programs on the advantage of incumbent candidates and the number of close races. Overall, winner’s margin of victory in races decreased significantly in both Maine and Arizona as compared to their respective comparison states after public financing was available; however, we could not attribute these decreases to the public financing programs due to factors such as the qualifications or experience of the candidates and Presidential and othe top-ballot races, which could motivate certain citizens to vote, thereby influencing electoral outcomes. We used three different measures of margin of victory in our analyses: (1) the average margin of victory for contested races, (2) the percentage of close races (i.e., races decided by less than 10 percentage points), and (3) the percentage of races that were landslides (i.e., races decided by more than 20 percentage points). As shown in tables 9 and 10, the average margin of victory for contested elections declined from 22 percent before public financing (1996 and 1998) to 19 percent after public financing (from 2000 through 2008) in Maine, and from 31 percent before public financing to 27 percent after public financing in Arizona. These changes, decreases of about 3 percent in Maine and 4 percent in Arizona, were statistically significantly different from the changes in the comparison states for both Maine and Arizona, where the average margin of victory increased about 1 percent in both the Maine and Arizona comparison states. The adjusted differences in the changes between Maine and Arizona and their respective comparison states are derived from statistical models that account for other factors that may have explained the changes, and in the case of average margin of victory the adjusted difference is statistically significant. Our fixed effects statistical models take into account whether elections were for the House of Representatives or Senate, and whether the races included incumbents. However, our results may be sensitive to our choice of comparison states. More information on these models and our choice of states is presented in appendix I and the e-supplement accompanying this report, GAO-10-391SP. We obtained similar results when we measured the margin of victory by contrasting the percentages of close races (defined as competitive races with a margin of victory of less than 10 percentage points) and races that were landslides (defined as competitive races with a margin of victory exceeding 20 percentage points). Close races increased in Maine and Arizona after public financing was available, by about 9 and 6 percentage points respectively. The change observed in Arizona was significantly different from changes in the respective comparison states, where the percentage of close races increased only slightly or actually decreased. Landslide races also decreased in Maine (by 7 percentage points) and Arizona (by 12 percentage points). These changes were significantly different from the changes in the comparison states after controlling for the other factors in our model. Figures 8 and 9 present the year-to-year outcomes (instead of the averages for before and after public financing) for the three margin of victory measures for Maine and its comparison states, and Arizona and its comparison states. Changes in contestedness—the percentage of all races that had at least one more candidate running than the number of seats available—in Maine and Arizona before and after public financing was available were no different from changes observed in comparison states. As shown in tables 11 and 12, before public financing was available (1996 and 1998), 86 percent of the elections in Maine and 60 percent of the elections in Arizona were contested. The percentage of contested elections after public financing was available (from 2000 through 2008) increased in both states, to 91 percent in Maine and 75 percent in Arizona. However, even after controlling for other factors, these increases, of 5 percentage points and 15 percentage points respectively, were not statistically different from the changes in comparison states where percentages of contested elections increased by about 5 and 12 percentage points. Further, year-to-year changes in the percentages of contested elections in Maine and Arizona over time are not much different from in their comparison states before or after controlling for other factors, as shown in figure 10. Incumbent reelection rates (i.e., the percentage of incumbents who were reelected among those incumbents who ran in contested races) did not change significantly in Maine and Arizona before and after public financing was available. We first examined the proportion of contested races with incumbents who won relative to all contested races with an incumbent candidate. As shown in tables 13 and 14, in Maine the percentage of races in which incumbents who were challenged were reelected was 88 percent before public financing was available and about 90 percent after it was available. In Arizona, the percentage was 98 percent before public financing and 97 percent after. Incumbent reelection rates in comparison states did not change over time—staying around 93 percent and 91 percent, respectively, in the two groups of comparison states. Further, our statistical model that tested the difference in change across time periods between the states with and without campaign financing provided no evidence of any statistically significant difference. Year-to-year changes in incumbent reelection rates for races in Maine and Arizona over time are basically unchanged and not much different from in their comparison states, as shown in figure 11. We found similarly and consistently high reelection rates when we considered individual incumbent reelection rates, the proportion of individual incumbents who won out of all incumbents who ran. In Maine, 90 percent of all incumbents running in general elections races were reelected in the years before public financing was available, and 90.2 percent after. In Arizona, the individual incumbent reelection rate for general elections before public financing was available was 96.9 percent, compared to 96.1 percent after public financing was available. Research has shown that incumbent candidates may have an advantage over other candidates because of several factors, such as visibility in the media, name recognition, and the ability to perform services for constituents. Thus, the high incumbent reelection rates observed in these states despite the implementation of the public financing programs is not surprising. Many other factors we could not control in our analyses may affect electoral competition, including the popularity of candidates, extreme one- issue candidates, polarizing candidates, local ballot initiatives and issues, economic conditions, and other aspects of political context. Further, the size and statistical significance of our comparative results also may be affected by our choice of comparison states. Thus, we cannot say definitively whether any of the changes we observe can be attributed to the campaign financing programs. The candidates and interest group representatives we interviewed from Maine and Arizona provided various perspectives on the effect of the public financing programs on the advantage of incumbent candidates and the number of close races. Most candidates we interviewed in Maine (8 of 11) believed that the advantage of incumbent candidates neither increased nor decreased as a result of the public financing program. Further, 2 of 11 candidates said that incumbents’ advantage had increased under the public financing program. Among the reasons candidates gave for incumbents’ advantage was their access to resources, such as campaign databases; political party support; and officeholder privileges, such as a budget to distribute communications (e.g., mailers and newsletters) to constituents. On the other hand, 1 of the 11 Maine candidates said that the advantage of incumbents had decreased as a result of the public financing program since some incumbents have been defeated by participating candidates who may not have run for legislative office without public financing. Arizona candidates had mixed perceptions on the effect of the public financing program on incumbents’ advantage. Four of 11 candidates said that the advantage of incumbents neither increased nor decreased as a result of the public financing program, citing incumbents’ benefits such as name recognition, experience in running a successful election campaign, and access to funding. Three candidates said that incumbents’ advantage increased. One of these candidates explained that participating incumbent candidates did not have to do as much outreach to voters as they would have if they needed to raise private funds. However, 3 candidates we interviewed stated that the advantage of incumbent candidates has decreased. Among the reasons given for the decrease in incumbents’ advantage was that incumbents face more challengers under public financing. Another candidate agreed that incumbents had to work harder to defend their seats in the primary election; however, according to the candidate, incumbents’ advantage had not changed in general elections since many legislative districts are either heavily Democratic or Republican. The majority of candidates we interviewed in Maine (9 of 11) thought that the number of close legislative races increased as a result of the public financing program and provided a range of explanations for why. For example, one candidate said that before the public financing program, some candidates would run unopposed because potential challengers lacked funds, but after public financing became available, more challengers have entered races and have run competitively. However, other candidates had different perspectives that were not consistent with the statistical data we observed—one candidate said that the number of close races decreased, and one candidate said that the number of close races neither increased nor decreased as a result of the public financing program. According to this candidate, the broader political climate influenced elections more than the public financing program. In Arizona, over half of the candidates (6 of 11) believed that the public financing program had increased the number of close races. Candidates attributed the increase to greater equality in financial resources among candidates, more candidates running for office, and more extensive discussion of the issues, among other reasons. On the other hand, in contrast with the data we observed, 3 candidates we interviewed said that the number of close races neither increased nor decreased as a result of the public financing program. Additionally, 2 candidates said that the number of close races increased in the primary election, where, according to one candidate, there have been more challengers, but neither increased nor decreased in the general election, since many districts are heavily Republican or Democratic. Half of the interest group representatives we interviewed in Maine and Arizona (5 of 10) thought the closeness of races had not changed, although our data analysis did reveal changes. For example, an Arizona representative commented that the public financing program by itself had not changed the closeness of races and that redistricting and the ability of independents to vote in the primary has made the races closer. On the other hand, 2 of the 10 representatives believed that the closeness of races had changed. One representative from Maine stated that he believed there may be a few more close races because of the public financing program while an Arizona representative believed the closeness of races had changed in the primaries because more candidates have an opportunity to run with public financing and therefore may be more competitive. Finally, 2 of the 10 interest group representatives were unsure whether public financing had changed the closeness of races and 1 of the 10 interest group representatives did not respond. While increasing voter choice, as measured by changes in the number of candidates per race and changes in the breadth of political party affiliations represented in races, was a goal of public financing programs, there were no observed changes in these measures in Maine and Arizona after the public financing programs were available. However, as discussed later, candidates we interviewed provided a range of perspectives about the role of third-party and independent candidates. The average number of legislative candidates per primary and general election race in Maine and Arizona did not vary greatly over the seven election cycles examined—before (1996 and 1998 elections) and after (2000 through 2008 elections) the public financing programs became available, as shown in table 15. During the 1996 through 2008 legislative elections in Maine and Arizona, candidates from a variety of third parties and independents ran for office. In Maine, these candidates included Green Party members and independents. In Arizona, these candidates included members of the Green, Natural Law, Reform, and Libertarian Parties, as well as independents. As shown in tables 16 and 17, while there were some changes in the percent of races with third-party or independent candidates receiving 5 percent or more of votes cast—a proxy indicator for “viable” candidates—there were no discernable trends from 1996 through 2008 in Maine and Arizona. The 22 candidates from Maine and Arizona we interviewed had mixed views on the role of third parties and independents in the 2008 election and the quality and types of candidates running for election. The majority of candidates in Maine (7 of 11) and Arizona (7 of 11) said that the role of third parties and independents neither increased nor decreased as a result of the public financing programs. However, the other candidates had differing perspectives. For example, one candidate in Maine told us that public financing had increased the role of third-party and independent candidates as it has been particularly helpful for third-party candidates running against incumbent candidates. Additionally, several candidates provided comments about the effect of the public financing programs on the quality and type of candidates running for legislative office. For example, in Maine, 3 of the 11 candidates told us that the public financing program had a positive effect on voter choice, by allowing a greater diversity of candidates to run for office and by improving the quality of political debate. On the other hand, 3 other Maine candidates thought the public financing program allowed candidates to run for office who were not credible or who were unqualified. In Arizona, 2 of the 11 candidates said that the public financing program allowed candidates that were on the extremes of the political spectrum to run and win, which has resulted in a more partisan and divided legislature. However, another candidate said that many of the participating candidates are experienced incumbent candidates. Average legislative candidate spending varied from year to year in Maine and Arizona in the five election cycles that occurred after public financing became available (2000 through 2008). In Maine, average candidate spending in House races decreased statistically significantly after public financing became available as compared to the two elections before public financing was available (1996 and 1998). However, we could not attribute this decrease to the public financing program because of other factors, such as reductions made to the amounts of funding publicly financed candidates received during the 2008 elections. Average candidate spending in Maine Senate races did not change significantly. In Arizona, data were not available to compare legislative candidate spending before 2000; however, in the five elections under the public financing program, average candidate spending has increased. Independent expenditures have increased fourfold in Maine, and state officials reported that independent expenditures have increased in Arizona since 2000. While average legislative candidate spending varied from year to year in Maine, as shown in figure 12, in the five elections after public financing became available average candidate spending in House races decreased, while average Senate candidate spending did not change significantly compared to the two elections before public financing was available. Specifically, average candidate spending in Maine House races decreased from an average of $6,700 before public financing was available to an average of $5,700 after public financing became available. A state official told us that a 5 percent reduction in the set amount of public funding distributed to participating candidates for the general election likely contributed to the decrease in spending in the 2008 election. As shown in figure 13, spending by Maine legislative incumbent candidates, challengers, and open race challengers (i.e., candidates running in open races with no incumbent candidates) varied from year to year. However, overall, the difference in average spending by incumbents and challengers narrowed in both House and Senate races after public financing became available. In addition, average spending by open race challengers was relatively higher than either incumbent or challenger spending averages in House races, but was not significantly different in Senate races in the elections after public financing became available. In Maine House races, incumbents spent $1,800 more on average than their challengers in the two elections before public financing became available. In comparison, the difference in average spending by incumbents and challengers was not statistically significant in the five elections under the public financing program. Open race challengers spent more on average ($6,100) than either incumbents, who spent an average of $5,600, or challengers running against incumbents, who spent an average of $5,400, in the five elections under the public financing program. Before public financing became available, incumbents spent an average of $7,700, more than the average amount spent by challengers ($5,900) or open race challengers ($6,300) during the same period. The difference in average incumbent and challenger spending in Maine Senate races also decreased in the period after public financing became available. On average, incumbents spent nearly $10,500 more than their challengers in the two elections before public financing became available; however, after public financing became available, the difference between average incumbent and average challenger spending was not statistically significant. Similarly, spending by open race challengers in Senate races was not significantly different from spending by either incumbents or challengers in the elections after public financing became available. As figure 14 shows, average spending by participating and nonparticipating candidates varied in the five elections under the public financing program. However, overall, spending by participating candidates was not significantly different than spending by nonparticipating candidates in both Maine House and Senate races in the five elections under the public financing program. Independent expenditures in Maine legislative races have increased by about $500,000 in the five elections under the public financing program. As figure 15 shows, independent expenditures increased from about $150,000 in 2000 to a high of about $655,000 in 2006, with a large increase occurring in the 2004 election. The Director of Maine’s commission told us that he believes that the increase in 2004 was due principally to a change in the definition of independent expenditures. While independent expenditures decreased somewhat (by about $20,000) in the 2008 election compared to the 2006 election, the total amount remained high. Average candidate spending in Arizona legislative races has generally increased in the five elections under the public financing program; however, we were not able to compare these spending levels to those in the period before public financing became available. As shown in figure 16, average candidate spending in Arizona House races has increased in each subsequent election since 2000, with the exception of 2006, when average spending declined about $1,000 from the previous election. In 2008, average spending increased to $48,700, a $13,000 increase from 2006. In Arizona Senate races, average candidate spending has been increasing following the 2002 election, after a decrease of about $10,000 in the 2002 election. State officials told us that the way candidates have spent campaign funds has changed since the implementation of the public financing program. For example, they said that candidates have coordinated their campaigns with other candidates in their district to maximize their campaign resources. For example, two Republican candidates for the Arizona House of Representatives may pool their campaign funds to send out one mailing in support of both candidates, rather than each candidate sending out separate mailings. Average spending by challengers and incumbents fluctuated from year to year, with challengers spending more in some elections, and incumbents spending more in other elections in both Arizona House and Senate races, as shown in figure 17. Overall, there was no statistically significant difference between average incumbent and average challenger spending in either Arizona House or Senate races in the five elections under public financing. Further, spending by open race challengers in House races was not significantly different from spending by incumbents or challengers after public financing became available. However, in each of the five elections examined, average spending by open race challengers in Arizona Senate races was higher than average spending by incumbents or challengers, and overall, open race challengers spent between $14,600 and $16,200 more on average than either incumbents or challengers. Participating candidates spent more on average than nonparticipating candidates in Arizona House, while in Senate races nonparticipating candidates spent more on average than participating candidates in some years and less in others, as shown in figure 18. Participating candidates in Arizona House races spent $44,500 on average, compared to nonparticipating candidates, who spent an average of $29,700 in the five elections under the public financing program. In Arizona Senate races, there was not a statistically significant difference between average spending by participating and nonparticipating candidates in the five elections examined. State officials said that the amount spent on independent expenditures has increased since 2000. Therefore, they stated that matching funds distributed to participating candidates for independent expenditures may account for some of the difference in average spending by participating and nonparticipating candidates. According to state officials, independent expenditures have increased in Arizona legislative elections under the public financing program. In 2008, independent expenditures in Arizona House and Senate races totaled $2,170,000. While complete data on independent expenditures specifically in legislative elections were not available for elections prior to 2008, state officials told us that independent expenditures have increased. Furthermore, in our 2003 report, the Arizona Citizens Clean Elections Commission identified independent expenditures in the 1998, 2000, and 2002 legislative and statewide elections. Independent expenditures in both legislative and statewide races totaled $102,400 in 1998, $46,700 in 2000, and $3,074,300 in 2002. We reported in 2003 that the increase in independent expenditures in the 2002 election was largely associated with the gubernatorial race, with more than 92 percent of the independent expenditures associated with two gubernatorial candidates. The candidates and interest groups we interviewed in Maine and Arizona had a range of experiences with and views on campaign spending, independent expenditures, and issue advocacy advertisements. Candidates’ and Interest Groups’ Views on Campaign Spending While candidates and interest groups had varying views about whether campaign spending had increased in the 2008 elections, in general they indicated that equality in financial resources among candidates had increased in the 2008 election as a result of the public financing programs. In Maine, about half of the candidates (5 of 11) we interviewed said that campaign spending increased in the 2008 election as a result of the public financing program. Candidates provided a number of reasons for the perceived increase in campaign spending. For example, one candidate said that campaign spending increased because some participating candidates spent more than they would have if they had raised private funds for their campaigns. Another candidate noted that the amount of money spent by participating candidates has increased in some races because they received additional matching funds for independent expenditures made by interest groups. Spending by nonparticipating candidates may have increased in some cases as well, according to one candidate, since the presence of a participating candidate in the race forces nonparticipating candidates to take the election more seriously and spend more on their campaigns than they would have otherwise. However, 3 other candidates we interviewed in Maine contended that campaign spending had decreased. For example, one candidate noted that spending had decreased because of the spending cap placed on participating candidates. Three candidates felt that spending in Maine legislative races had neither increased nor decreased as a result of the public financing program. In one candidate’s view, contribution limits have had a greater influence on spending than the public financing program. In Arizona, the majority of candidates (7 of 11) we interviewed believed that candidate spending increased in the 2008 election as a result of the public financing program. One nonparticipating candidate told us that, because of the matching funds provision of the public financing program, in 2008 he spent almost double the amount than he spent in any previous campaign in order to get out his message and outspend his participating opponent. Another candidate commented that the increase in independent expenditures has driven up campaign spending by triggering additional matching funds for participating candidates. On the other hand, 3 candidates felt that the public financing program led to a decrease in campaign spending in the 2008 election. One participating candidate explained that she could have raised more money traditionally than she received from the public financing program. One candidate indicated that spending neither increased nor decreased. Regarding interest groups in Maine, two of the five representatives stated that candidate spending increased. One of these representatives commented that there has been an increase in money spent by candidates because there is more access to money and the races are more competitive. Further, this representative stated that the public financing program gives challengers an opportunity to level the playing field when running against incumbents. Participating candidates who would otherwise not be able to raise enough private money can run a well- financed campaign using public funds and have an opportunity to present their issues for debate in the race. On the other hand, three of the five interest group representatives stated that candidate spending neither increased nor decreased in the 2008 election as a result of the public financing program. One of these representatives commented that the amount of money spent by candidates has not changed because limits are set by the legislature. However, this representative opined that the amount of money spent on behalf of the candidates in the form of independent expenditures had increased dramatically and consistently. He went on to say that the public financing program is reducing the disparity between the candidates who can raise the money and those candidates who cannot raise the money and that a candidate who is not serious can receive as much money as a serious candidate. In Arizona, four of the five interest group representatives believed that candidate spending increased as a result of the public financing program. For example, one of these representatives said that the public financing program has moved money from the candidates to independent expenditures, and that political parties are playing a significant role in this shift. Another interest group representative believed that candidate spending increased but was unsure if this increase was due to the public financing program, noting that increased campaign spending could be attributed to more competitive races or the rise in the cost of campaign materials due to inflation. Further, he noted that a pattern has emerged in which candidates run as participating candidates during their first election, and after being elected run subsequently as nonparticipating candidates. These legislators have name recognition and can raise the money required to run their campaigns and can also help other candidates get elected. On the other hand, one of the five representatives believed that campaign spending had neither increased nor decreased and that money has been redirected from the candidate campaigns to independent expenditures. He did not believe that his organization was spending any less money on campaigns. In general, candidates and interest group representatives in Maine and Arizona reported that equality in financial resources among candidates had increased in the 2008 election as a result of the public financing programs. In Maine, the majority of the candidates interviewed (7 of 11) said that equality in financial resources among candidates increased as a result of the public financing program. Two candidates commented that candidates from different political parties compete on a roughly equal playing field under the public financing program. Another Maine candidate said that both nonparticipating and participating candidates spend about the same amount on their campaigns. However, 2 candidates we interviewed said that equality in financial resources had decreased as a result of the public financing program. According to one candidate, more money may be spent by political action committees than by candidates in a race, which can reduce equality. One nonparticipating candidate responded that the public financing program increased equality in financial resources among participating candidates, but decreased equality in financial resources among nonparticipating candidates, and 1 candidate was not sure how the public financing program had influenced equality in financial resources among candidates. In Arizona, about half of the candidates (6 of 11) thought equality in financial resources among candidates had increased. Two of these candidates commented that in their experience, candidates spent roughly the same, regardless of their political party affiliation or if they participated in the public financing program or used traditional means to finance their campaigns. On the other hand, 1 candidate said that equality in financial resources had decreased, and commented that he was outspent by his participating opponents by a ratio of 13 to 1. Three of the 11 candidates we interviewed said that the equality in financial resources neither increased nor decreased as a result of the public financing program. For example, one candidate told us that incumbents continue to outspend their opponents and that nonparticipating candidates have developed strategies to maximize their financial advantage, such as raising funds at the end of the campaign so participating candidates have little time to spend matching funds. The remaining candidate was not sure about the change in resource equality. Seven of the 10 interest group representatives we interviewed in Maine (3 of 5) and Arizona (4 of 5) said that equality in financial resources among candidates as a result of the public financing programs had increased. For example, an Arizona interest group representative commented that the public financing law holds the candidates’ financial resources even. On the other hand, 1 of the 5 representatives from Maine stated that equality in financial resources among candidates decreased and commented that since monetary limits are set statutorily, it is the independent expenditures that skew the financial resources among candidates. Finally, 2 of the 10 representatives, 1 from Maine and 1 from Arizona, believed that equality in financial resources neither increased nor decreased, while 1 of these representatives further commented that even though financial resources stayed the same, some nonparticipating candidates had a financial advantage because they asked for larger donations from interest groups. Candidates’ and Interest Group Representatives’ Views on Independent Expenditures Independent expenditures were of varying importance in the races of the candidates we spoke with. The majority of the Maine legislative candidates we interviewed (7 of the 11) reported that independent expenditures were of little or no importance to the outcome of their races in the 2008 election. One candidate explained that no independent expenditures were made on his behalf because he was perceived to be the likely winner. However, 2 candidates we interviewed said that independent expenditures were moderately important, and 2 candidates said that independent expenditures were extremely or very important to the outcome of their races in the 2008 election. The candidates who had independent expenditures made in their races shared their experiences with us. One candidate said an independent expenditure made on his behalf could have possibly hurt his campaign since the expenditure was for a mailer that was poorly conceived and included a photograph of him that was of low quality. Another candidate who participated in the public financing program in Maine said that she and her participating opponent received large amounts of matching funds in response to independent expenditures made by business, trucking, state police, and equal rights groups that went towards mailings, television ads, and newspapers ads. However, the candidate thought that other factors played a greater role in the outcome of her election. In Arizona, independent expenditures reportedly played an important role in the outcome of 6 of the 11 candidates’ races, with 5 candidates saying that independent expenditures were moderately important and 1 candidate reporting that independent expenditures were extremely important. One of these candidates said that groups made independent expenditures on behalf of his opponent to produce a number of mailers as well as billboards and television commercials that hurt his election campaign by shifting the focus away from the issues that he had concentrated on. Another candidate said that groups made independent expenditures opposing her near the end of her 2008 campaign; however, since she participated in the public financing program, she received matching funds and was able to respond. On the other hand, 5 candidates reported that independent expenditures were of little or of no importance in the outcome of their races. One candidate said that while there was a lot of money spent on independent expenditures in his race, the independent expenditures did not play a big role in the outcome of the election since roughly the same amount was spent on behalf of both him and his opponent. Another candidate explained that since she was an incumbent and her reelection was secure, not much was spent on independent expenditures in her race. Eight of the 10 interest group representatives in Maine (5 of 5) and Arizona (3 of 5) we interviewed said their groups made independent expenditures in support of candidates in the 2008 elections; although, the representatives had varying views about the influence the expenditures had on the outcome of the races. All 5 Maine interest group representatives made independent expenditures in the 2008 elections, and all expenditures included mailers in support of candidates. Three of these 5 Maine representatives were not sure how much influence the expenditures had on the outcome of the elections. On the other hand, the remaining 2 representatives had different views. One Maine representative believed that her group’s expenditures were effective in getting the candidate’s message out to the voters. Finally, another Maine representative, who made several independent expenditures, said his experience was mixed, and the candidates he made independent expenditures on behalf of lost in more cases than they won. In Arizona, 3 of the 5 interest groups made independent expenditures. Two of these representatives said the expenditures were for mailers in support of candidates and believed that they were beneficial because the candidates won. The third representative said that his group made expenditures for both positive and negative mailers, and he believed that the expenditures were ineffective and was not sure what role they played in the outcome of the 2008 elections. Candidates’ Views on Issue Advocacy Spending While Maine and Arizona legislative candidates we interviewed offered varying views on issue advocacy spending, 14 of the 22 candidates stated that issue advocacy advertisements were of little of no importance to the outcome of their races in the 2008 elections. Issue advocacy spending is often viewed as those forms of media advertisements that do not expressly advocate for or against a clearly identified political candidate. For example, such issue advocacy ads do not use terms like “vote for,” “vote against,” or “reelect.” In general, courts have not upheld campaign finance law regulation of issue advocacy spending upon the reasoning that the rationales offered to support such regulations did not justify the infringement upon constitutional free speech protections. According to state officials in Maine and Arizona, neither Maine nor Arizona track issue advocacy spending. In Maine, 7 of the 11 candidates we interviewed reported that issue advocacy advertisements were of little or of no importance to the outcome of their races. One of these candidates explained that his race was not targeted by issue advocacy ads because he was expected to win and his opponent was not perceived to be very competitive. Another candidate we interviewed had a negative issue advocacy ad made in his race, but he did not think it affected the outcome of the election. The candidate told us the issue advocacy ad listed the tax increases he voted for alongside a smiling picture of him; however, according to the candidate, the ad only told half of the story, since the bill that contained the tax increases was revenue neutral and raised some taxes while lowering others. In contrast, 4 of the 11 candidates we interviewed said that issue advocacy was moderately important in their 2008 races. For example, 1 of these candidates said that issue advocacy advertisements highlighting the candidates’ positions on education issues was a factor in the outcome of his race. Similarly, in Arizona, the majority of candidates interviewed (7 of 11) said that issue advocacy ads were of little or no importance to the outcome of their races in the 2008 election. For example, 1 candidate told us that he did not think that issue advocacy ads made a difference in his race because the ads did not mention the candidates’ names. Another candidate said that there were some issue advocacy ads that played an information role in his race by presenting a comparison of the candidates’ beliefs; however, the candidate thought the ads were of little importance in the outcome of the election. On the other hand, 3 candidates said that issue advocacy ads were moderately important to the outcome of their races. According to one candidate, issue advocacy advertisements on crime, abortion, and education funding influenced the outcome of his race. Our surveys of voting-age citizens and interviews with candidates and interest group representatives in Maine and Arizona indicated that the public campaign financing programs did not decrease the perception of interest group influence and did not increase public confidence in government. However, candidate and interest group representatives reported that campaign tactics, such as the role of political parties and the timing of expenditures, had changed. In 2009, the percentage of voting-age citizens in Maine and Arizona who said that the public financing law had greatly or somewhat increased the influence of special interest groups on legislators was not significantly different from those who said that the law had greatly or somewhat decreased special interest group influence. For example, among those polled in Maine in 2009, the percentage of voting-age citizens who said that the influence of interest groups greatly or somewhat increased was 17 percent, while 19 percent said that the interest group influence had greatly or somewhat decreased, as shown in table 18. An additional 19 percent felt that the law had no effect on the influence of interest groups on legislators. In Arizona in 2009, 24 percent believed the public financing law greatly or somewhat increased the influence of interest groups, while 25 percent felt it greatly or somewhat decreased interest group influence. Additionally, 32 percent of those polled indicated that the public financing law had no effect on the influence of interest groups. Both Maine and Arizona candidates and interest group representatives had mixed views about changes in interest group influence as a result of the public financing programs in their states. In Maine, a little over half of the candidates (6 of 11) said that the likelihood that elected officials serve the interests of their constituents free of influence by specific individuals or interest groups neither increased nor decreased as a result of the public financing program. One of these candidates said the public financing program has not met the goal of decreasing the influence of interest groups, since interest groups will always find ways to influence legislators and the election process. However, 4 candidates we interviewed in Maine—all of whom participated in the public financing program—said that that likelihood that elected officials serve free of influence by individuals or groups greatly increased or increased. One of these candidates explained that participating candidates are more empowered to serve as they see fit and are less willing to listen to political party leadership. On the other hand, a different candidate said that the elected officials are less likely to serve free of influence by specific individuals or groups as a result of the public financing program. The candidate explained that under the public financing program, lobbyists and special interest groups have focused less on individual candidates, and more on winning favor with the Democratic and Republican party leadership. According to this candidate, interest groups are spending more, since the contribution limits do not apply to contributions to political parties. In turn, the candidate said that political parties are buying the loyalty of candidates by providing know-how, campaign staff, and polling data during the election. For Arizona, about half of the candidates interviewed (5 of 11) said that the public financing program did not affect the likelihood that elected officials serve the interests of their constituents free of influence by specific individuals or groups. One of these candidates said that the influence of special interest groups still exists, even if it does not come in the form of direct contributions. She explained that interest groups approach candidates with questionnaires and ask them to take pledges on different policy issues and also send their members voter guides and scorecards that rate candidates. Two other Arizona candidates we interviewed commented that under the public financing program, interest groups have been contributing to campaigns in different ways, such as providing campaign volunteers, and collecting $5 qualifying contributions for participating candidates. In contrast, 4 of the 11 candidates said that the likelihood that elected officials serve the interests of their constituents had decreased as a result of the public financing program. One of these candidates explained that the role of interest groups has increased, as they have become very skilled at producing advertisements with independent expenditures. On the other hand, 2 candidates we interviewed said that the public financing program increased the likelihood that elected officials serve the interests of their constituents free of influence by specific individuals or groups. One of these candidates said that in her experience as a participating candidate and state senator, interest groups are not “in her ear all of the time,” and legislators are free to make decisions based on the interests of their constituents. With regard to Maine interest groups we interviewed, the five representatives we interviewed had varying views about the likelihood that elected officials serve the interests of their constituents free of influence by specific individuals or interest groups and about changes in interest group influence as a result of the public financing program. Two representatives believed that the likelihood that elected officials serve the interests of their constituents free of influence had increased, and one representative stated that it had decreased. The two remaining representatives stated that it had neither increased nor decreased. One of these representatives commented that candidates are predisposed to certain issues based on their core beliefs and there is not any correlation between public financing and the likelihood that the elected officials will serve the interests of their constituents free of influence. With regard to changes in interest group influence, three Maine representatives stated that they have less of a relationship with candidates. One of these three representatives stated that interest groups are one step removed from the candidate because to make independent expenditures they cannot directly coordinate with the candidate. As a result, this representative further stated that interest groups have established stronger relationships with political parties. Another of these representative believed that the public financing program has slightly decreased the role of interest groups because money tends to be funneled through the political parties. Also, there has been more emphasis on interest groups giving their endorsements of candidates rather than giving them money. With regard to Arizona interest groups we interviewed, four of the five representatives said that the likelihood that elected officials serve the interests of their constituents free of influence by specific individuals or interest groups neither increased nor decreased as a result of the public financing program. One of the five representatives stated that the likelihood that elected officials serve the interests of their constituents had decreased but did not elaborate. Regarding interest group influence, two of the five representatives expressed opinions about whether changes in interest group influence as a result of the public financing programs have occurred. For example, one of these representatives stated that prior to the public financing program, interest groups made direct contributions to the candidates, but now they have to make independent expenditures or give money to the political parties. This representative stated that public financing has led to fringe candidates entering races and has caused a polarization in the legislature that has decreased the role of interest groups. Another representative stated that the interest groups do not directly support the candidate’s campaigns and, instead, make independent expenditures. He also stated that there has also been an increased emphasis on volunteer campaign activities in which interest groups use their members to help certain candidates. In 2002 and 2009, the percentage of voting-age citizens in Maine and Arizona who said that their confidence in state government had somewhat or greatly decreased was not significantly different from those who said that their confidence had somewhat or greatly increased as a result of the public financing law. Additionally, the predominant response in both states was that respondents did not believe that the public financing program had any effect on their confidence in state government, as shown in table 19. For example, in Maine in 2009, the percentage of voting-age citizens who stated that the public financing law had no effect was 42 percent while the percent who felt that their confidence had somewhat or greatly increased was 20 percent, and the percent who felt their confidence had somewhat or greatly decreased was 15 percent. In Arizona, the percentage of voting-age citizens who stated that the public financing law had no effect was 39 percent in 2009, while the percent who felt that their confidence had somewhat or greatly increased was 26 percent, and the percent who felt their confidence had somewhat or greatly decreased was 22 percent. In Maine and Arizona, over half of the candidates we interviewed reported that the public’s confidence in government had not changed as a result of the public financing programs. Over half of the candidates in Maine (6 of 11) said the public’s confidence in government neither increased nor decreased as a result of the public financing program. One of these candidates explained that he did not think many people were aware of the public financing program. Three of the 11 candidates said that the public’s confidence in government decreased in 2008 because of the public financing program. According to one candidate, people have been disappointed with the quality of the candidates, and their confidence in government has decreased as a result. On the other hand, 2 of the 11 candidates said that the public financing program increased the public’s confidence in government. In Arizona, 7 of the 11 candidates interviewed said that the public’s confidence in government neither increased nor decreased as a result of the public financing program. The remaining 4 candidates were divided. Two candidates said that the public’s confidence in government greatly increased or increased as a result of the public financing program. One of these candidates commented that the public financing program goes beyond providing public financing by providing a public forum and publications that play an important role in informing voters about the races and candidates. However, 2 candidates said that the public’s confidence in government has decreased as a result of the public financing program. One of these candidates said that the public financing program resulted in a more divisive government, which has slightly decreased the public’s confidence in government. Candidates and interest group representatives in Maine and Arizona provided a range of perspectives on how campaign tactics have changed under the public financing programs. Their observations included changes in how money is spent and the role of political parties and the timing of campaign activities. Candidates in both Maine and Arizona identified changes regarding how money is spent and the role of political parties since the implementation of the public financing programs. For example, in Maine, one candidate told us that private funding that would have gone directly to fund candidate campaigns has been redirected to political parties, who strategically focus their resources in certain races to help elect their candidates. Candidates reported that political parties have helped support candidates by providing advice, polling services, campaign volunteers, distributing campaign literature, and making automated telephone calls to constituents on behalf of candidates. According to another Maine candidate, political parties are advising candidates to participate in the public financing program so that the political parties and political action committees can raise more money for their organizations. However, other candidates had different perspectives on the role of political parties under the public financing program. For example, one candidate told us that since participating candidates receive public financing, they are less dependent on political parties for money, less willing to listen to the party leadership, and are more empowered to make their own decisions. Candidates in Arizona reported similar changes in how money is spent and the role of political parties. For example, one candidate commented that now more money is being funneled through the political parties rather than being directly provided to the candidates. Another candidate said that political parties have used the public financing program as a vehicle, explaining that when candidates use public funds for their campaigns, the money that would have normally gone to the candidate is now diverted to other candidates or causes. According to one candidate, after public financing, political parties are more active and have more extensive field operations to support candidates in a greater number of districts. Further, four candidates said that political parties are gaming the public financing system to maximize support for their candidates. For example, one candidate explained that if two Republican candidates or two Democratic candidates were running in the same multimember district, then partisan groups could make independent expenditures on behalf of one candidate that would trigger matching funds for the other participating candidate. However, two candidates said their party did not get involved in their races in the 2008 election, and one candidate said she did not observe any change in the role of political parties since the implementation of the public financing program. Furthermore, one candidate said that under the public financing program, candidates have more independence from political parties, noting that she relies on support from a broad constituency in her district, not just from her political party. Interest group representatives in both Maine and Arizona identified changes regarding how money is spent and the role of political parties since the implementation of the public financing programs. For example, in Maine, one interest group representative stated that the group coordinates its expenditures through the party caucus committees and other interest groups. He said that substantial contributions from the caucuses are now made to candidate campaigns without the candidates’ knowledge. These committees are also engaged in public polling on an ongoing basis to identify voting patterns and constituent concerns in order to identify candidates to support. Another representative stated that because she made contributions to the political party, she does not have a way to know how her political action committee money is being spent because the committee makes independent expenditures on behalf of the candidate. Further, she stated that for participating candidates, the only thing an interest group can do is give an endorsement. In turn, participating candidates use these endorsements in their campaign advertisements. On the other hand, one representative said that there has not been much difference in campaign tactics since public financing has been available, and another representative said that the same tactics, such as direct mailers and going door-to-door for monetary solicitations, have been used. Interest group representatives in Arizona similarly reported that public financing has changed campaign strategies. For example, one representative said that there is an increased reliance on volunteer activities, especially for statewide races. This representative stated that the amount of public funds for statewide candidates is not adequate, so candidates must rely on volunteers to get their message out. Volunteer activities, such as handing out flyers door-to-door or working phone banks to call voters, have become increasingly important. Another representative stated that since more candidates are participating in the public financing program and cannot accept direct contributions, there is more money available to nonparticipating candidates. He has noticed that nonparticipating candidates are asking for more money from interest groups than before public financing. According to another representative, campaign strategies are evolving. For example, a recent strategy has been the teaming of public and private candidates to maximize their resources such as on mailers. Candidates and interest group representatives in Maine and Arizona also commented on how the public financing program has changed the timing of some campaign activities. In Maine, three candidates said that candidates or interest groups are changing the timing of spending in order to minimize either the amount or the effectiveness of matching funds distributed to opponent participating candidates. For example, one participating candidate told us that supporters of his opponent distributed mailers right before the date when communications that support or oppose clearly identified candidates are presumed to be independent expenditures and trigger matching funds for participating opponents. Another strategy, according to one candidate, is for nonparticipating candidates or interest groups to spend money in the days immediately before the election, when participating candidates’ ability to use the money is effectively restricted due to time constraints. In response, one candidate told us that participating candidates have television, radio, or other advertisements ready in case they receive additional matching funds that need to be spent quickly. In Arizona, five candidates said that the tactics surrounding the timing of campaign spending have changed since the implementation of the public financing program. For example, one candidate said that the start of the campaign season is determined by the date on which spending by or on behalf of candidates triggers matching funds. In addition, one candidate explained that nonparticipating candidates have changed the timing of fundraising efforts, so that more funds are raised at the end of campaign, when it is more difficult for participating candidates to spend matching funds effectively. As in Maine, one candidate in Arizona said that participating candidates have responded to this tactic by preparing advertisements ahead of time, just in case they receive additional matching funds. Interest group representatives in Maine and Arizona also commented on how the public financing program has changed the timing of some campaign activities. In Maine, one interest group representative stated that candidates were strategically timing their advertisements to gain a competitive advantage. For example, candidates are thinking about from whom to get their seed money, and when to qualify for the money. In addition, usually, incumbents have an advantage because they can send out newsletters to constituents close to the election without triggering matching funds. This representative stated the biggest consideration regarding campaign strategies is how and when matching funds will be triggered by the independent expenditures. She said that independent expenditures are made in the last 5 days before an election on the assumption that the opposing participating candidate cannot make effective use of the matching funds. In Arizona, one interest group representative said that generally nonparticipating candidates control the timing of their fundraising and spending, and participating candidates make plans to spend matching funds to counter last-minute attack advertisements. While increasing voter participation, as indicated by increases in voter turnout, was a goal of public financing programs in Maine and Arizona, limitations in voter turnout data, differences in how voter turnout is measured across states and data sources, and challenges isolating the effect of public financing programs on voter turnout hindered the analysis of changes over time. Voter turnout is typically calculated as a percentage of the voting-age population (VAP) or voting-eligible population (VEP) who cast a ballot in an election. The calculation of changes in voter turnout over time depends less on the specific data used for the numerator and denominator than it does on the consistency of how these data were collected over time and the use of comparable time frames and types of elections (e.g., presidential and congressional races). However, data reporting issues, changes in measurement, and other factors affect the calculation of voter turnout estimates. With respect to data limitations, data on voter turnout are not consistent across states or data sources. Depending on the source, the numerator of the turnout calculation (i.e., who cast a ballot in an election) may include the total number of approved ballots cast, the number of ballots counted whether or not they were approved, self-reports of voting information, or the number of ballots cast for the highest office on a ticket, such as for president. For example, official voter turnout data compiled by the Election Assistance Commission (EAC) are based on surveys of states; however, states vary in their policies, for example, related to voter registration, as well as in which turnout statistics they report. Some states report voter turnout as the highest number of ballots counted, whereas other states report voter turnout as the number of votes for the highest office. Further, which specific statistic is reported is not necessarily constant over time. For example, EAC data prior to 2004 provide voter turnout based on the number of votes for the highest office on the ticket. Beginning in 2004, EAC reported total ballots cast, counted, or total voters participating for Maine and Arizona, but has not consistently reported the vote for highest office in these states. The Federal Election Commission (FEC) also provides information on turnout for federal elections, but the specific highest office in a given state and year could be for a state office such as governor that would not be reported along with federal election results. Other voter turnout statistics, including those based on surveys of U.S. residents as part of the Census Bureau’s Current Population Survey (CPS) or the American National Election Studies, rely on respondents’ self- reports of voting behavior. However, self-reports of voting behavior are subject to overreporting because many respondents perceive that voting is a socially desirable behavior. Additionally, estimates of voting based on self-reports can fluctuate depending on the wording of the question used in a survey. Further, survey results are generalizable only to the population covered by the survey, or sampling, frame. The CPS sampling frame excludes individuals living in group quarters such as nursing homes, meaning that estimates of turnout based on CPS data would not include turnout among these individuals. Data on other forms of voter participation, such as volunteering for a campaign, contacting media, donating money, fundraising, and contacting representatives on issues of concern, are limited because they are rarely collected with the express purpose of making state-level estimates, and surveys with this information are not usually designed in a manner to allow comparison across individual states over many years. In addition, measurements of the denominator of voter turnout differ with respect to whether citizenship or other factors that affect eligibility are taken into account. Turnout estimates produced by the Census Bureau have historically used the VAP as a denominator, which includes those U.S. residents age 18 and older. In theory, a more accurate estimate of voter turnout can be made by adjusting VAP to account for the statutory ability of individuals to vote, in particular by removing noncitizens from the estimate. This is particularly important at the state level because the proportion of noncitizens varies across states and over time. However, the practical application of such adjustments may be complicated by the timing of available data relative to the date of the election or by other data limitations. For example, although the Census Bureau began to produce estimates of a citizen VAP for EAC in 2004, the estimate is calculated as of July 1 of the election year and does not adjust for population changes that may occur between July and the time of the election. Other alternatives for adjusting VAP for citizenship include calculating estimates between decennial Census surveys. The Census data currently provided to EAC include adjustments for citizenship based on another alternative, the American Community Survey (ACS). The ACS uses a different sampling frame than other surveys used to adjust for citizenship, such as the CPS, and has slightly different estimates of citizenship. In addition to adjustments for citizenship, researchers have also adjusted VAP to account for other factors that affect eligibility to vote, including state felony disenfranchisement laws, and overseas voting, among others. To make these adjustments, researchers use alternative data sources such as information on the population in prison from the Department of Justice’s Bureau of Justice Statistics; however, these adjustments cannot always be applied similarly because of differences across states over time (such as in the proportion of probationers that are felons). Lastly, changes in voter turnout cannot be attributed directly to public funding as there are a number of factors that affect voter turnout. Voter turnout can be affected by demographic factors such as age, income, how recently a person registered to vote, and previous voting history. For example, studies have shown that much higher percentages of older Americans vote than do younger citizens. Voter turnout can also be influenced by a broad range of contextual factors, including the candidates and their messages, mobilization efforts, media interest, campaign spending, and negative advertising. These potential confounding factors, along with aforementioned difficulties in calculating precise and consistent turnout information at the state level, prevented us from quantifying the extent to which, if any, Maine’s and Arizona’s public financing programs affected these states’ voter turnout. Additional information about factors influencing the determination of changes in voter participation in Maine and Arizona can be found in the e-supplement accompanying this report—GAO-10-391SP. Seven years ago our 2003 report concluded that with only two elections from which to observe legislative races—2000 and 2002—it was too early to precisely draw causal linkages to resulting changes. Today, following three additional election cycles—2004, 2006, and 2008—the extent to which there were changes in program goals is still inconclusive. There were no overall observable changes in three of the four goals, and we cannot attribute observed changes with regard to the winner’s victory margin in Maine and Arizona to the public financing programs because other factors, such as changing economic conditions and candidate popularity, can vary widely and affect election outcomes. Further, essential data needed, such as uniform voter registration and turnout data across states, do not currently exist to enhance analyses conducted and, in the case of the fifth goal, increasing voter participation, to allow for analysis of changes. While undertaking considerable efforts to obtain and assemble the underlying data used for this report and ruling out some factors by devising and conducting multiple analytic methods, direct causal linkages to resulting changes cannot be made, and many questions regarding the effect of public financing programs remain. Public financing programs have become an established part of the political landscape in Maine and Arizona and candidates have chosen to participate or not participate based on their particular opponents and personal circumstances and values. The public financing program is prevalent across these states, and in each election cycle new strategies have emerged to leverage aspects of the public financing program by candidates and their supporters to gain advantage over their opponents. The trend of rising independent expenditures as an alternative to contributing directly to candidates is clear and its effect is as yet undetermined. We requested comments on this draft from the Maine and Arizona Offices of the Secretary of State and the commissions overseeing the public financing programs in each state. We received technical comments from the Arizona Citizens Clean Elections Commission, which we incorporated as appropriate. We did not receive any comments from the other agencies. We are sending copies of this report to interested congressional committees and subcommittees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions concerning this report, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. illiam O. Jenkins, Jr. In accordance with the congressional direction specified in Senate Report 110-129 to revisit and update our 2003 report on the public financing programs in Maine and Arizona to account for data and experiences of the past two election cycles, this report provides data related to candidate program participation, including the number of legislative candidates who chose to use public funds to run for seats in the 2000 through 2008 elections in Maine and Arizona and the number of races in which at least one legislative candidate ran an election with public funds; and describes statistically measurable changes and perceptions of changes in the 2000 through 2008 state legislative elections in five goals of Maine’s and Arizona’s public financing programs—(1) increasing electoral competition by, among other means, reducing the number of uncontested races (i.e., races with only one candidate per seat in contention); (2) increasing voter choice by encouraging more candidates to run for office; (3) curbing increases in the cost of campaigns; (4) reducing the influence of interest groups and, thereby, enhance citizens’ confidence in government; and (5) increasing voter participation (e.g., voter turnout)—and the extent to which these changes could be attributed to the programs. To obtain background information and identify changes since our 2003 report, we conducted a literature search to identify relevant reports, studies, and articles regarding the public financing programs in Maine and Arizona, as well as campaign finance reform issues generally, which had been published since May 2003 when our report was issued. Based on our literature review, discussions with researchers who have published relevant work on public financing programs or state legislatures, and suggestions by state officials in Maine and Arizona, we interviewed 9 researchers and 17 representatives of advocacy groups and other organizations concerned with campaign finance reform or issues related to state legislative elections. See the bibliography for a listing of the reports and studies we reviewed. We reviewed the state statutes governing the public financing program— Maine’s Clean Election Act and Arizona’s Citizens Clean Elections Act— from 2002 through 2009 and other documentation related to the public financing program, such as candidate handbooks and annual reports, to determine any changes in the programs since our 2003 report. In addition, we interviewed state election officials in the commissions responsible for administering the two programs—Maine’s Commission on Governmental Ethics and Election Practices and Arizona’s Citizens Clean Elections Commission. We also interviewed officials in Maine’s and Arizona’s Offices of the Secretary of State, the agencies responsible for supervising and administering state elections activities, such as tabulating official election results. Through our discussions with Maine and Arizona state officials and our review of changes to the public financing statutes in both states from 2002 through 2009, we determined that the five goals of the public financing programs, as set out in our 2003 report, have not changed. We reviewed the Web sites of Maine’s Commission on Governmental Ethics and Election Practices (www.state.me.us/ethics) and Arizona’s Citizens Clean Elections Commission (www.azcleanelections.gov) to obtain information on the public financing programs, such as candidate handbooks and forms necessary in order to run for office. Additionally, we reviewed information on state elections on the Web sites of Maine’s Secretary of State (http://www.maine.gov/sos) and Arizona’s Secretary of State (http://www.azsos.gov). Officials from these state agencies told us that their respective Web sites were current and reliable for our review. In addressing the objectives, we obtained and analyzed, to the extent possible, available statistical data from Maine’s and Arizona’s commissions and Secretaries of State offices on candidate program participation, election outcomes, and reported campaign spending from the 1996 through 2008 state legislative elections. We assessed the quality and reliability of electronic data provided to us by officials in Maine and Arizona by performing electronic testing for obvious errors in accuracy and completeness; validating the data using other sources; and reviewing the associated documentation, such as system flow charts. We also interviewed state officials about their data systems and any issues or inconsistencies we encountered with the processing of the data. When we found discrepancies, such as nonpopulated fields, we worked with state officials to correct the discrepancies before conducting our analyses. Based on these tests and discussions, we determined that the data included in the report were sufficiently reliable for our purposes. Although the public financing programs in Maine and Arizona cover both legislative and certain statewide offices, we limited the scope of our review to legislative candidates, since most of the elections for statewide offices occurred every 4 years and sufficient data would not have been available to conduct our analyses and draw conclusions. To obtain candidates’ and interest groups’ perspectives about the public financing programs, we conducted telephone interviews with a nonprobability sample of 22 out of 653 candidates who ran in 2008 state legislative primary and general elections in Maine (11 out of 452 candidates) and Arizona (11 out of 201 candidates). We conducted interviews with candidates from each state from June through September 2009. We selected these candidates to reflect a range of those who did and did not use public financing, won or lost in primary and general elections, had different political party affiliations, ran for election in different legislative chambers, and were incumbents and challengers. In our interviews, we asked similar, but not identical, questions to those from our 2003 report. Specifically, we included questions about the candidates’ views on factors influencing their decision to participate or not participate in the public financing program, the effects of the public financing program on electoral competition and campaign spending, and changes in the influence of interest groups on elections. We coded the candidates’ responses to the interview questions and conducted a content analysis to categorize responses and identify common themes. Further, we interviewed a nonprobability sample of 10 interest group representatives—5 in Maine and 5 in Arizona. In Maine, we selected these interest groups from a listing of approximately 80 registered interest groups provided by a Maine state official. In Arizona, we selected interest groups from a total of approximately 220 interest groups, which we identified through the Arizona Secretary of State campaign finance Web site as contributors to campaigns during the 2008 election cycle. We selected these interest groups based on several factors, including industry sectors, such as communications or construction, range of contributions made to political campaigns, and availability and willingness of the representatives to participate in our interviews. Results from these nonprobability samples cannot be used to make inferences about all candidates or interest groups in Maine and Arizona. However, these interviews provided us with an overview of the range of perspectives on the effects of the public financing programs. Results from the candidate interviews are included in report sections regarding candidate participation, voter choice, electoral competition, campaign spending, and interest group influence. Results from the interest group interviews are included in report sections regarding electoral competition, campaign spending, and interest group influence. Further details about the scope and methodology of our work regarding each of the objectives are presented in separate sections below. To provide data related to candidate program participation, including the number of legislative candidates who chose to use public funds to run for legislative seats (“participating candidates”) in the 2000 through 2008 elections in Maine and Arizona and the number of races in which at least one candidate ran an election with public funds, we obtained data from Maine’s and Arizona’s commissions and Offices of the Secretary of State. Specifically, for each state, we obtained or calculated data showing the number of legislative candidates who chose to use public funds to run for seats in the 2000 through 2008 elections, the seats (i.e., House or Senate) for which they were candidates, the political party affiliation of the candidates, whether the candidates were incumbents or challengers, whether the candidates were successful in their races, and the number of races in which at least one legislative candidate ran an election with public funds. As used in our report, “challengers” consist of all nonincumbent candidates. Thus, a candidate who was not an incumbent is called a challenger, even if that candidate did not face an opponent. Also, in counting races to calculate the proportion of races with at least one participating candidate, we included all races in which there was a candidate on the ballot regardless of whether or not the candidate faced a challenger. Additionally, we eliminated from our analyses all candidates with zero votes and write-in candidates whose names did not appear on the ballot. In designing our approach to assess electoral competition, we first reviewed literature published since our 2003 report and interviewed researchers and representatives of organizations and advocacy groups who are concerned with public financing and campaign finance reform issues in general. Specifically, we reviewed articles and interviewed researchers and representatives of organizations concerned with public financing issues who had conducted studies and research on electoral competition in states. Based on our review of the literature and these discussions, we concluded that there is no agreement on a standardized methodology to measure electoral competitiveness in state legislative elections. Thus, we used many of the same measures of electoral competition as those in our 2003 report, including the winners’ victory margins, which refers to the difference between the percentage of the vote going to the winning candidate and the first runner up; percentages of contested races; which refers to the percentage of all races with at least one more candidate running than the number of seats in contention; and, incumbent reelection rates, which refers to the percentage of incumbents who were reelected. To assess changes in electoral competition in Maine and Arizona, we examined changes in these three measures of electoral competition in state legislative races by comparing the two elections before public financing became available to the five elections with public financing. However, unlike our 2003 report, we obtained and analyzed general election data from 1996 through 2008 from four comparison states that did not offer public financing programs for legislative candidates to determine if changes identified in Maine’s and Arizona’s general election outcomes for that same time period were similar to or different from changes observed in the four comparison states. We selected the four comparison states—Colorado, Connecticut, Montana, and South Dakota—based on a number of factors, including geographic proximity to Maine or Arizona; the capacity of the state legislature; the presence of legislative term limits; structure of the state legislature, such as legislative districts with more than one representative; and district size. In selecting our comparison states, we also reviewed other factors such as demographic and economic characteristics, including age, race, and poverty levels, and urban/rural population distribution, and recommendations from researchers and experts with knowledge of state legislatures we interviewed. Although all states were potentially candidates for comparison to Maine and Arizona, we eliminated some states (such as those with odd-year election cycles or a unicameral legislature) from our review because of their dissimilarity to Maine and Arizona, and focused primarily on those states that were recommended to us by researchers and experts we interviewed with knowledge of state legislatures. We also considered whether a state had reliable electronic data that covered the 1996 through 2008 general elections and whether the state was able to provide the data to us within the time frame of our review. No state we considered perfectly matched Maine or Arizona across the full range of characteristics we reviewed. Table 20 summarizes some of the characteristics we used to select the four comparison states for comparison to Maine and Arizona. We conducted analyses, to the extent possible, of the four comparison states’ election data for 1996 through 2008 for comparison with Maine and Arizona to determine whether any trends or patterns observed in states with public financing were also seen in the four comparison states that do not have public financing programs. For our analyses, we compared Maine with the election outcomes of Connecticut, Montana, and South Dakota. We compared Arizona with the election outcomes of Colorado, Montana, and South Dakota. Generally, when conducting these analyses, we separated House and Senate elections and grouped Maine’s and Arizona’s election outcomes before the public financing program became available (1996 and 1998 elections) and election outcomes after public financing (2000 through 2008) with election outcomes in the comparison states during the same time periods. We measured victory margins in three ways. First, we calculated the average margin of victory for contested elections, defined in single- member districts as the difference in the number of votes between the winner and first runner up, divided by the total vote count. This measure is generally equivalent to the calculation of margin of victory in our 2003 report. For multimember districts, we defined the margin of victory as the number of votes going to the second winner minus the number of votes going to the runner up, excluding the number of votes going to the first winner from the denominator. Second, we compared whether changes in the margin of victory had an effect on the competitive nature of elections as defined by the distribution of the vote outcome between the winner and first runner-up. We compared close elections—defined as a difference of less than 10 percentage points in votes between the winning and losing candidates—with elections that were not as close—10 percentage points or more difference in votes between the winning and losing candidates. Third, we compared “landslide elections” or races with decisive winners—defined as a difference of more than 20 percentage points in votes between the winning and losing candidates—with elections that were not landslides—defined as 20 percentage points or less difference in votes between the winning and losing candidates. We measured the number of contested races by contrasting elections in which the number of candidates exceeded the number of seats available in the race with elections in which the number of candidates was equal to the number of seats available. We measured incumbent reelection rates in two ways. First, for those general election races with incumbents that were contested, we calculated the percentage of races with incumbents who won compared to all races with incumbents. Second, we calculated the percentage of individual incumbents who won, relative to all incumbents who ran. To assess whether our calculations of incumbent reelection rates were sensitive to redistricting that forced incumbents from formerly separate districts to run against each other, we calculated the individual incumbency reelection rate excluding incumbents who participated in races with more incumbents than seats. Although we were not able to assess other potential effects of redistricting on incumbent reelection rates, such as those caused by demographic changes in a candidates’ constituency, we conducted a limited analysis of geographic changes in state legislative district boundaries. We used two types of multivariate statistical methods, fixed effects regression and hierarchical loglinear models, to evaluate how the competitiveness of races in Maine and Arizona changed after the implementation of public financing programs. Although multivariate methods do not allow us to directly attribute changes in outcomes to states’ public financing programs, they do allow us to assess whether changes in Maine and Arizona were unique relative to a set of comparison states, controlling for other factors, and whether the observed changes were different from what would have occurred by chance. Our statistical models and estimates are sensitive to our choice of comparison states for Maine and Arizona, thus researchers testing different comparison states may find different results. We estimated fixed effects regression models to rule out broad groups of variables that may explain the patterns in our data without directly measuring them. Fixed effects models account for unmeasured factors that do not change over time (such as the structure of the state legislature), or that change in the same way (such as which party controls the U.S. Congress), for all states or legislative districts. This feature is particularly useful for our analysis because comprehensive and reliable data are not available on many of the factors that affect the competitiveness of state elections, such as long-term district partisanship, local economic conditions, and candidate quality. We estimated a variety of fixed effects models to gauge the sensitivity of the results to different assumptions and alternative explanations. These included the following: Models that included fixed effects for districts and each combination of state and chamber of the legislature. These models estimate the district effects separately than the state effects. Models that excluded multimember districts. These models confirm that our results are not sensitive to our choice of measure of margin of victory for multimember districts. Models that logged the margin of victory to normalize the data to account for outlying data. These models reduce the potential influence of highly uncompetitive races. Models that excluded races with no incumbent running for reelection. These models account for the possibility that term limits influenced whether a race was contested because they exclude those seats that were open because of term limits. Models that excluded races from Connecticut in 2008 when public funding became available. Full public financing was available for the first time to state legislative candidates in the 2008 elections in Connecticut. Models that excluded races in which the number of incumbents exceeded the number of available seats. These models confirm that our results are not sensitive to our definition of an incumbent “win” when more incumbents than available seats participated in a race. We included fixed effects for each year and, where appropriate, controlled for whether an incumbent was running for reelection. We estimated the models of both continuous and binary outcomes using linear probability models and robust variance estimators, due to the fact that all of our covariates are binary (i.e., all of the variables stand for the presence or absence or something, such as incumbency). We also estimated loglinear models to evaluate the changes in these outcomes in House and Senate elections in Maine, Arizona, and the four comparison states. In our analyses, we fit hierarchical models to the observed frequencies in the different four-way tables or five-way tables formed by cross-classifying each of the four outcomes by state (Arizona vs. other states and Maine vs. other states), chamber (Senate vs. House), time period (before public financing programs were available in elections prior to 2000 and after public financing programs were available in 2000 and later elections), and whether an incumbent was or was not involved in the race. We followed procedures described by Goodman (1978) and fit hierarchical models that placed varying constraints on the odds and odds ratios that are used to describe the associations of state, chamber, and time period with each outcome. Ultimately, we chose from among these different models a “preferred” model that included factors that were significantly related to the variation in each outcome and excluded those factors that were not. We are issuing an electronic supplement concurrently with this report— GAO-10-391SP. In addition to summary data on election outcomes in Maine and Arizona, the e-supplement contains additional discussion on the following issues: summary tables of the election data obtained from the four comparison states; fixed effects model assumptions, sensitivity analysis, and results; loglinear model methods and results; margin of victory measures in multimember districts; incumbency reelection rates and the potential effect of district boundary changes following the 2000 Census; and voter turnout calculations and data. To determine whether public financing encouraged more state legislative candidates to run for office, we calculated the average annual number of candidates per legislative primary and general election races for seven election cycles, including two elections preceding the public financing program—1996 and 1998—and five elections after public financing became available—2000 through 2008. Also, to determine whether there were different types of candidates running for office, we compared the percentage of races with third-party or independent legislative candidates who received at least 5 percent of votes cast for each of these seven election cycles. We chose our threshold based on research and interviews with state officials that suggested 5 percent of votes is commonly required for parties to gain access to and retain ballot placement. Ballot placement is critical in that it enables voters to use party information to make voting decisions, and allows them to see alternative party candidates at the same level as major party candidates without having to recall a specific candidate name. This definition of viability focuses on voter choice, and is distinct from whether a candidate is “electable” or competitive with other candidates. To determine changes in candidate spending, we obtained available campaign spending and independent expenditure data from Maine and Arizona. Specifically, we obtained summarized campaign spending and independent expenditure data from Maine’s Commission on Governmental Ethics and Election Practices, the state agency responsible for campaign spending reports. We found that Maine’s campaign spending data for the 1996 through 2008 election cycles and independent expenditure data for the 2000 through 2008 election cycles were sufficiently reliable. In Arizona, we obtained campaign spending and independent expenditure data from the Secretary of State’s office. Due, in part, to several upgrades to Arizona’s campaign finance data systems over the time period reviewed, we found that Arizona’s campaign spending data for the 2000 through 2008 election cycles and independent expenditure data for the 2008 election cycle were sufficiently reliable, with limitations as noted. For example, up to the 2008 election, Arizona’s campaign spending database did not include precise data to identify and link each candidate to his or her campaign finance committee(s), the entities responsible for reporting candidates’ contributions and spending. Further, the candidates’ campaign finance committees can span several election cycles and include spending reports for candidates who ran in several races for the same or different offices, such as House or Senate. Thus, to the extent possible, we matched candidates and candidate campaign finance committees through electronic and manual means, identified and calculated relevant candidate spending transactions, and sorted the data by election cycle dates. Further, although Arizona’s Secretary of State office collected independent expenditure data from 2000 through 2008, it did not collect data on the intended beneficiaries of independent expenditures until the 2008 election cycle. Therefore, we limited our analysis of independent expenditures to the 2008 elections since we could not identify which candidates benefited from the expenditure. We worked with state officials responsible for the public financing programs and campaign finance data systems in Maine and Arizona to develop our methodology for analyzing these data. These officials reviewed summaries we wrote about their respective databases and agreed that they were generally accurate and reliable. We calculated the average House and Senate legislative candidates’ spending in Maine for seven election cycles, from 1996 through 2008 and in Arizona for five election cycles, from 2000 through 2008. For comparisons across years and to observe any trends, we adjusted all candidate spending for inflation with 2008 as the base year using the Department of Commerce’s Bureau of Economic Analysis gross domestic product implicit price deflator. To assess changes in interest group influence and citizens’ confidence in government, we included questions in our interviews with candidates in Maine’s and Arizona’s 2008 elections and interviews with interest groups in both states. Also, we contracted with professional pollsters who conducted omnibus telephone surveys with representative samples of voting-age citizens in Maine and Arizona. Generally, this polling effort was designed to determine the extent to which voting-age citizens in each state were aware of their state’s public financing program and to obtain their views about whether the program has decreased the influence of interest groups, made legislators more accountable to voters, and increased confidence in government. In order to compare responses, the survey consisted of largely similar questions to those asked for our 2003 report. The questions for Maine and Arizona were identical, except for some minor wording differences customized for the respective states, as shown in table 21. Follow-up questions (e.g., questions 2, 3, and 4 in each set) were not asked of any individual who, in response to question 1, acknowledged knowing “nothing at all” about the applicable state’s clean election law or was unsure or declined to answer. Since we pretested largely similar questions with members of the general public for our 2003 report, we did not pretest questions for this effort. To conduct the Maine poll, we contracted with Market Decisions (Portland, Maine), the same polling organization that conducted the Maine poll for our 2003 report. During October 19, 2009, to November 2, 2009, the firm completed 404 telephone interviews with randomly selected adults throughout Maine. The sample of the telephone numbers called was based on a complete updated list of telephone prefixes used throughout the state. The sample was generated using software designed to ensure that every residential number has an equal probability of selection. When a working residential number was called, an adult age 18 or older in the household was randomly selected to complete the interview. The 404 completed interviews represent a survey response rate of 42.5 percent. To conduct the Arizona poll, we contracted with Behavior Research Center, Inc. (Phoenix, Arizona), the same polling organization that conducted the Arizona poll for our 2003 report. During September 9 through 18, 2009, the firm completed telephone interviews with 800 heads of households in Arizona. To ensure a random selection of households proportionately allocated throughout the sample universe, the firm used a computer-generated, random digit dial telephone sample, which selected households based on residential telephone prefixes and included all unlisted and newly listed households. Telephone interviewing was conducted during approximately equal cross sections of daytime, evening, and weekend hours—a procedure designed to ensure that all households were equally represented regardless of work schedules. Up to five separate attempts were made with households to obtain completed interviews. The 800 completed interviews represent a survey response rate of 42.98 percent. All surveys are subject to errors. Because random samples of each state’s population were interviewed in these omnibus surveys, the results are subject to sampling error, which is the difference between the results obtained from the samples and the results that would have been obtained by surveying the entire population under consideration. Measurements of sampling errors are stated at a certain level of statistical confidence. The maximum sampling error for the Maine survey at the 95 percent level of statistical confidence is plus or minus 6.7 percent. The maximum sampling error for the Arizona survey at the 95 percent level of statistical confidence is plus or minus 5 percent. To examine changes in voter participation, we reviewed information about voter turnout data from the Census Bureau, Federal Election Commission, United States Election Assistance Commission, the American National Election Studies, and other resources, including two repositories of elections data and information—George Mason University’s United States Election Project (the Elections Project) and the Center for the Study of the American Electorate. We identified these sources through our review of the literature and through discussions with researchers. To determine the extent to which changes in voter participation could be assessed over time, we reviewed documentation and research on these potential data sources, including information on collection and measurement of the voting-age population (VAP) or voting-eligible population (VEP) and the type of turnout recorded. Finally, we examined data and methodologies for measuring changes in voter turnout and other forms of participation to determine whether changes in participation could be precisely measured at the state level. We found that the different data sources required to calculate changes in turnout are not always comparable across sources and over time, because of differences in the way that data are collected or changes in how turnout is defined. As such, there was no need to conduct electronic testing to further assess the reliability of the data for our purposes. This does not indicate that the data are unreliable for other purposes. We also discussed voter turnout calculations with state officials and researchers. Additional detail about our work related to voter participation is included in the e-supplement to this report— GAO-10-391SP. We conducted this performance audit from November 2008 through May 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Maine voters, by a margin of 56 percent to 44 percent, passed the Maine Clean Election Act (Maine’s Act) in November 1996. Arizona voters, by a margin of 51 percent to 49 percent, passed the Citizens Clean Elections Act (Arizona’s Act) in November 1998. These ballot initiatives established optional financing programs for candidates desiring to use public funds to finance their campaigns as an alternative to traditional fundraising means, such as collecting contributions from individuals or political action committees. The Maine and Arizona programs were the first instances of state programs that offered public funding intended to fully fund most campaign costs of participating candidates seeking state legislature seats and certain statewide offices. Both states’ public financing programs became available for candidates beginning with the elections in 2000. Generally, participating candidates—those candidates who forgo private fund raising and who otherwise qualify to take part in the respective state’s public financing program—are to receive specified amounts of money for their primary and general election campaigns. Under Maine’s and Arizona’s laws, nonparticipating candidates—those candidates who choose to continue using traditional means for financing campaigns—are subject to certain limits on contributions and reporting requirements. This appendix provides an overview of the public financing programs for legislative election campaigns in Maine and Arizona. Detailed information is available on the Web sites of the state agencies responsible for administering the respective program—Maine’s Commission on Governmental Ethics and Election Practices (www.state.me.us/ethics) and Arizona’s Citizens Clean Elections Commission (www.azcleanelections.gov). Other than noting that the public financing program is an alternative financing option available to certain candidates, Maine’s Act has no section that specifically details the purposes, goals, or objective of the law. To get the initiative on the ballot, a coalition of interest groups, the Maine Voters for Clean Elections, collected about 65,000 signatures. At that time, the coalition and other proponents advertised that the public financing program would “take big money out of politics” by limiting what politicians spend on campaigns, reducing contributions from special interests, and increasing enforcement of election laws. They said that the initiative, if passed, would decrease the influence of wealthy individuals, corporations, and political action committees in politics, and would level the playing field so that challengers would have a chance against incumbents. They asserted that politicians would then spend more time focusing on the issues that affect all of their constituents rather than spend time on pursuing money for their campaigns. Further, proponents also advertised that the public financing program would allow candidates who do not have access to wealth the opportunity to compete on a more equal financial footing with traditionally financed candidates, restore citizen’s faith and confidence in government, and give new candidates the opportunity to run competitively against incumbents. In 2003 we reported that according to Maine state officials and interest group representatives we interviewed there was not any organized opposition to the initiative when it was on the ballot. A 2007 report by the Maine Commission on Governmental Ethics and Election Practices reaffirmed that the goals of the program are generally to increase the competitiveness of elections; allow participating candidates to spend more time communicating with voters; decrease the importance of fundraising in legislative and gubernatorial campaigns; reduce the actual and perceived influence of private money in elections; control the increase of campaign spending by candidates; and allow average citizens a greater opportunity to be involved in candidates’ campaigns. In Maine, candidates who wish to participate in the state’s public financing option and receive funds for campaigning must first be certified as a Maine Clean Election Act candidate. Certified candidates, among other things, must (1) forgo self-financing and all private contributions, except for a limited amount of “seed money,” which are funds that may be raised and spent to help candidates with the qualifying process prior to certification, and (2) demonstrate citizen support by collecting a minimum number of $5 contributions from registered voters. For example, as table 22 shows, to qualify for public financing during the 2008 election cycle, a candidate in a Maine House race had to gather $5 qualifying contributions from at least 50 registered voters, and could raise no more than $500 of seed money. After being certified by the state as having met qualifying requirements, participating candidates receive initial distributions (predetermined amounts) of public funding and are also eligible for additional matching funds based on spending by privately funded opponents in conjunction with independent expenditures against the candidate or on behalf of an opponent. For example, in Maine’s 2008 election each participating candidate in a contested race for the House of Representatives (i.e., a race with more than one candidate per seat in contention) received an initial distribution of public funds in the amount of $1,504 for the primary election and an amount of $4,144 for the general election. Also, under Maine’s Act, the maximum allowable matching funds available to a participating candidate in a legislative race were capped at double the initial distribution that the candidate received for his or her contested race, as shown in table 23. Under Maine’s Act, prior to being amended in 2009, the commission was required to recalculate the initial distribution amounts at least every 4 years, based upon average expenditures in similar races in the two previous election cycles. Under this statute, the commission was not required to recalculate the initial distribution amounts in 2008 and intended to use the same payment amounts as in 2006. However, according to a state official, due to a shortfall in the state’s General Fund budget, the Maine State Legislature approved a 5 percent reduction in the general election distribution amounts, which took effect in the 2008 legislative elections. Beginning in the 2012 elections, in response to a 2009 amendment, the state will be required to recalculate the initial distribution amounts every 2 years taking into account several factors such as average candidate spending and increases in costs of campaigning. Matching funds are triggered when required reports show that the sum of a privately funded opponent’s expenditures or obligations, contributions and loans, or fund revenues received exceeds a participating candidate’s sum of fund revenues. Further, the calculation used to assess whether matching funds are triggered is to include reported independent expenditures that benefit an opponent’s campaign. Generally, independent expenditures are any expenditures made by individuals or groups, other than by contribution to a candidate or a candidate’s authorized political committee, for any communication (such as political ads or mailings) that expressly advocates the election or defeat of a clearly identified candidate. During the final weeks before an election, the definition of independent expenditure expands beyond express advocacy to include a broader range of communications directed to the public. In 2008, a total of about $3 million in public funds was authorized for the 332 participating candidates who ran in the Maine primary or general elections for state legislature. Various revenue sources are used to support Maine’s public financing program. As table 24 shows, appropriations were the largest funding source in Maine in 2008. Table 24 also indicates that in 2008, about 6 percent of Maine’s funding came from state income tax checkoff donations and other voluntary donations. This included $194,970 in funding from state income tax checkoff donations, which represented about 7 percent of the 665,503 total returns filed in tax year 2007 in the state. Maine’s Act utilizes a commission, the Maine Commission on Governmental Ethics and Election Practices, to implement the public financing program and enforce provisions of the act. The commission consists of five members appointed by the Governor. Nominees for appointment to the commission are subject to review by the joint standing committee of the state legislature having jurisdiction over legal affairs and to confirmation by the state legislature. The commission is to employ a director and a staff to carry out the day-to-day operations of the program. In addition to financing election campaigns of candidates participating in the public financing program, the Maine Clean Election Fund is also to pay for administrative and enforcement costs of the commission related to Maine’s Act. In 2008, the commission’s total expenditures from the fund were $3,357,472, including $552,426 in personnel, technology, and other administrative costs. Before the passage of Maine’s Act, political campaigns were financed completely with private funds. There were no limitations placed on expenditures by candidates from their personal wealth. Under Maine’s Act, nonparticipating candidates are not limited in the amount they may spend from their personal financial resources on their own campaigns. While not faced with limits on the total amount of money that they can raise or spend, nonparticipating candidates are subject to certain limitations on the amount that an individual, corporation, or political committee can contribute to the campaigns of nonparticipating candidates. In the 2008 elections, for example, a nonparticipating candidate for the state legislature could accept up to $250 from a donor per election. Prior to the 2000 election, the candidates could have collected up to $1,000 from individuals and up to $5,000 from political committees and corporations. Additional reporting requirements are placed on nonparticipating candidates who have one or more participating opponents. For example, a nonparticipating candidate with a participating opponent must notify the commission when receipts, spending, or obligations exceed the initial allocation of public funds paid to the participating opponent. Further, the nonparticipating candidate must file up to three additional summary reports so that the commission can calculate whether the participating opponent is entitled to receive any matching funds. Under Maine law, individuals or organizations making independent expenditures in excess of $100 during any one candidate’s election must file reports with the state. Reporting requirements for independent expenditures are important for helping to determine if matching funds are triggered. Independent expenditures are generally defined as any expenditure for a communication, such as campaign literature or an advertisement that expressly advocates the election or defeat of a clearly identified candidate that is made independently of the candidate, the candidate’s committee, and any agents of the candidate. However, under Maine’s campaign finance laws, expenditures by a group or individual to design, produce, or disseminate a communication to support or oppose a clearly identified candidate during the final weeks before an election with a participating candidate will be presumed to be independent expenditures, even if the communication does not expressly advocate a candidate’s election or defeat. This “presumption period” was first implemented in the 2004 Maine election. In 2008, the presumption period was 21 days before a primary election and 35 days before a general election. The law relating to the presumption period for a general election increased the period from 21 to 35 days in 2007. As table 25 shows, Maine has reporting requirements based upon the amount and timing of the independent expenditures to help ensure that participating candidates receive any additional matching funds they may be eligible for in a timely manner, particularly in the days before the election. Arizona’s Act contains a “findings and declarations” section that addresses the intent of the program. Specifically, the “findings” subsection of the Citizens Clean Elections Act, passed by voters in 1998, noted that the state’s then-current election financing-system allows elected officials to accept large campaign contributions from private interests over which they have governmental jurisdiction; gives incumbents an unhealthy advantage over challengers; hinders communication to voters by many qualified candidates; effectively suppresses the voices and influence of the vast majority of Arizona citizens in favor of a small number of wealthy special interests; undermines public confidence in the integrity of public officials; costs average taxpayers millions of dollars in the form of subsidies and special privileges for campaign contributors; drives up the cost of running for state office, discouraging otherwise qualified candidates who lack personal wealth or access to special interest funding; and requires that elected officials spend too much of their time raising funds rather than representing the public. Further, the “declarations” subsection of Arizona’s 1998 Act stated that: “the people of Arizona declare our intent to create a clean elections system that will improve the integrity of Arizona state government by diminishing the influence of special interest money, will encourage citizen participation in the political process, and will promote freedom of speech under the U.S. and Arizona Constitutions. Campaigns will become more issue-oriented and less negative because there will be no need to challenge the sources of campaign money.” As in Maine, Arizona candidates who wish to participate in the state’s public financing option and receive funds for campaigning must first be certified as a Clean Election candidate. Certified candidates, among other things, must (1) forgo self-financing and all private contributions, except for a limited amount of “early contributions,” which are funds that may be raised and spent to help candidates with the qualifying process prior to certification, and (2) demonstrate citizen support by collecting a set number of $5 contributions from registered voters. To qualify for public financing during the 2008 election cycle, a candidate for Arizona’s House of Representatives had to gather at least 220 qualifying $5 contributions, and could collect no more than $3,230 in early contributions, as shown in table 26. After being certified by the state as having met qualifying requirements, participating candidates receive initial distributions (predetermined amounts) of public funding and are also eligible for additional matching funds when an opposing nonparticipating candidate exceeds the participating candidate primary or general election spending limits. In Arizona’s 2008 elections, each participating candidate for the House of Representatives or Senate who was in contested party primary elections (i.e., races with more than one candidate per seat in contention) received an initial distribution of public funds in the amount of $12,921. After the primary, successful major party candidates who were in a contested general election race then received an additional $19,382, as shown in table 27. Independent candidates received 70 percent of the sum of the original primary and general election spending limits. Unopposed candidates (i.e., those in an uncontested race) received only the total of their $5 qualifying contributions as the spending limit for that election. Participating candidates also received additional matching funds up to predetermined limits when an opposing nonparticipating candidate exceeded the primary or general election spending limits. Matching funds were also provided to participating candidates when independent expenditures were made against them or in favor of opposing candidates in the race. The calculation to assess whether matching funds for participating candidates are triggered is to include reported independent expenditures that, in general, are made on behalf of nonparticipating or another participating candidate in the race by individuals, corporations, political action committees, or other groups. A January 2010 federal district court ruling held Arizona’s Citizens Clean Election Act to be unconstitutional. More specifically, the U.S. District Court for the District of Arizona held that Arizona’s matching funds provision burdens First Amendment speech protections, is not supported by a compelling state interest, is not narrowly tailored, is not the least restrictive alternative, and is not severable from the rest of the statute thereby rendering the whole statute unconstitutional. On May 21, 2010, the U.S. Court of Appeals for the Ninth Circuit reversed the district court ruling on the basis that the matching funds provision imposes only a minimal burden on First Amendment rights, and bears a substantial relationship to the state’s interest in reducing political corruption. In total, about $6 million in public funds was distributed in 2008 to the 120 participating candidates for the Arizona legislature. Arizona’s public financing program is supported through various revenue sources. As table 28 shows, a surcharge on civil and criminal fines and penalties was the largest funding source. Table 28 also indicates that in 2008, $6.6 million, or about 39 percent of the fund’s revenue, came from state income tax checkoff donations and other voluntary donations. Arizona’s Act established the Citizens Clean Elections Commission to implement the public financing program and enforce provisions of the act. The commission consists of five members selected by the state’s highest- ranking officials of alternating political party affiliation. No more than two commissioners may be from the same political party or county, and commissioners may not have run for or held office, nor been appointed to or elected for any office for the 5 years prior to being chosen as a commissioner. One new commissioner is to be appointed each year. As established by Arizona’s Act, the commission is to employ an Executive Director to facilitate administration of the program. The Executive Director is responsible for, among other things, educating and assisting candidates in compliance with the act’s requirements, limits, and prohibitions, assisting candidates in participating and obtaining public funding, as well as determining additional staffing needs and hiring accordingly. Arizona’s Act caps commission spending for a calendar year at $5 times the number of Arizona resident personal income tax returns filed the previous calendar year. Of that amount, the commission may use up to 10 percent for administration and enforcement activities and must use 10 percent or more for voter education activities. The remainder of commission spending goes to participating candidates’ campaign funds. In calendar year 2008, the commission’s expenditures totaled $14,741,043— $850,447 for administration and enforcement, $6,179,857 for voter education, and $7,710,739 for campaign funds. With regard to the $7,710,739 spent for campaign funds in 2008, $1,715,395 was for statewide candidates and $5,995,344 was for legislative candidates. The commission’s responsibility for administering and enforcing Arizona’s Act covers related contribution limits, spending limits, and reporting requirements that affect both participating and nonparticipating candidates. Cases of possible violations may be initiated with the commission in one of two ways: (1) either by an external complaint or (2) through information that comes to the commission’s attention internally. The commission may assess civil penalties after investigating compliance matters and finding probable cause of a violation unless the candidate comes into compliance within a set time frame or settlement agreement is reached. Under certain circumstances, the commission can remove a legislator from office for violating specified Arizona Clean Elections Act spending or contribution limits. For example, the commission, for the first time, acted to remove a state legislator from office for exceeding spending limits by over 10 percent—about $6,000—in his publicly funded election campaign during the 2004 primary election. The commission’s action was upheld by an Arizona administrative law judge and an appeal by the legislator was unsuccessful in the Arizona court system. Before the passage of Arizona’s Act, political campaigns in Arizona were financed completely with private funds. There were no limitations placed on expenditures by candidates from their personal wealth. Under Arizona’s public financing laws, nonparticipating candidates are not limited in the amount they may spend from their personal financial resources on their own campaigns. While not faced with limits on the total amount they can spend on their own campaigns, nonparticipating candidates are subject to certain limitations on the amounts of contributions they can accept. For example, in Arizona, contributions from individuals were limited to $488 per donor for nonparticipating candidates for the state legislature for the 2008 election cycle. The Arizona act reduced the limits on individual contributions to nonparticipating candidates by 20 percent. Nonparticipating candidates have additional reporting requirements. For example, a nonparticipating candidate opposed by a participating candidate, must, in general, file a report with the Secretary of State if the campaign’s expenditures before the primary election exceed 70 percent of the original primary election spending limit imposed on a participating opponent or if the contributions to a nonparticipating candidate has exceeded 70 percent of the original general election spending limit. Under Arizona law, individuals or organizations making independent expenditures must file reports with the Secretary of State. According to commission officials, the commission coordinates with the Secretary of State to determine if participating candidates are eligible for matching funds based upon independent expenditures opposing participating candidates or supporting other candidates in their race. Under Arizona law, independent expenditures are generally defined as expenditures such as campaign literature or advertisements that expressly advocate the election or defeat of a clearly identified candidate that is made independently of the candidate, the candidate’s committee, and any agents of the candidate. As table 29 shows, the amount and timing of the independent expenditure in relation to the election dictates when and how the independent expenditure must be reported. In addition, according to commission and state officials, Arizona has made changes intended to improve and clarify the process of reporting independent expenditures, given their importance in determining matching fund disbursements under the public financing program. For example, these officials told us that they made a number of updates to the office’s campaign finance system for the 2008 election to help improve the reporting and tracking of independent expenditures and the timely disbursement of matching funds to participating candidates. One update required individuals or committees making independent expenditures to report the unique identification number of the candidate that is the beneficiary of an independent expenditure. A Secretary of State official told us that prior to the 2008 election the beneficiary of the independent expenditure was inconsistently identified in a text field, and there was no systematic way to distinguish independent expenditures made on behalf of specific candidates or ballot initiatives. After Maine voters passed the Maine Clean Election Act in November 1996 and Arizona voters passed the Citizens Clean Elections Act in November 1998, a similar public financing law (Connecticut’s Act) was introduced in the Connecticut state legislature in October 2005 and enacted in December 2005, establishing the Citizens’ Election Program. Connecticut’s Act established an optional financing program for candidates for the state legislature beginning in 2008 and certain additional statewide offices beginning in 2010 to use public funds to finance their campaigns as an alternative to traditional fundraising means, such as collecting contributions from individuals or political action committees. In addition, the New Jersey Fair and Clean Elections Pilot Project was enacted into law in August 2004 and the 2007 New Jersey Fair and Clean Elections Pilot Project Act was enacted into law in March 2007. These acts respectively established pilot projects offering optional public financing of campaigns for candidates seeking election to the General Assembly from certain legislative districts for the 2005 election and for candidates seeking election to the General Assembly and the Senate from certain legislative districts in the 2007 election. Detailed information is available on the Web sites of the state agencies responsible for administering the respective programs—Connecticut’s State Elections Enforcement Commission (SEEC) (www.ct.gov/seec/site/default.asp) and New Jersey’s Election Law Enforcement Commission (www.elec.state.nj.us). Connecticut’s Act established the Citizens’ Election Program, which offered full public financing for participating candidates for the House of Representatives and Senate of the state legislature, also known as the General Assembly, beginning in 2008, and will expand to certain statewide offices, such as governor and attorney general, beginning in 2010. Connecticut’s State Elections Enforcement Commission (SEEC) outlined the following goals of the public financing program: to allow candidates to compete without reliance on special interest money, to curtail excessive spending and create a more level playing field among candidates, to give candidates without access to sources of wealth a meaningful opportunity to seek elective office in Connecticut, and to provide the public with meaningful and timely disclosure of campaign finances. In Connecticut, candidates for the state legislature who wish to receive public funds for campaigning must qualify by, among other things, (1) raising a certain total amount of money, in amounts between $5 and $100, in qualifying contributions from individuals, and (2) collecting a certain number of these qualifying contributions from individuals who reside in the district for which the candidate seeks legislative office, as shown in table 30. In addition, candidates can contribute a limited amount of personal funds to their candidate committees before applying for the initial distribution of public funds. The maximum amount of personal funds allowed per candidate varies depending on the office sought. Any allowable amount of personal funds a candidate contributes is not considered as part of the qualifying contributions, and reduces the initial distribution by a corresponding amount. After meeting the requisite qualifications and meeting the ballot requirements administered by the Secretary of State, participating candidates from major political parties may receive initial distributions of public funding as shown in table 31. Minor party candidates can receive varying amounts of public funding depending on whether they meet certain requirements. For elections held in 2010 and thereafter, SEEC is to adjust the amount of public funding for legislative candidates every 2 years to account for inflation. Participating candidates are also eligible for supplemental public funding up to certain specified amounts, based on spending by nonparticipating or participating opposing candidates whose aggregate contributions, loans, or other funds received or spent exceed the applicable spending limit—the amount of qualifying contributions plus applicable full initial distribution for a participating candidate in that race. In addition, on the basis of required independent expenditure reports or a SEEC determination, a participating candidate can also receive additional matching funds, in general, if such independent expenditures are made with the intent to promote the defeat of the participating candidate. Such additional funds are to be equal to the amount of the independent expenditure but may not exceed the amount of the applicable primary or general election grant for the participating candidate. If such independent expenditures are made by an opposing nonparticipating candidate’s campaign, additional matching funds are only to be provided if the nonparticipating candidate’s campaign expenditures plus the amount of independent expenditures, exceed the applicable initial public funding amount for the participating candidate. The primary revenue source for Connecticut’s public financing program is derived from the sale of abandoned or unclaimed property in the state’s custody, such as funds left in saving or checking accounts; stocks, bonds, or mutual fund shares; and life insurance policies. As of March 3, 2010, the Citizens’ Clean Election Fund has about $43 million, a fund established by Connecticut’s Act for the public financing program. In addition, the Citizens’ Election fund receives funds from voluntary contributions and interest earned on the fund’s assets, and if the amount from the sale of abandoned or unclaimed property is less than the amounts specified under state law to be transferred to the Citizens’ Election Fund, then the difference is to be made up from corporation business tax revenues. During the 2008 election cycle, about $8.3 million was distributed to 250 participating candidates in the general election and about $3 million was expended for SEEC administrative costs. About three-fourths (250 of 343) of legislative candidates in Connecticut’s general election participated in the public financing program, and there was at least one participating candidate in over 80 percent of the races, as shown in table 32. Of the participating legislative candidates in Connecticut’s general election, more than half, or 130 of 250 candidates, were incumbents. Of those participating candidates who were elected to office, about 95 percent of the incumbents were elected, or 123 of 130 participating incumbent candidates, and about 23 percent of the challengers were elected, or 28 of 120 participating challenger candidates, as shown in table 33. In 2004, the New Jersey Fair and Clean Elections Pilot Project was enacted into law and established an optional public financing program for General Assembly candidates in two legislative districts in the 2005 general election. Under New Jersey’s 2005 public financing program for legislative candidates, the state Democratic party chairperson and the state Republican chairperson each chose one district to participate in the program. In one of the selected districts, two out of the four candidates for the state Assembly qualified for public funds, and in the other district, no candidates qualified. In 2007, the state legislature expanded the number of districts covered by the program to Senate and General Assembly candidates in three legislative districts and made several changes in the program, such as decreasing the number of contributions each candidate was required to collect from registered voters in his or her district. The goals of the 2007 New Jersey Clean Elections Pilot Project are to end the undue influence of special interest money, to improve the unfavorable opinion of the political process, and to “level the playing field” by allowing ordinary citizens to run for office. To participate in the 2007 Clean Elections Pilot Project, candidates needed to, among other things, (1) file a declaration of intent to seek certification with the New Jersey Election Law Enforcement Commission (ELEC), the agency responsible for the public financing program; (2) agree to participate in at least two debates; and (3) after certification, limit their expenditures to the amounts raised as “seed money” and qualifying contributions, and public funds received from the fund. During the qualifying period, candidates may accept seed money contributions of $500 or less from individuals registered to vote in New Jersey, but in aggregate seed money contributions may not exceed $10,000. A candidate seeking certification must obtain at least 400 contributions of $10 (i.e., $4,000) to receive the minimum amount of public funds available and at least 800 contributions of $10 (i.e., $8,000) to receive the maximum amount of public funds. The contributions must be from registered voters from the legislative district in which the candidate is seeking office. In addition, if two state Assembly candidates from the same party are running in the same legislative district, they both must agree to participate in the public financing program to become certified and eligible to receive public funds. The amount of public funds received by a certified candidate depended upon several criteria: (1) whether or not the candidate is opposed, (2) whether or not the candidate is a major party candidate, and (3) whether the candidate ran in a “split” district, one that, in general, was selected jointly by members of the majority and minority parties in the legislature. After being certified, a candidate nominated by a political party who has also received at least 400 qualifying contributions would receive a grant amount of $50,000 if opposed and $25,000 if unopposed. If the candidate were running in a “competitive” district, then such a candidate could collect funding in equal proportion to the number of remaining qualifying contributions (after the initial 400) up to a maximum of 800 qualifying contributions for a total amount of public funds not to exceed the average amount of money spent by all candidates in the two preceding general elections for those offices. If a candidate is running in one of the two “nonsplit” districts, that is, one district selected by the members of the majority political party, and one district selected by the members of the minority political party, then the candidate could collect funding in equal proportion to the number or remaining qualifying contributions (after the initial 400) up to 800 qualifying contributions for a total not to exceed $100,000. Qualifying contribution amounts received would be deducted from grant amounts. For example, if a candidate raised 400 $10 qualifying contributions, the amount dispersed to the candidate would be $46,000 ($50,000 minus $4,000 collected in qualifying contributions). Participating candidates may also receive additional funds under certain circumstances. When a campaign report of a nonparticipating candidate shows that the aggregate amount of contributions exceeds the amount of money provided to an opposing participating candidate, ELEC may authorize an additional amount of money equivalent to the excess amount, up to a maximum of $100,000 to each opposing participating candidate in the same district as the nonparticipating candidate. In addition, when a participating candidate files a written and certified complaint to ELEC, and ELEC determines that (1) a nonparticipating candidate is benefiting from money spent independently on behalf of the nonparticipating candidate or that (2) a participating candidate is the subject of unfavorable campaign publicity or advertisements by an entity not acting in concert with the opposing nonparticipating candidate, ELEC may authorize an additional amount of money up to a maximum of $100,000 to the opposing participating candidate in the same legislative district who is not benefiting from the expenditure. For the 2007 pilot project, the New Jersey state legislature funded the program with approximately $7.7 million from the state’s general funds. In addition, voluntary donations, earnings received from the investment of money in the fund, and fines and penalties collected for violations of the public financing program are also sources of revenue. All unspent money is to be returned to the fund. About $4 million was distributed to participating candidates for the 2007 pilot project. According to a state official, New Jersey’s public financing program, which contains matching funds provisions, was not reauthorized for the 2009 elections due to both concerns about a federal district court ruling holding that the matching funds provisions of Arizona’s Citizens Clean Elections Act to be unconstitutional, as well as state budget constraints. In the 2007 Pilot Program, 16 of the 20 legislative candidates running for office in the three legislative districts participated in the program, and every winning candidate participated. Two of the 16 participating candidates received funds in addition to their initial distribution of public funds due to independent expenditures made on behalf of opposing nonparticipating candidates. In addition to the contact named above, Mary Catherine Hult, Assistant Director; Nancy Kawahara; Geoff Hamilton; Tom Jessor; Grant Mallie; Heather May; Amanda Miller; Jean Orland; Anna Maria Ortiz; Doug Sloane; Michelle Su; Jeff Tessin; Adam Vogt; and Monique Williams made significant contributions to this report. Berry, William D., Michael B. Berkman, and Stuart Schneiderman. “Legislative Professionalism and Incumbent Reelection: The Development of Institutional Boundaries.” American Political Science Review, vol. 94, no. 4 (December 2000). Carey, John M., Richard G. Niemi, and Lynda W. Powell. “Incumbency and the Probability of Reelection in State Legislative Elections.” The Journal of Politics, vol. 62, no. 3 (August 2000). Carsey, Thomas M., Richard G. Niemi, William D. Berry, Lynda W. Powell, and James M. Snyder, Jr. “State Legislative Elections, 1967-2003: Announcing the Completion of a Cleaned and Updated Dataset.” State Politics and Policy Quarterly, vol. 8, no. 4 (Winter 2008). Duff, Brian, Michael J. Hanmer, Won-ho Park, and Ismail K. White. “How Good is This Excuse: Correcting the Over-reporting of Voter Turnout in the 2002 National Election Study.” American National Election Studies Technical Report No. nes010872 (August 2004). Francia, Peter L., and Paul S. Herrnson. “The Impact of Public Finance Laws on Fundraising in State Legislative Elections.” American Politics Research, vol. 31, no. 5 (September 2003). Gross, Donald A., and Robert K. Goidel. The States of Campaign Finance Reform. Columbus, Ohio: The Ohio State University Press, 2003. Gross, Donald A., Robert K. Goidel, and Todd G. Shields. “State Campaign Finance Regulations and Electoral Competition.” American Politics Research, vol. 30, no. 2 (March 2002). Hamm, Keith E., and Robert E. Hogan. “Campaign Finance Laws and Candidacy Decisions in State Legislative Elections.” Political Research Quarterly, vol. 61, no. 3 (September 2008). Hogan, Robert E. “State Campaign Finance Laws and Interest Group Electioneering Activities.” The Journal of Politics. vol. 67, no. 3 (August 2005). La Raja, Ray J., and Mathew Saradjian. “Clean Elections: An Evaluation of Public Funding for Maine Legislative Contests.” Center for Public Policy and Administration, University of Massachusetts Amherst, 2004. Levin, Steven M. Keeping It Clean: Public Financing in American Elections. Los Angeles, California: Center for Governmental Studies, 2006. Malbin, Michael J., and Thomas L. Gais. The Day After Reform, Sobering Campaign Finance Lessons from the American States. Albany, New York: The Rockefeller Institute Press, 1998. Malhotra, Neil. “The Impact of Public Financing on Electoral Competition: Evidence from Arizona and Maine.” State Politics and Policy Quarterly, vol. 8, no. 3 (Fall 2008). Mayer, Kenneth R. Declaration to the United States District Court District of Arizona. Filed 9/23/08, CV-08-01550-PHX-ROS. Mayer, Kenneth R., Timothy Werner, and Amanda Williams. “Do Public Funding Programs Enhance Electoral Competition?” in Michael P. McDonald and John Samples, eds. The Marketplace of Democracy, Electoral Competition and American Politics. Washington, D.C.: Cato Institute and Brookings Institution Press, 2006. McDonald, Michael P., Alan Abramowitz, Brad Alexander, and Matthew Gunning. “Drawing the Line on District Competition/Drawing the Line on District Competition: A Rejoinder.” PS, Political Science & Politics, vol. 39, no. 1 (January 2006). McDonald, Michael P., and John Samples, eds. The Marketplace of Democracy, Electoral Competition and American Politics. Washington, D.C.: Cato Institute and Brookings Institution Press, 2006. Miller, Michael. “Gaming Arizona: Public Money and Shifting Candidate Strategies.” PS Online, vol. 41, no. 3 (July 2008). Miller, Michael G. “The Fifth Source and the Ballot Box: Public Money, Candidate Time, and Changing American Elections.” Paper presented at the annual meeting of the Midwest Political Science Association, Chicago, April 2009. Moncrief, Gary F., Richard G. Niemi, and Lynda W. Powell. “Time, Term Limits, and Turnover: Trends in Membership Stability in U.S. State Legislatures.” Legislative Studies Quarterly, vol. XXIX, no. 3 (August 2004). Niemi, Richard G., Simon Jackman, and Laura R. Winsky. “Candidacies and Competitiveness in Multimember Districts.” Legislative Studies Quarterly, vol. XVI, no. 1 (February 1991). Primo, David M. Declaration to the United States District Court District of Arizona. CV-08- 01550-PHX-ROS. Samples, John, ed. Welfare for Politicians? Taxpayer Financing of Campaigns. Washington, D.C.: Cato Institute, 2005. Squire, Peverill. “Legislative Professionalization and Membership Diversity in State Legislatures.” Legislative Studies Quarterly, vol. XVII, no. 1 (February 1992). Thompson, Joel A., and Gary F. Moncrief, eds. Campaign Finance in State Legislative Elections. Washington, D.C.: Congressional Quarterly, Inc., 1998. | The 2000 elections in Maine and Arizona were the first in the nation's history where candidates seeking state legislative seats had the option to fully fund their campaigns with public moneys. In 2003, GAO reviewed the public financing programs in Maine and Arizona and found the programs' goals were to (1) increase electoral competition; (2) increase voter choice; (3) curb increases in campaign costs; (4) reduce interest group influence; and (5) increase voter participation. GAO reported that while the number of candidates who participated in the programs increased from 2000 to 2002, it was too soon to determine the extent to which these five goals of the programs were being met. Senate Report 110-129 directed GAO to update its 2003 report. This report: (1) provides data on candidate participation and (2) describes changes in five goals of Maine's and Arizona's programs in the 2000 through 2008 elections and the extent to which changes could be attributed to the programs. To address its objectives, GAO analyzed available data about candidate participation, election outcomes, and campaign spending for the 1996 through 2008 legislative elections in both states, reviewed studies, and interviewed 22 candidates and 10 interest group officials selected to reflect a range of views. The interview results are not generalizable to all candidates or all interest groups. GAO is issuing an electronic supplement with this report--GAO-10-391SP--which provides data and summaries of statistical analyses conducted. In Maine and Arizona, legislative candidates' participation in the public financing programs, as measured by the percentage of candidates participating and the proportion of races with a participating candidate, increased from 2000 to 2008. Specifically, the participation rate of candidates in Maine's general elections increased from 33 percent in 2000 to over 80 percent in 2006 and 2008. Meanwhile, the participation rate of candidates in Arizona's general elections increased from 26 percent in 2000 to 64 percent in 2008. Also, the proportion of races with at least one candidate participating in the program generally increased from 2000 through 2008. While there was some evidence of statistically significant changes in one of the five goals of Maine's and Arizona's public financing programs, we could not directly attribute these changes to the programs, nor did we find significant changes in the remaining four goals after program implementation. Specifically, there were statistically significant decreases in one measure of electoral competition--the winner's margin of victory--in legislative races in both states. However, GAO could not directly attribute these decreases to the programs due to other factors, such as the popularity of candidates, which affect electoral outcomes. We found no change in two other measures of competition, and there were no observed changes in voter choice--the average number of legislative candidates per district race. In Maine, decreases in average candidate spending in House races were statistically significant, but a state official said this was likely due to reductions in the amounts given to participating candidates in 2008, while average spending in Maine Senate races did not change. In Arizona, average spending has increased in the five elections under the program. There is no indication the programs decreased perceived interest group influence, although some candidates and interest group officials GAO interviewed said campaign tactics changed, such as the timing of campaign spending. Data limitations, including a lack of comparable measures over time, hinder analysis of changes in voter participation. |
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In October 1991, DOD implemented the Fund which consolidated the nine existing industrial and stock funds operated by DOD as well as DFAS, the Defense Industrial Plant Equipment Service, the Defense Reutilization and Marketing Service, the Defense Commissary Agency, and the Defense Technical Information Service. The Army, Navy, Air Force, and Defense agencies industrial and stock funds have maintained their individual identities as part of the Fund. The Fund’s estimated fiscal year 1996 revenue of $75 billion makes it equivalent to one of the world’s largest corporations. Effective cash management is directly dependent on DOD managers receiving accurate and timely data on the Fund’s cash balances, collections, and disbursements. According to DOD’s Financial Management Regulation, Volume 11B, the Fund is to maintain the minimum cash balance necessary to meet both operational requirements and to meet disbursement requirements in support of the capital asset program. In essence, the Fund is to maintain a minimum cash balance which, at the same time, is sufficient to cover expenses, such as paying employees for repairing ships and aircraft and vendors for inventory items. Currently, DOD’s policy requires the Fund to maintain cash levels to cover 7 to 10 days of operational costs ($1.5 billion to $2.1 billion) and 4 to 6 months of capital asset disbursements ($.5 to $.9 billion). The regulation further provides that if the overall cash level of the Fund falls below $1 billion, DFAS will take immediate actions to resolve cash shortages by advance billing customers. Cash generated from the sale of goods and services is the primary means of the Fund maintaining an adequate level of cash. The ability to generate cash consistent with DOD policy is dependent on (1) accurately setting prices to recover the full costs of producing goods and services, (2) accurately projecting workload, such as the number of aircraft to be repaired during the year, and (3) collecting funds in a timely manner from customers for work performed. To the extent that (1) the Fund is not paid for work performed in a timely manner or (2) DOD cannot produce accurate and timely information on the Fund’s collections and disbursements, unanticipated fluctuations or, worse yet, cash shortages will occur. DOD has experienced continual difficulties in effectively implementing and operating the Fund. Since the concept of the Fund was first put forth in February 1991, we have monitored and evaluated its implementation and operations. From its inception, over 4 years ago, we have pointed out that DOD did not have the procedures and systems in place to operate the Fund. In March 1995, we further reported that DOD’s ability to properly manage the Fund continued to be hindered in part because of its inability to adequately manage the Fund’s cash. In May 1995, we testified that we continued to have concerns about DOD’s management of the Fund’s cash. When the Fund was established, the responsibility for managing cash was placed under the Office of the Secretary of Defense (Comptroller). However, on February 1, 1995, cash management and related Antideficiency Act responsibilities were returned to the military service and DOD component level. This change was a major departure from the benefits of a single cash balance DOD cited in establishing the Fund. According to DOD officials, the policy was changed to better align accountability and responsibility for cash management. DOD pointed out that the operational control of actions taken by each Fund activity, which results in cash disbursements and collections, always has and continues to reside with the military services and DOD components. While this report focuses on cash management problems, they are symptomatic of the persistent weaknesses in DOD’s and the Fund’s financial management operations. DOD’s fiscal year 1995 Federal Managers’ Financial Integrity Act (FMFIA) report highlighted a number of serious weaknesses in DOD’s financial management operations and systems. GAO’s High-Risk Report Series also pointed out that DOD has serious, long-standing problems in providing reliable financial and cost information to those responsible for carrying out and overseeing DOD’s missions and programs. With regard to the Fund, the FMFIA report identified that it had inadequate accounting and reporting. Having systems and reports that provide timely and accurate information on the Fund’s cash balances for individual business areas and on collections and disbursements is integral to having effective controls over cash management. The overall objective of this assignment was to evaluate the Fund’s cash management practices with respect to the functions that impact on cash, such as billing customers and collecting receivables. To accomplish our objective, we (1) interviewed officials in the Office of the Secretary of Defense (Comptroller), DFAS, the military services, and Defense components regarding their reporting of monthly collection and disbursement information for the Fund, (2) reviewed DOD’s cash management policies and procedures to obtain an understanding of the Fund’s cash management practices, and (3) collected and analyzed for selected Fund business areas financial information related to collections, disbursements, accounts receivables, and accounts payable. In addition, through discussions with appropriate DOD officials and a review of pertinent documents, such as the Report on Budget Execution Defense Business Operation Fund (DD Form 1176) and the Defense Business Operations Fund Accounting Report (1307), we determined whether the Fund’s systems provided managers with information conducive to managing cash. We performed our work at the headquarters, Office of the Under Secretary of Defense (Comptroller); Departments of the Army, Navy, and Air Force; Defense Logistics Agency (DLA); Defense Finance and Accounting Service (DFAS); the Cleveland, Columbus, Denver, and Indianapolis DFAS Finance Centers; DFAS operating locations in Norfolk and San Diego; and selected Fund business activities. Our review was performed from July 1995 through February 1996, in accordance with generally accepted government auditing standards. The quantitative financial information used in this report on the Fund’s financial operations was produced from DOD’s systems and was not independently verified by GAO. DOD’s fiscal year 1995 FMFIA report acknowledges inadequacies in the Fund’s accounting and reporting. In addition, the DOD IG has cited system deficiencies as one of the major obstacles to the preparation of financial statements that fairly present the Fund’s financial position. We provided a draft of this report to DOD for comment. On March 20, 1996, we discussed the facts, conclusions, and recommendations in our draft report with cognizant DOD officials and have incorporated their comments where appropriate. The Fund’s financial reports are untimely, incomplete, and inaccurate and, therefore, do not provide Fund managers with the information they need to manage cash. Specifically, we found that (1) the monthly financial reports do not contain cash balances for each individual Fund business area, (2) collection and disbursement data are not timely since the data are reported approximately 3 to 4 weeks after the month in which the transaction took place, and (3) monthly financial reports do not fully disclose billions of dollars of adjustments made to accounts receivable and payable balances, which could mask the actual amount of future collections and disbursements. Effective cash management is dependent on the availability of timely and accurate information that impact the Fund’s cash balance. The absence of this information could (1) result in an increase in the Fund’s cash requirements to cover the day-to-day fluctuations in the Fund’s cash balance and (2) impact major programmatic decisions which may be driven largely by cash balance considerations. In accordance with DOD policy, the Fund’s monthly financial reports provide cash balance information at the military service and DOD component level who presently have cash management responsibility. However, the Fund’s monthly financial reports do not provide cash balance information on the Fund’s individual business areas although most decisions that impact cash, such as buying inventory items from vendors, are made at the business area or activity level. Instead, the monthly financial reports only show collections and disbursements. As such, the reports lack key information such as the amount of the initial allocation of the cash by DOD to the military services and DOD components in February 1995, when cash management responsibility was decentralized. The initial allocation—a substantial amount of the Fund’s cash—was $1.7 billion, or 39 percent of the Fund’s $4.4 billion cash balance at the end of September 1995. Lacking this basic information can put entities charged with Antideficiency Act responsibilities in the position of having to comply with the Act without the tools to do so. For example, since the Antideficiency Act responsibility was passed from DLA to the Transportation Command (TRANSCOM) in May of 1995, TRANSCOM managers are responsible for ensuring that they do not spend more than they have. However, they do not know their cash balance. The position the managers are in is similar to an individual writing personal checks without ever knowing his or her checkbook balance. In April 1995, just before cash management responsibility was transferred, TRANSCOM called attention to the difficulties it would have in complying with the Act to DLA, stating that it “does not have an accounting system to properly account for or report cash transactions,” and that “during contingency operations, we have no control over cash collections of transportation bills.” In response to TRANSCOM’s memorandum, the DLA comptroller stated that “the lack of control over cash cited in your memorandum applies equally to all Defense agencies, including DLA.” Further, managers only receive official information once a month on the amount of collections and disbursements that impact the cash balance. These data are not timely since they are not received until 3 to 4 weeks after the end of the month in which transactions took place. For example, the reports for February 1996 will not be available until the end of March 1996. As a result, the Fund’s cash can only be managed on a reactive rather than proactive basis. The lack of timely data was raised as a serious problem by the Joint Logistics Commanders who are senior-level general officers. In a June 1995 memorandum to the Under Secretary of Defense (Comptroller), the Joint Logistics Commanders stated that “the current twenty-five day compilation period is not acceptable for cash management purposes” and that a “reduction in cycle times for recording and reporting transactions impacting cash balances is required.” They also stated that “cycle time reduction is of critical importance to facilitate major programmatic decision which may be driven largely by cash balance considerations, particularly those made late in the fiscal year.” DFAS officials recognize that the current reports are not adequate or timely. A DFAS official told us that DFAS is currently developing reporting procedures so that the military services and DOD components can identify the monthly cash balance for each Fund business area, such as the Navy shipyard business area or the Air Force depot maintenance business area. With respect to the timeliness of the reports, DOD’s Financial Management Regulation on the Fund establishes a goal to improve cash reporting by providing real-time cash balances on the Fund’s business areas. However, until the Fund’s financial systems and processes are improved, the ability to provide the collection and disbursement data more promptly will not be achieved. Further, given that these system improvement efforts will be a long-term venture, it is important for DOD to concurrently pursue efforts to improve the quality of the financial information in the systems today. In previous reports on the Fund, we have stressed the need for DOD to improve existing operations and to not wait for implementation of the new systems to improve the quality of information. Operating improvements can be realized under the present systems through better adherence to existing policies and procedures and manual correction of existing erroneous data. In fact, if the reliability of the information is not improved dramatically, any new systems will provide the same erroneous data and perpetuate the operational problems that result from managers not receiving accurate information. The Fund’s financial reports, as of September 1995, showed that the Fund had $4.5 billion and $920 million of undistributed disbursements and collections, respectively. In preparing the Fund’s monthly financial reports, DOD did not fully disclose that billions of dollars of adjustments were made to its accounts receivable and payable balances for undistributed disbursements and collections. In order to more accurately reflect the true accounts receivable and payable balance on financial reports, DOD’s guidance—Financial Management Regulation, Volume 11B, Chapter 54—provides that accounts receivables and payables should be adjusted by the amount of undistributed collections and disbursements, respectively. Conceptually, undistributed collections and disbursements are collections and disbursements that have been made and reported to the Treasury but not posted to DOD’s records. Therefore DOD adjusts the (1) accounts payable balance based on the difference between the disbursements recorded in the accounting system’s general ledger and the disbursements reported to the Treasury and (2) accounts receivable balance based on the difference between the collections recorded in the accounting system’s general ledger and the collections reported to the Treasury. Normally, adjustments should reduce receivable and payable balances. However, our analysis of the Fund’s financial reports and supporting documentation showed that DOD had negative undistributed disbursements and collections in some business areas which increased, instead of decreased, the amounts of accounts payable and receivable. These negative amounts can occur for numerous reasons, such as transactions being reported on the activity records but not on Treasury records and/or double recording of transactions by the activities. For example, as of the end of September 1995, accounts receivable for the Navy shipyards and the DLA distribution depots were increased by $542 million and $364 million, respectively, as a result of negative undistributed collections. Similarly, accounts payable for the Military Sealift portion of TRANSCOM increased by $205 million as a result of negative undistributed disbursements. Fully disclosing adjustments on the Fund’s monthly reports would serve to highlight reporting problems, such as negative undistributed collections and disbursements. Such negative amounts cast serious doubts on the accuracy and reliability of the reported account balances. If they were fully disclosed on financial reports, they would serve as “red flags” for management, calling attention to the fact that the information being reported could be inaccurate and warrants further analysis, and that corrective action may be needed. During fiscal year 1995, DOD continued the practice of advance billing customers for work it had not yet performed to ensure that sufficient funds were available to meet day-to-day operating expenses. At the end of September 1995, the military services had advance billings outstanding of $2.6 billion. Of this amount, the Navy had about $2 billion or 77 percent of the total. At the same point in time, DOD had outstanding accounts receivables of $1.4 billion that were over 60 days old. If DOD was more aggressive in collecting these receivables, it could help reduce the Fund’s cash shortage and the need to advance bill customers. Recognizing that the Fund’s operations would not generate adequate cash to complete the transfers of $5.5 billion as required by the National Defense Authorization Act for Fiscal Year 1993, the DOD Principal Deputy Comptroller directed in June 1993 that all depot maintenance and selected Naval research and development activities advance bill customers for goods and services to be provided. In July 1994, the Comptroller of Defense stopped the advance billing at all activities except the Naval shipyards and research and development activities. Although these remaining activities had been tentatively scheduled to stop advance billing in January 1995, this did not occur. In discussing a draft of this report with DOD officials, they stated that when the responsibility for Fund cash was returned to the DOD components, along with the associated Antideficiency Act responsibilities, in February 1995, the amount of cash returned to the Army, Navy, and Air Force was not sufficient to cover outstanding Fund liabilities. The Fund’s financial reports indicate that this was the case, with each of the military services facing cash shortages. Therefore, according to DOD, it was necessary for the military services to continue to advance bill customers so that their cash portion of the Fund would not go negative. The following table provides information on the actual amount of outstanding advance billings and the reported cash balance for the military services and the Defense agencies at the end of September 30, 1995. The above table shows that if the Navy had not advance billed its customers, the Navy Fund cash balance would have been a negative $372 million as of September 30, 1995. In fact, the Navy advance billed its customers about $1.2 billion during September 1995 to ensure that the Navy Fund cash balance remained positive—at the end of August 1995, the Navy Fund cash balance was about $40 million. By comparison, even without advance billing, the table shows that the Army and Air Force portion of the Fund had positive balances of $315 million and $157 million, respectively. In updating the Fund’s cash balance information as of the end of December 1995, we found that the reported cash balance had significantly decreased since September 1995. Over that 3-month period, the Fund’s overall cash balance had decreased from $4.4 billion to $2.1 billion—over a 50-percent reduction. Navy had the greatest share of the cash reduction; its balance decreased from about $1.6 billion to $83 million. In discussing a draft of this report with DOD officials, they stated that the Fund would not advance bill customers during fiscal years 1996 and 1997. They also stated that the Army and Air Force would eliminate their outstanding advance billing balances by the end of fiscal year 1996 and that the Navy would eliminate its outstanding advance billing balance by the end of fiscal year 1997. As part of our ongoing work, we will continue to monitor the Fund’s effort to eliminate the outstanding advance billing balances. One way to help reduce the cash shortage problem is for the Fund to promptly collect accounts receivables. Since the Fund is a $75 billion operation and it bills customers at least monthly, it is normal to have 1 or 2 months of accounts receivables on the books. As of September 1995, DFAS reported that the Fund had $6 billion in accounts receivables for Fund business areas with receivables exceeding $50 million. However, about 24 percent of the Fund’s receivables, or $1.4 billion, have been outstanding for over 60 days with almost $1 billion of this amount outstanding for over 120 days. The following table provides aging information on the Fund’s accounts receivables that are over 60 days old. The DOD Financial Management Regulation, Volume 4, provides that “procedures shall be established for the routine aging of all amounts overdue so that appropriate actions can be taken to effect their collection. The aggressive and efficient management of receivables in the Department of Defense is an important element of DOD stewardship over public funds.” However, as the above table shows, DOD has not collected the accounts receivables in a timely manner. Some examples of why the Fund has not been collecting receivables in a timely manner are highlighted below and are discussed in further detail in appendix I. DFAS was not reimbursed $57 million by the Army and $34 million by the Navy in a timely manner for work performed in fiscal years 1993 and 1994. DFAS was paid 6 months to 2 years after it performed this work. Further, as of February 2, 1996, the Navy still has not reimbursed DFAS $7 million for work performed during fiscal years 1993 or 1994. DFAS was not paid primarily because it was performing work before receiving a funding document from its customers as generally required by the DOD Financial Management Regulation. As of September 30, 1995, DFAS’ accounts receivable report showed that TRANSCOM had $697 million of accounts receivable. Of that amount, $437 million had not been billed to customers. For example, during fiscal years 1993 and 1994, TRANSCOM performed about $104.5 million of transportation services but had not received reimbursement as of February 16, 1996—1 to 3 years after the work was performed. TRANSCOM has not been reimbursed primarily because the billing documentation did not identify the specific activities to be billed. In discussing a draft of this report with DOD officials, while agreeing to pursue collection of the receivables, they stated that accounts receivable data provide misleading information to DOD managers since some of these receivables will not be collected. They said they needed to determine the collectibility of the receivables and write-off amounts determined to be uncollectible. However, since most of the receivables are from DOD activities, if they were valid receivables, it would seem they should be collectible. Therefore, DOD needs to aggressively pursue collecting the receivables and fully document why any receivables would not be collectible. Because the Fund is a revolving fund, promptly being reimbursed for work performed is essential to its financial stability since this is the principal means through which it receives moneys needed to cover operating expenses. Further, the lack of timely reimbursements may result in cash fluctuations throughout the fiscal year and therefore lead to possible additional advance billing of customers. Although problems discussed in this report transcend the entire Department, they were most prevalent with the Navy and DFAS activities providing accounting services to the Navy. The difficulties in accurately accounting for and reporting on the Navy’s portion of the Fund’s cash are highlighted below and discussed in more detail in appendix II. Processing of interfund transactions, which occur when one DOD activity sells or buys goods and/or services from another DOD activity, resulted in the overstatement of business area cash—collections less disbursements—on the departmental level financial reports. Although this problem impacts several business areas, it is the most severe in the Naval Aviation Depots. Within the aviation depots alone, Navy officials acknowledged that cash may be overstated anywhere from $800 million to $1 billion. As discussed earlier, recording of undistributed transactions distorted the amount of collections and disbursements reported on the Fund business areas’ financial reports. The Navy/DFAS routinely recorded undistributed collections and disbursements in the Research and Development business area financial reports, rather than allocating the amounts to the appropriate business areas. This resulted in an understatement of cash in the Research and Development business area and a corresponding overstatement of cash in the other business areas. As a result, management did not have an accurate picture of the business areas’ collections, disbursements, and cash for use in the decision-making process. Large unreconciled cash differences exist at the Naval Aviation Depots. As of September 30, 1995, the unreconciled cash differences at the aviation depots ranged from a negative $15 million to a positive $375 million. A comptroller official with the Naval Air Systems Command (NAVAIR) stated that visibility over cash within NAVAIR had been lost. Since the Navy constitutes approximately $23 billion or 31 percent of the Fund’s estimated fiscal year 1996 revenue of $75 billion, until the problems with the Navy cash balances are resolved, the accuracy of the financial information on the Fund’s operations will continue to be highly questionable. We have discussed these matters with cognizant Navy and DFAS officials, and, based on these discussions, they have initiated actions that, if properly implemented, should help resolve the problems. For example, DFAS and the Navy have developed specific funding codes to help resolve problems related to processing interfund transactions. Since the inception of the Fund, the DOD IG and the military service audit agencies have audited the Fund’s financial statements, prepared pursuant to the requirements of the CFO Act. These audits have continually identified serious problems in the Fund’s financial statements which relate to the Fund’s cash management practices. The DOD IG was not able to render an opinion on the Consolidated Statement of Financial Position of the Fund as of September 30, 1994, because of the lack of a sound internal control structure for the Fund and significant instances of noncompliance with regulations. Some problems related to the Fund’s cash, accounts receivable, and accounts payable identified in DOD IG and military service audit agency reports are highlighted below. Unsupported and unverified transactions recorded in DLA’s distribution depot and the Air Force depot maintenance business areas caused accounts receivable to be misstated by $511.8 million. The Naval Audit Service reported that the accounts payable for the Navy portion of the Fund was overstated by a net estimated amount of $52.4 million. Overstatements were caused by activities paying recorded payables in fiscal year 1994 without adjusting accounts payable, insufficient supporting documents, and bookkeeping and input errors. The Air Force Audit Agency reported that the Financial Inventory Accounting and Billing System (FIABS) did not record accounts payable for $2.4 billion disbursed for reparable item purchases and repairs. Additionally, FIABS did not maintain subsidiary records to support $96.9 million owed to vendors for purchased consumable items. As a result, users of the financial information did not have accurate accounts payable balances to project future cash outlays. Although established as a business operation, the Fund has yet to pass the test of an annual financial statement audit—for fiscal years 1993 and 1994, the DOD IG could not render an audit opinion on the Fund’s consolidated financial statements. The cash management problems we identified in this report are only a facet of the broader financial management weaknesses confronting the Fund and DOD overall. Successful implementation of the CFO Act will be key to solving DOD’s long-standing financial management weaknesses. In the interim, by correcting the Fund’s cash management problems, DOD can provide better tools than currently available to the Fund’s business area managers for use in the decision-making process. While the Fund’s cash balance is managed at the military service and DOD component level, most decisions that impact cash, such as buying inventory items from vendors, are made at the business area or activity level. However, the poor state of cash-related information DOD managers have to work with severely inhibits their ability to manage the Fund’s cash. This is evident by the fact that DOD relies on advance billing of customers for work not yet performed to ensure that the Fund has sufficient funds available to meet its day-to-day operating expenses. Covering cash shortages in this manner does not provide the necessary incentives to effectively manage certain business processes of the Fund that are related to cash such as collecting accounts receivables in a timely manner. Unless a high priority is placed on correcting these problems, the status quo will be perpetuated, and the Fund will continue to be limited in its ability to carry out its original objective of enhancing readiness capability through business operation efficiencies. We recommend that the Under Secretary of Defense (Comptroller) identify the cash balance for each business area in the Fund’s monthly 1307 financial report, fully disclose in the monthly 1176 and 1307 reports the amount of the adjustments made to the accounts receivable and payable balances for undistributed collections and disbursements, validate and aggressively pursue the collection of accounts receivables especially those over 60 days old, and direct DOD activities to follow existing DOD Financial Management Regulation and provide funding documents to the Fund prior to the Fund beginning work. On March 20, 1996, we discussed a draft of this report with officials of the Secretary of Defense (Comptroller), Army, Navy, Air Force, DFAS, and DLA, who are responsible for the Fund’s cash management. In general, these officials agreed with the report’s findings, conclusions, and recommendations. Regarding the accounts receivable information and DOD’s view that some of the receivables may not be collectible as noted earlier in this report, we modified the proposal contained in our draft report to recommend that DOD validate the Fund’s accounts receivable balances. We are sending copies of this report to the Secretary of Defense; the Director of the Office of Management and Budget; the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services; the Senate Committee on Governmental Affairs; the House Committee on Government Reform and Oversight; the Subcommittee on Government Management, Information, and Technology, House Committee on Government Reform and Oversight; and the House and Senate Committees on Appropriations; and other interested parties. Copies will be made available to others upon request. Please contact me at (202) 512-6240 if you or your staffs have any questions concerning this report. Other major contributors to this report are listed in appendix III. Since the Fund is a revolving fund, being promptly reimbursed for work performed is essential to its financial stability. As the Fund performs work and incurs costs, it bills customers on the basis of predetermined prices—commonly referred to as “stabilized” or “standard” prices. These payments are then used to finance subsequent operations, much as sales revenues are used in commercial enterprises. As stated in this report, we identified numerous instances in which the Fund was not being reimbursed in a timely manner for services performed. As of September 1995, 24 percent of the Fund’s receivables, or $1.4 billion, had been outstanding for more than 60 days. This constricts management’s ability to manage cash efficiently, and it could increase the requirements of the Fund to cover the cash fluctuations throughout the fiscal year. The following details the instances we identified in which customers did not reimburse the Fund in a timely manner. Each year, DFAS performs about $1.5 billion of accounting and finance work, such as paying civilian and military personnel for the military services and Defense agencies. However, DFAS was not reimbursed $57 million by the Army and $34 million by the Navy in a timely manner for work performed in fiscal years 1993 and 1994. In addition, DFAS still has not been reimbursed $7 million for Navy work performed in fiscal years 1993 or 1994. In this case, the Navy did not send DFAS a funding document to cover routine DFAS accounting services. DFAS and the Navy have been working on resolving this problem, and DFAS recently requested that the Navy provide a funding document—called a Military Interdepartmental Purchase Request (MIPR)—for $7 million to cover DFAS services performed in fiscal years 1993 and 1994. Chapter 61 of the DOD Financial Management Regulation on the Fund provides that “as a general rule, no work or services should be performed by a Defense Business Operations Fund activity except on the basis of reimbursable orders received and accepted that constitute obligations of Federal Government ordering activities or advances from non Federal Government entities.” The following details cases we identified in which the Army and Navy did not promptly reimburse DFAS. DFAS performed $17 million of work in fiscal year 1993 and $40 million of work in fiscal year 1994 that the Army did not pay for until the following fiscal year. To finance the fiscal year 1993 work, the Army issued MIPRs to DFAS. The Army issued 38 MIPRs, dated between April 1994 and October 1994, to DFAS—at least 6 months after the end of fiscal year 1993. To finance the fiscal year 1994 work, the Army issued 9 MIPRs, dated between June 1995 and September 1995 to DFAS—at least 8 months after the end of fiscal year 1994. DFAS performed $41 million of Navy work in fiscal years 1993 or 1994 for which it did not receive payment in a timely manner. In October 1995, the Navy paid DFAS $34 million for this work—1 to 2 years after the work was done. As of February 2, 1996, the Navy still had not reimbursed DFAS for $7 million for the work performed during this time period. Army and Navy officials informed us that they did not pay bills promptly because they did not always receive sufficient details from DFAS on the bills, including information on how much money was owed by the different activities within a service. DFAS officials told us that, since the Army and Navy raised the concern on the billing detail, DFAS has begun to include in its bills to the services more detailed information, such as (1) the identification of the specific customer that will pay the bill and (2) the type of work performed such as maintaining pay accounts. DFAS officials also told us that they were performing work for the military services and DOD components without always having received a funding document from the military services or DOD components. They told us that (1) this has been a continual problem since DFAS became part of the Fund in fiscal year 1992 and (2) the military services and DOD components knew that DFAS was going to perform some accounting services even without receiving a funding document. To resolve the DFAS funding problem, the Under Secretary of Defense (Comptroller) issued memorandums to the military services and DLA in August 1995 requiring them to fund the full fiscal year 1996 DFAS amount no later than 10 working days after the apportionment reflecting the fiscal year 1996 Appropriations Act. Similar to DFAS, DLA distribution depots, which are responsible for receipt, storage, and issue of inventory items, are not promptly reimbursed for the work they have performed. This is occurring chiefly because the distribution depots also are performing work before receiving a funding document from their customers. To illustrate, on November 6, 1995, or 1 month after the beginning of fiscal year 1996, we requested from DLA a listing of those activities that had provided the distribution depots with fiscal year 1996 funding documents and those activities that had not provided them funding documents. We found that, at the time, 19 activities had provided the distribution depots funding documents totaling about $78 million. However, 18 activities had not provided the distribution depots with funding documents. After we requested the information, the 18 activities eventually provided the distribution depots with funding documents totaling $174 million. Of that amount, about $167 million was received in December 1995. Because the distribution depots did not receive funding documents in time, they could not bill some customers for work performed in October and November 1995 until December 1995. In addition to the funding document problem, the distribution depot billing process is manual, which precipitates other problems because it is time-consuming and can cause clerical errors. For example, clerical errors resulted in $234 million of collections being improperly recorded in March 1995. As a result, large fluctuations were shown on the distribution depot business area’s monthly reports on budget execution (1176 report) as the errors were corrected. Specifically, the cumulative collection balances for February, March, and April 1995 were $404 million, $769 million, and $570 million, respectively. Since the monthly reports provide cumulative balances, the collection amount should be increasing each month. However, the April balance is almost $200 million less than the March balance. DFAS-Columbus, which provides accounting services for the distribution depots, recognizes that it needs to automate the manual billing process. In fiscal year 1993, a system change request was made to automate the billing process. Current DFAS plans show that automating the billing process will be done in three segments with the initial segment being implemented in June 1996. The first segment is to include such features as establishing a new subsidiary ledger, identifying customers, and capturing funding document information. The second and third segments, which are expected to be implemented in January 1997 and January 1998, respectively, are to add such features as the issuance and acceptance of funding documents by electronic data interchange (EDI), automatic updates to general ledger accounts, EDI transfer of funds capability, status of funds reports to customers, and an interface of billing data to the disbursing and collection system. As of September 1995, DFAS’ accounts receivable aging report showed that TRANSCOM had $697 million of accounts receivable. Of that amount, $437 million, or 63 percent, of accounts receivable had not been billed. Because of the severity of the accounts receivable problem, on November 20, 1995, the Under Secretary of Defense (Comptroller) issued a memorandum to TRANSCOM pointing out that (1) “TRANSCOM appears to have the highest percentage of total accounts receivable, as well as unbillable receivables, within DBOF” and (2) “since reducing aged receivables remains an important financial goal as well as integral to sound cash management, TRANSCOM needs to again focus on solutions to this problem.” According to TRANSCOM and DFAS officials, in some cases TRANSCOM has not billed customers because it does not know who to bill due to invalid billing codes. TRANSCOM estimates that this problem accounts for more than $125 million of its unbilled amount. Another $100 million is unbilled because customers rejected bills—a problem that also may be related to invalid billing codes. For example, during fiscal years 1993 and 1994, the Air Mobility Command of TRANSCOM performed about $104.5 million of transportation services for the Army and/or DLA but has not received reimbursement as of February 16, 1996. Of the $104.5 million, TRANSCOM performed $61.1 million and $43.4 million of transportation services in fiscal years 1993 and 1994, respectively. TRANSCOM has not received reimbursement primarily because the billing documentation did not identify the activities to be billed. According to TRANSCOM and DFAS officials, $91 million of the $105 million relates to the use of invalid billing codes. They are now researching each shipment 1 to 3 years old to identify a valid code and which activity should pay the bill. To resolve the accounts receivable problem, DOD established a joint working group comprised of TRANSCOM, Transportation Component Commands, and DFAS functional experts in June 1995. Many factors contributing to the accounts receivable problem originate in the transportation operation systems and processes that provide the accounting system data which DFAS uses to bill and collect customer dollars. The joint working group is currently discussing changes that need to be made to the systems to correct the problem. During fiscal year 1995, collections for the Military Sealift Command portion of TRANSCOM were not processed by DFAS for the months of April and June 1995. According to Military Sealift Command officials, the collections for these 2 months were not processed because DFAS did not input the data into the disbursement/collection system. This resulted in large fluctuations in net outlays (the difference between disbursements and collections) from month to month. Officials informed us that the collection cycles were processed in subsequent months. The actual Military Sealift Command’s collections processed from March through July are shown in the following table. As table I.1 shows, there is an irregular pattern in reporting collections by the Military Sealift Command. Since the Military Sealift Command is part of TRANSCOM, not processing collections makes TRANSCOM’s cash management responsibilities difficult to perform. Chapter 61 of the DOD Financial Management Regulation, Volume 11B, on the Fund provides that billings and collections shall be accomplished at least monthly and include applicable labor, material, overhead, and surcharges. Processing the collection data each month is critical because this is the mechanism through which the Fund obtains the funds necessary to help finance its day-to-day operations. As previously discussed, DOD recognizes that the transportation business area has financial problems and has established a joint working group to resolve these problems. The Navy—and DFAS activities providing accounting services to the Navy—had the most problems accurately accounting for and reporting on the Fund’s cash. Specifically, we found problems with the (1) processing of interfund bills that overstated business area cash on the departmental level financial reports, (2) reporting of collection data that overstated Treasury cash, (3) treatment of undistributed transactions on financial reports that distorted business area collections and disbursements information on financial reports, and (4) accountability over cash at the Navy Aviation Depots (NADEPs). Effective cash management is directly dependent on the availability of accurate and timely data on cash levels. These problems could (1) result in an increase in the Fund’s cash requirement to cover the day-to-day fluctuations in the Fund’s cash balance and (2) impact major programmatic decisions, which may be driven largely by cash balance considerations. Interfund billing transaction processing problems at DFAS-Cleveland have resulted in Navy business area disbursements being misstated on the Fund’s monthly 1176 financial report. Navy and DFAS officials informed us that this problem has resulted in misstated reported disbursements for several Navy business areas, such as the NADEP, Shipyard, Ordnance, and Research and Development business areas. They also stated that the NADEPs have the biggest disbursement reporting problem. The officials estimated that the interfund problem has resulted in an overstatement of NADEPs’ cash anywhere from $800 million to over $1 billion. This reflects a breakdown in controls in DOD’s disbursement process and creates problems in reconciling the departmental and activity-level books. Interfund transactions occur when one DOD activity sells or buys goods and/or services from another DOD activity. The Navy’s interfund processing problem primarily occurs when the Army, Air Force, or DLA sells material to Navy depot maintenance activities and uses nonspecific codes to identify the Navy buying activity. This results in interfund disbursement transactions not being charged to the Navy activity buying the material in Navy’s departmental level accounting records. DFAS and Navy officials told us that this is not a new problem. Various documents disclosed that the Navy has had problems with processing interfund transactions since the early 1980s. We discussed the interfund transaction processing problem with DFAS headquarters officials, and, as a result, DFAS has developed a listing of specific activity fund codes for use by the military services and DLA. The Navy and DFAS are currently developing implementing procedures for the DOD activities to use these fund codes. In May 1995, the Naval Audit Service reported that the Navy Fund supply management business area inappropriately reported estimated collections resulting from sales rather than actual collections. While estimating collections based on sales has been a long-standing Navy practice since ships and other activities are sometimes late in reporting actual collections, current DOD and DFAS guidance states that collections from sales are to be based on actual collection transactions and not estimates. Because this guidance was not followed, the Navy’s (Aviation Supply Office) cash was overstated by $670 million on DOD’s and the Treasury’s accounting records. DOD agreed with the Naval Audit Service’s finding that the Navy/DFAS should not be estimating collections for the Navy Aviation Supply Office. The overstatement of cash occurred when the Navy and DFAS implemented an accounting system change. Because of the change, duplicate collections were reported when DFAS paying offices estimated collections for the Naval Aviation Supply Office in one financial transaction register while actual collections were being reported in another register. To correct this problem and accurately report actual collections for the Aviation Supply Office, DFAS made a $670 million net adjustment (collections less disbursements) to the accounting records in May 1995, which reduced the Navy Fund cash balance on DOD’s and the Treasury’s books. However, we found that the Navy/DFAS is still estimating collections for 87 other Navy activities. As of September 1995, the Navy/DFAS had estimated collections of $150 million resulting from sales. To curtail this practice, DFAS headquarters sent a memorandum, dated December 29, 1995, to its activities instructing them that “effective immediately, the practice of estimating collections and disbursements is prohibited.” The memorandum further instructs DFAS to contact the activities not reporting actual collections in time to meet the Treasury reporting cut off date and obtain the actual amounts in lieu of using estimates. If attempts to get the actual collection amounts fail, the financial reports prepared by DFAS are to be footnoted to disclose the activities missing from the reports. The Navy agrees with DFAS that the use of estimates is inappropriate for financial reporting. However, the Navy informed DFAS that eliminating this practice is subject to the development of procedures that provide for the processing of actual collection data for activities not able to meet the Treasury reporting cut off date. Navy/DFAS treatment of undistributed transactions resulted in significant misstatements of cash for Navy business areas. Specifically, Navy’s Research and Development (R&D) business area—rather than the appropriate business areas—were allocated undistributed amounts at the request of the Navy. This treatment of undistributed transactions misleads report users by distorting business area disbursements and collections, resulting in an understatement of R&D cash and an overstatement of the other Navy business areas’ cash. The following table shows the amount of undistributed disbursements and collections that were recorded in R&D for fiscal years 1993 and 1994. We have discussed the treatment of undistributed disbursements and collections for financial reporting purposes with both DFAS and Navy Comptroller officials. Subsequently, a DFAS official told us that the undistributed disbursements and collections were allocated to the appropriate business area in the Fund’s monthly financial reports beginning in September 1995. We also found that there are significant differences in cash amounts between the NADEPs’ accounting records and the department-level records contained in the Centralized Expenditure Reimbursement Processing System (CERPS) that cannot be reconciled. This situation has caused considerable concern within Naval Air Systems Command (NAVAIR), which has overall responsibility for NADEP operations. A NAVAIR comptroller official told us that visibility over Fund cash within NAVAIR has been lost and that nobody knows what the cash balance is or should be. As a result, NAVAIR’s ability to adequately manage the Fund’s cash is severely inhibited. As of September 30, 1995, unreconcilable cash differences at the NADEPs ranged from a negative $15 million to a positive $375 million. The following table shows these unreconcilable amounts by individual NADEP. ($16) (9) (19) (78) (67) (69) Because of the current process used to account for and report disbursement and collection data, there are three different cash balances for the individual NADEPs depending on the accounting records from which the balances are obtained: (1) an amount recorded on the NADEPs’ activity accounting records, (2) an amount reported by CERPS, and (3) an amount reported as the Navy Comptroller Treasury balance. In theory, the amount reported by CERPS and the amount reported as the Navy Comptroller Treasury balance should be the same because they are derived from the same disbursement and collection transactions. However, this is not the case. The Navy Comptroller Treasury amount contains disbursement and collection information from various financial registers that are not made available to the NADEPs. As a result, the CERPS and Navy Comptroller Treasury amounts do not agree. When the NADEPs perform cash reconciliations between their activity records and departmental records, they can usually reconcile the differences between the activity and CERPS amounts being reported, for example, differences that occur in the timing of when transactions are recorded in the activities records versus when the transactions are reported to the Treasury. However, they cannot reconcile the differences between CERPS and the Navy Comptroller Treasury balance because of the missing financial register information. Even if the NADEPs had the missing information, they would still have trouble reconciling the amounts because the interfund processing problem discussed above is contributing to some of the unreconcilable amounts. Because of the (1) different cash balances the NADEPs must use when reconciling cash and (2) missing financial registers, the NADEPs include qualifying language in their fiscal year-end certification of the financial statements that references the three different cash balances as well as the missing financial information. In discussing a draft of this report with DOD officials, they acknowledged that having three cash balances is a problem and that they are taking actions to eliminate one of the cash balances by providing the NADEPs the missing financial register information. Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, March 1, 1995). Defense Budget: Capital Asset Projects Undergo Significant Change Between Approval and Execution (GAO/NSIAD-95-20, December 28, 1994). Letter to the Principal Deputy Comptroller (GAO/AIMD-94-159R, July 26, 1994). Defense Business Operations Fund: Improved Pricing Practices and Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994). Financial Management: DOD’s Efforts to Improve Operations of the Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-170, April 28, 1994). Defense Management Initiatives: Limited Progress in Implementing Management Improvement Initiatives (GAO/T-AIMD-94-105, April 14, 1994). Financial Management: DOD’s Efforts to Improve Operations of the Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, March 25, 1994). Financial Management: Status of the Defense Business Operations Fund (GAO/AIMD-94-80, March 9, 1994). Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, October 12, 1993). Financial Management: Opportunities to Strengthen Management of the Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993). Financial Management: Opportunities to Strengthen Management of the Defense Business Operations Fund (GAO/T-AFMD-93-4, May 13, 1993). Letter to Congressional Committees (GAO/AFMD-93-52R, March 1, 1993). Financial Management: Status of the Defense Business Operations Fund (GAO/AFMD-92-79, June 15, 1992). Financial Management: Defense Business Operations Fund Implementation Status (GAO/T-AFMD-92-8, April 30, 1992). Defense’s Planned Implementation of the $77 Billion Defense Business Operations Fund (GAO/T-AFMD-91-5, April 30, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Defense Business Operations Fund's (DBOF) cash management practices, focusing on: (1) Department of Defense (DOD) efforts to manage cash; and (2) ways DOD could provide additional management oversight. GAO found that: (1) DBOF cash management problems persist and reflect long-standing DOD financial management weaknesses; (2) DBOF managers do not have timely, accurate, and complete data on individual business areas' cash balances and do not fully disclose adjustments to account balances in their monthly financial reports; (3) the Defense Finance and Accounting Service consistently has the most severe problems in accurately accounting for and reporting the Navy's cash balances, but it is developing reporting procedures to identify monthly cash balances in each business area; (4) collection and disbursement data cannot be provided more promptly until DBOF financial systems and processes are improved; (5) DOD continues to rely on advance billing to supply cash for day-to-day operations, but billing and collection problems have resulted in billions of dollars in outstanding accounts receivable; (6) DOD needs to enhance accountability and employ tools to effectively manage its cash to prevent inaccurate, untimely, and incomplete cash balances, collections, and disbursements when new financial systems are implemented; and (7) if cash management practices do not change, DOD could require excessive cash amounts to maintain ongoing DBOF operations, violate the Antideficiency Act, and limit its opportunities to fulfill DBOF objectives. |
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Legislation enacted in 1992 authorized a Civil-Military Cooperative Action Program under which DOD was permitted to use the armed forces’ skills and resources to assist civilian efforts to meet domestic needs by participating in projects and activities that would benefit the community.One of the objectives of the program was to enhance individual and unit training and morale in the armed forces through meaningful community involvement. While the statute required DOD to ensure that it provided the assistance in a manner consistent with the military mission of the units involved, the statute did not require an assessment of the training value of providing the assistance. In 1996, legislation repealed the program and replaced it with the current IRT Program. Like the prior statute, the current legislation (10 U.S.C. 2012) authorizes units or members of the armed forces to provide support and services to nondefense organizations. The law also requires that assistance be incidental to military training, not adversely affect the quality of training, and not result in a significant increase in the cost of the training; unit’s assistance meet valid unit training requirements; and individual members’ assistance be directly related to their specific military specialties. Moreover, as was required under the prior program, DOD officials must coordinate with civilian officials to ensure that DOD assistance meets a valid community need and does not duplicate other available public services. Finally, the statute states that assistance may be provided only if it is requested by a responsible official of the organization that needs the assistance and it is not reasonably available from a commercial entity. See appendix I for a complete version of the provisions of 10 U.S.C. 2012. To administer the IRT Program, DOD issued a specific directive to guide military organizations entering into projects with civilian organizations and established specific processes to ensure that projects conform to statutory requirements. Although the Assistant Secretary of Defense for Reserve Affairs is responsible for monitoring the program, military organizations exercise a high degree of autonomy in making decisions to enter into projects. Military organizations use operations and maintenance and pay and allowances appropriations to fund IRT projects and need apply to OSD only if they require supplemental IRT funding. In fiscal year 1997, Congress appropriated $16 million in such funding for the program. We selected six IRT projects of varying sizes and activities to determine their conformance with statutory requirements. These projects consist of three road-building projects (Operation Alaskan Road on Annette Island, Alaska; Navajo Nation Building Project between Sawmill and Fort Defiance, Arizona; and Operation Good Neighbor near Gallup, New Mexico); one medical project (MIRT 97 - Adams County, Ohio); one project to place excess combat vehicles off the shore of New Jersey to build artificial reefs (Operation REEFEX 97), and one project to reconstruct a basketball court (Operation Crescent City 97 in Louisiana). DOD officials do not know the full extent of the IRT Program. Despite OSD’s expectation that military organizations would file after-action reports on each of their civil military projects, these reports have not been consistently filed. Some service and component command officials told us that they did not require after-action reports for IRT projects that did not receive supplemental funding. Officials of organizations that required reporting of all projects stated that even they might not be aware of small projects conducted at a local level. Using available service and OSD records for fiscal year 1997, we found that most of the projects were engineering, infrastructure, or medical in nature. At least 129 IRT projects were conducted in at least 35 states and the District of Columbia, and all active, reserve, and National Guard components of each of the services participated in the projects. The scope of these projects varied from activities conducted in 1 day by a few participants from a single unit to joint multiyear operations with hundreds of participants. Because we were unable to determine the full extent of IRT projects, we could not characterize the nature of all the projects. Although OSD officials told us they had obligated approximately $15.6 million of the $16 million Congress appropriated specifically for the IRT Program in fiscal year 1997, DOD does not capture those costs that the services and their components absorbed from their own pay and allowances and operations and maintenance accounts. As a result, we could not determine total program costs. Supplemental IRT funding spent on the six projects we reviewed amounted to at least $4.6 million. Project officials told us that service and component contributions to these projects were at least $3.6 million. We could not determine their total cost because we had to rely on project participants’ memories of the types of costs incurred and, in many cases, their estimates of the expenses. The projects and their costs are discussed in more detail in appendix II. The legislation requires the Secretary of Defense to prescribe regulations governing the provision of assistance under the IRT Program. In response to this requirement, DOD issued Directive 1100.20, “Support and Services for Eligible Organizations and Activities Outside the Department of Defense.” This directive controls the implementation and administration of the program. Although the directive meets the legislation’s requirements, DOD could improve the directive by addressing how it will implement the statutory requirement that the provision of assistance not result in a significant increase in the cost of training. DOD has implemented the IRT Program through its directive, much of which restates in nearly identical language the statutory provisions governing the program. It provides, in some instances, additional guidance on how DOD is to implement the program, as shown in the following two examples. Under 10 U.S.C. 2012(f), the Secretary of Defense is required to prescribe regulations that include procedures to ensure that assistance is provided along with, rather than separate from, civilian efforts and meets a valid civil or community need. To meet this requirement, the directive encourages the establishment of advisory councils composed of various public, private, business, and civic sector representatives. The directive states that if an advisory council does not exist in the area in which assistance is to be provided, responsible DOD commanders or other officials are to consult and coordinate, to the maximum extent practicable, with the same types of individuals who would serve on the councils. The statute requires that civil military program assistance be provided only if the assistance is not reasonably available from a commercial entity. The directive states that in determining reasonable availability, DOD may also take into account whether the requesting organization or activity would be able, financially or otherwise, to address the specific civic or community need. Additional guidance could help organizations implement the statutory requirement that assistance not result in a significant increase in the cost of training. DOD’s directive repeats the language of the statute but does not explain what constitutes an increase in costs for training or a “significant increase.” DOD currently does not assess whether undertaking an IRT project will significantly increase the cost of training. Guidance on this point would provide a basis for assessing whether participating military organizations were complying with the requirements. The directive calls on the service secretaries to ensure that commanders of units or personnel participating in IRT activities determine that the assistance provided is consistent with valid unit training requirements or related to the specific military specialty of participating personnel. Service officials told us that they were drafting guidelines but did not know when they might be complete. The six projects we reviewed as case studies were generally conducted within the statutory requirements. For example, the benefiting organizations were eligible for the assistance, and the provision of assistance did not interfere with units’ or individuals’ military functions. While the statute requires that individuals providing assistance perform tasks directly related to their military specialties, on two of the projects we reviewed, some individuals’ tasks were not directly related to their specialties. Thus, it appeared that the goal of completing a project sometimes took priority over the goal of providing valid military training. In addition, we were unable to determine whether providing the assistance had resulted in a significant increase in the cost of training for any of the six projects because DOD has established no basis for making such a determination. The extent to which five of the projects conformed with each statutory requirement is summarized in table 1. OSD approved the sixth project (Operation Crescent City), which was sponsored by the Marine Corps Reserve, for supplemental IRT funding and the Marine Corps conducted project planning. Marine Corps officials subsequently canceled the project when they failed to reach an agreement with the community that would allow them to ensure that statutory provisions would be met. For example, according to these officials, there was no written request letter, no agreement on who would provide services the Marine Corps unit did not have the skills to provide, and no agreement on who would pay for those aspects of the project that had no training value. The following paragraphs provide additional information on the conformance of the five projects to statutory requirements. We found that the benefiting organizations for all five projects met the eligibility criteria established in the statute. Furthermore, a written request for assistance existed for four of the five projects. Officials of the fifth project—Operation REEFEX 97—told us that there was no written request for assistance for that project. In addition, officials of Operation Good Neighbor and of Operation REEFEX 97 told us that certifications of noncompetition with the private sector had not been provided for those projects. DOD collects these certifications to establish that assistance is not reasonably available from commercial sources, as required by the statute. The officials from Operation Good Neighbor told us they had attempted to get community officials to provide a certification before starting the project but had been unsuccessful. They said they had contacted OSD officials and were told to continue the project, in spite of not having a certification. Officials of Operation REEFEX 97 told us they did not know why there was no certification for their project. The statute requires that the assistance not interfere with a unit’s or members’ ability to perform their military functions. Officials of each of the five projects told us that no need for them to perform their military functions had arisen during work on the projects. They said that had such a need arisen, performance of their military functions would have been their priority. On the three projects with unit participation, the work of the participating units was directly related to their mission-essential task lists and was therefore considered valid unit training. We found, however, that on two projects, some individuals’ tasks were not directly related to their specialties. For Operation Alaskan Road, Marine Corps officials determined that the assigned combat engineering unit would need to be augmented to accomplish its part of the project in the time allotted. As a result, 25 refuelers from a bulk fuel company were trained in combat engineering skills and used to augment the 125-person combat engineering company. Marine Corps officials acknowledged the bulk refuelers’ duties for this project were not related to their military specialties. Also, Marine Corps officials told us that many tasks the combat engineers were required to perform involved skills not found in the individual training skills manual for the combat engineer (for example, plumbing rough-in work, masonry, quarrying operations, and finished wood frame carpentry). For Operation Good Neighbor, 7 of the 25 Navy Reserve Seabees performing road construction had military specialties unrelated to the tasks they performed. For example, Seabees with the military specialties of construction welder, carpenter/mason, and utilitiesman were used as heavy equipment operators. In addition, three of the five Seabees who built ramps for the handicapped had military specialties unrelated to the tasks they performed. The Seabees’ military specialties were surveyor and heavy equipment operator, but they were used as carpenters/masons. The statute requires that the assistance have no adverse impact on training quality. Most of the individuals involved in each of our five projects were participating in valid training for their units or performing tasks in their military specialties. Officials told us that for the individuals not performing tasks in their military specialties, participation did not interfere with any other training opportunities. The statute requires that the assistance provided not result in a significant increase in the cost of training. This determination was not made for any of the five projects. Also, DOD has provided military organizations neither an explanation of what constitutes an increase in costs for training nor a definition of a “significant increase.” The statute requires that the assistance provided be incidental to training, but on two projects, the assistance provided was not entirely incidental to the training. As discussed previously, some of the individuals used in Operation Alaskan Road and Operation Good Neighbor had military specialties that were unrelated to the tasks needed for the projects. Consequently, it appeared the goal of completing the projects took priority over the goal of providing valid military training. OSD has provided limited and inconsistent oversight of IRT projects and the delivery of support and services under them. For the most part, oversight is limited to those projects that receive supplemental IRT Program funding. Even within those projects, OSD did not always follow its own processes for ensuring the statutory requirements for civil military projects were met and did not have procedures in place to ensure that military organizations were meeting the statutory requirement not to provide assistance that results in a significant increase in training costs. The service secretaries have not established any additional oversight requirements. The process for projects that receive supplemental IRT funding involves an application that the sponsoring service or component submits to OSD, a memorandum of agreement (MOA) between OSD and the sponsor once OSD approves the application, and an after-action report. In its guidance for submission of requests for supplemental funding for 1997 IRT projects, OSD specified a format for application submissions. The information required includes the name of the requesting civilian organization and other contributing organizations, certification of noncompetition, training requirements or objectives to be met, and estimated funding requirements. However, the application does not require a certification that each proposed project does not result in a significant increase in the cost of training. For approved applications, OSD and the sponsor sign an MOA that specifies the amount of supplemental IRT funding allotted to the project and requirements to be met before the funds can be spent. An MOA may cover one or several projects that the same service or component is sponsoring. OSD officials told us that, under their policy, if the sponsor has more than one approved project, the sponsor determines the amount of supplemental IRT funds to distribute to each of its approved projects. The sponsor is responsible for ensuring that the requirements in the MOA are met. The MOA also requires military organizations to submit after-action reports that include, for example, the number of personnel participating in the project and an accounting of funds used to support the project. Copies of after-action reports are to be provided to OSD. Using documentation that OSD provided for fiscal year 1997 projects, we found that the process was not always followed because (1) sometimes applications were not submitted, (2) MOAs were not always executed, and (3) after-action reports were not always prepared. Additionally, we found cases in which MOAs were executed and supplemental IRT funds were used without the sponsor having met the requirements of the MOA. In one case, OSD had funded a project without any part of the process having been followed. OSD officials told us that they funded the project near the end of the fiscal year when it became apparent that not all of the supplemental IRT funding that had been obligated would be spent. They said that to avoid losing the funds at the end of the fiscal year, they had orally directed the transfer of funds from one Marine Corps component to another to fund this project and had not required an application, had not issued an MOA, and had not required an after-action report. The officials told us they had no paperwork relating to the project. Moreover, we found that, in some cases, sponsoring organizations, such as service components or joint organizations, had not determined that IRT projects did not result in significant increases in the cost of training because they believed this was part of OSD’ s process for approving supplemental funding for projects. OSD, on the other hand, told us this determination was the responsibility of the sponsoring organizations. OSD officials told us that they did not require the submission of applications and the issuance of MOAs for projects that required no supplemental IRT funding but that the DOD directive for the program requires submission of after-action reports for all IRT projects. However, the directive provides no designated time frame for providing the reports, and we found that they were not always submitted. Some service and component officials told us that after-action reports were not required if supplemental IRT funding was not used. Given the differing interpretations of the DOD requirement regarding after-action reports, clarifications to the directive could result in more consistent submission of the reports. While Congress authorized the IRT Program to permit the use of the armed forces to meet civilian needs, it established specific requirements to ensure, among other things, that individual projects do not adversely affect military training or significantly increase the cost of training. To ensure that these requirements are met, stronger adherence to oversight procedures already in place, modifications to those procedures, and more specific guidance on determining training cost implications are needed. We therefore recommend that the Secretary of Defense take action to manage the program to comply with the oversight procedures that have been established. Specifically, we recommend that when projects require supplemental IRT funding, sponsors have submitted applications with the required information and OSD and the sponsoring organizations have developed MOAs and DOD’s directive be clarified to explicitly require the preparation and submission of after-action reports within a designated time frame for all projects, not just those requiring supplemental IRT funding. We also recommend that the Secretary of Defense establish guidance for making cost determinations for joint projects and directing the service secretaries to define what constitutes an increase in the cost of training and what represents a “significant increase” in training costs associated with IRT projects. In addition, we recommend that the Secretary of Defense modify OSD program oversight procedures to ensure that a determination has been made as to whether an increase in training costs is significant. In written comments on a draft of this report, DOD partially concurred with our findings and concurred with our recommendations. DOD characterized our position as advocating greater centralized control to improve program performance. DOD also noted that the Fiscal Year 1996 National Defense Authorization Act, Section 574, discouraged centralized DOD management of activities allowed under 10 U.S.C. 2012 and that, in response to that legislation, DOD has gradually reduced the level of centralized oversight and instructed the services to provide instructions to implement the program. Once the services issue these instructions, DOD stated a decentralized approach can work more effectively. While the legislation does not permit centralized direction of activities under the IRT Program, it does not preclude DOD from conducting oversight. We do not advocate greater centralized control but rather better oversight to improve conformance with statutory requirements. For example, we recommended stronger adherence to oversight procedures already in place, modifications to those procedures, and more specific guidance on determining training cost implications. We continue to believe that such oversight is necessary and prudent to ensure compliance with the program’s statutory requirements. DOD also stated that it has fully accounted for resources specifically authorized and appropriated in fiscal year 1997 to fund IRT projects and that the services are responsible for IRT related costs funded from service resources. While DOD stated a separate system may be required to capture total costs, it emphasized that the benefits and costs of implementing such a system should be weighed against the value and size of the IRT Program. We note that the legislation requires DOD to ensure that assistance provided under the IRT Program does not result in a significant increase in the cost of training. Because of this requirement, we believe that maintaining information on project costs is important. To assess the nature, extent, and cost of the support and services DOD has provided under 10 U.S.C. 2012, we interviewed OSD and service officials and examined pertinent documents. We aimed at identifying the organization of the program and the types and scale of projects conducted through the program. To ascertain whether the regulations and procedures were consistent with the requirements of section 2012, we compared available OSD and service regulations to the requirements of section 2012 and examined the procedures used to identify, plan, implement, and report on the projects we used as case studies and compared those procedures with the requirements of section 2012. Because much of the program is decentralized and the universe of projects was not well defined, we used a case study methodology to examine those parts of the program for which no centralized source of information existed. The projects we examined were judgmentally selected from among those projects approved for supplemental funding from the section 2012 program. Our selections included several different types of projects; collectively, these projects included participants from each military service and each of their components. Other project selection factors included scale (size and duration) and geographic location. For each project, we obtained information on the level of support and services provided from OSD, the involved services, and local commanders. We then compared the types of support and services with the project criteria set forth in the law to determine whether the project conformed to statutory requirements, particularly those dealing with military training. Because our case studies do not represent a valid statistical random sample, our findings cannot be projected to the entire program. However, we believe our case studies provide insights into how the program is being carried out and monitored. To evaluate the OSD’s and service secretaries’ oversight of such civil military projects, we interviewed IRT officials within OSD and each of the services and examined pertinent documents to determine how the oversight role was implemented. We also reviewed the legislative history of section 2012 to ascertain where statutory responsibility for overseeing such projects rested. In addition, we examined the available policies and procedures to ascertain how DOD expected the projects to be monitored. We conducted our review between September 1997 and January 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to other appropriate congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant, Marine Corps; and the Director, Office of Management and Budget. Copies will also be made available to others on request. Please call me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. The following provisions are stated, verbatim, in 10 U.S.C. 2012. (a) Authority to provide services and support.—Under regulations prescribed by the Secretary of Defense, the Secretary of a military department may in accordance with this section authorize units or individual members of the armed forces under that Secretary’s jurisdiction to provide support and services to non-Department of Defense organizations and activities specified in subsection (e), but only if— (1) such assistance is authorized by a provision of law (other than this section); or (2) the provision of such assistance is incidental to military training. (b) Scope of covered activities subject to section.—This section does not— (1) apply to the provision by the Secretary concerned, under regulations prescribed by the Secretary of Defense, of customary community relations and public affairs activities conducted in accordance with Department of Defense policy; or (2) prohibit the Secretary concerned from encouraging members of the armed forces under the Secretary’s jurisdiction to provide volunteer support for community relations activities under regulations prescribed by the Secretary of Defense. (c) Requirement for specific request.—Assistance under subsection (a) may only be provided if— (1) the assistance is requested by a responsible official of the organization to which the assistance is to be provided; and (2) the assistance is not reasonably available from a commercial entity or (if so available) the official submitting the request for assistance certifies that the commercial entity that would otherwise provide such services has agreed to the provision of such services by the armed forces. (d) Relationship to military training.—(1) Assistance under subsection (a) may only be provided if the following requirements are met: (A) The provision of such assistance— (i) in the case of assistance by a unit, will accomplish valid unit training requirements; and (ii) in the case of assistance by an individual member, will involve tasks directly related to the specific military occupational specialty of the member. (B) The provision of such assistance will not adversely affect the quality of training or otherwise interfere with the ability of a member or unit of the armed forces to perform the military functions of the member or unit. (C) The provision of such assistance will not result in a significant increase in the cost of the training. (2) Subparagraph (A)(i) of paragraph (1) does not apply in a case in which the assistance to be provided consists primarily of military manpower and the total amount of such assistance in the case of a particular project does not exceed 100 man-hours. (e) Eligible entities.—The following organizations and activities are eligible for assistance under this section: (1) Any Federal, regional, State, or local governmental entity. (2) Youth and charitable organizations specified in section 508 of title 32. (3) Any other entity as may be approved by the Secretary of Defense on a case-by-case basis. (f) Regulations.—The Secretary of Defense shall prescribe regulations governing the provision of assistance under this section. The regulations shall include the following: (1) Rules governing the types of assistance that may be provided. (2) Procedures governing the delivery of assistance that ensure, to the maximum extent practicable, that such assistance is provided in conjunction with, rather than separate from, civilian efforts. (3) Procedures for appropriate coordination with civilian officials to ensure that the assistance— (A) meets a valid need; and (B) does not duplicate other available public services. (4) Procedures to ensure that Department of Defense resources are not applied exclusively to the program receiving the assistance. (g) Advisory councils.—(1) The Secretary of Defense shall encourage the establishment of advisory councils at regional, State, and local levels, as appropriate, in order to obtain recommendations and guidance concerning assistance under this section from persons who are knowledgeable about regional, State, and local conditions and needs. (2) The advisory councils should include officials from relevant military organizations, representatives of appropriate local, State, and Federal agencies, representatives of civic and social service organizations, business representatives, and labor representatives. (3) The Federal Advisory Committee Act (5 U.S.C. App.) shall not apply to such councils. (h) Construction of provision.—Nothing in this section shall be construed as authorizing— (1) the use of the armed forces for civilian law enforcement purposes or for response to natural or manmade disasters; or (2) the use of Department of Defense personnel or resources for any program, project, or activity that is prohibited by law. (Added Pub.L. 104-106, Div. A, Title V, § 572(a), Feb. 10, 1996, 110 Stat. 353.) The following provides specific information on each of the six projects we used for case studies. Operation Alaskan Road, requested by the Metlakatla Indian community, is a multiyear engineering project sponsored by the Pacific Command and coordinated by the Alaskan Command. Members of the Missouri and Alaska National Guard were tasked to assist in the planning efforts. Phase one of the project, conducted in fiscal year 1997, involved over 850 members of the active forces of each of the military services. About 70 members of the Army and Air National Guard and the Army and Marine Corps Reserves also participated. During fiscal year 1997, the project was organized and planned and a base camp was constructed. The camp is to be used to house the military personnel who are expected to build a 14-mile road on Annette Island in Alaska over the next 5 years. The road will connect the town of Metlakatla with a remote section of the island that is much closer to the site of a proposed ferry terminal. The community believes that the proposed additional ferry access will allow more medical, educational, and commercial opportunities for the approximately 1,600 residents of Metlakatla. In fiscal year 1997, about 150 Marines spent 57 days on the island constructing a 300-person base camp to be used in the future by U.S. military personnel constructing the road. The base camp consists of 38 buildings, including berthing barracks, a mess hall, and shower and restroom facilities. The Marines invested over 63,000 hours of labor to construct the buildings, which are designed to last about 5 years. Unit officials stated that this project provided their personnel with many training opportunities, such as ship-to-shore landing, horizontal engineering, and vertical construction. Marine Corps officials told us the Alaskan deployment was good training for the engineer support company that participated. We found, however, that some individuals performed tasks unrelated to their military specialties, raising questions about whether the assistance provided was incidental to training. Specifically, because the company did not have enough combat engineers to complete the project in the allotted time, 25 Marines from a bulk fuel company, who were untrained in combat engineering skills, augmented the combat engineers. Therefore, a significant amount of time (about 2 months prior to deployment and more time on-site) was spent teaching basic combat engineering skills to the bulk refuelers. Also, Marine Corps officials told us that many tasks the combat engineers were required to perform involved skills not found in the individual training skills manual for the combat engineer. Some examples included plumbing rough-in work, masonry, quarrying operations, and finished wood frame carpentry. Two Navy troop transport ships carried the Marines on two separate trips from San Diego, California, to Annette Island. The trips took a total of 23 days and involved more than 650 Navy personnel. In Alaska, a Navy landing craft utility (LCU) transported personnel and supplies between the island and the mainland. Twenty five LCU personnel were assigned in support of this project. This project fit the unit’s mission of ship-to-shore movement of combat troops and equipment and provided the unit the opportunity to train for and prove the capability of LCUs to perform operations for extended periods while unsupported by a ship or parent command. During the 8-week operation, the craft made daily trips to Annette Island and surrounding areas. The total Department of Defense (DOD) cost for Operation Alaskan Road in fiscal year 1997 is not known, but it was at least $5.1 million. Innovative Readiness Training (IRT) funds spent on the project were about $2.1 million and paid for such expenses as supplies and equipment, some of the fuel (ground and ship), building materials, and commercial transportation. Additional service and component contributions were at least $3 million. These included pay and allowances for most personnel working on the project, some travel and per diem costs, and some contracting costs. Project officials were not able to determine all costs, however. For example, the amount did not include payments for staff management oversight and some flights for personnel and supplies. In addition to DOD, many organizations have been involved in the project, including the Metlakatla Indian community, the Bureau of Indian Affairs, the Coast Guard, the Federal Highway Administration, and the Alaska Department of Transportation and Public Facilities. The Navajo Nation Building Project, conducted for the benefit of the Navajo Nation, is a multiyear engineering project that began in fiscal year 1995 and is sponsored by the Army National Guard. During fiscal year 1997, participants began reconstructing Blue Canyon Road between Sawmill, Arizona, and Fort Defiance, Arizona. About 420 Army National Guard members from several states participated in the project, expending about 32,400 days (about 2,400 days for engineers and about 30,000 days for administrative and logistical support). Most of these participated with their units during their annual training. The units provided administrative and logistical support; conducted rock quarry operations; regraded 9 miles of road; installed shoulders, ditches, and drainage structures; applied a gravel surface along 6 miles of road; and provided security. The Navajo Nation Council reported that the reconstructed Blue Canyon Road will provide people residing in the area with an all-weather road that is passable during inclement weather. The total DOD cost to fund this project is not known, but it was at least $2.3 million. This amount included about $1.9 million in supplemental IRT funds that paid for expenses exceeding the amounts units budgeted for annual training. These expenses included pay and allowances and travel and per diem for some participants, transportation of soldiers and equipment, and the rental of equipment at the project site. Service and component contributions of at least $423,000 were used for pay and allowances and some per diem for participants on annual training. Service officials were unable to provide the amount spent for military airlift used to transport some soldiers to the project site. In addition to DOD, the communities of Sawmill and Fort Defiance, the Navajo Nation, the Bureau of Indian Affairs, Indian Health Services, the U.S. Forest Service, the Environmental Protection Agency, and the Arizona and New Mexico State Historic Preservation Offices made contributions to the project. Operation Good Neighbor was an engineering project sponsored by the Air Force Reserve for the benefit of the Navajo Nation. During fiscal year 1997, the project to reconstruct roads near Gallup, New Mexico, was planned and reconstruction activities begun. About 38 Air Force and Navy reservists and active duty Air Force personnel participated. Project officials told us that the certification of noncompetition with the private sector had not been provided for this project. They said that they had been unsuccessful in their attempts to get community officials to meet the requirement before starting the project. As a result, they had contacted Office of the Secretary of Defense (OSD) officials and were told to continue the project, without the certification. The Naval Reserve Seabees tasked to do the reconstruction over a 30-day period were able to work on only 2 of the 35 miles of originally planned road reconstruction due to delays in obtaining environmental clearances. They completed the 2 miles in 2 days. The project was then shifted to the partially reconstructed Blue Canyon Road project between Sawmill, Arizona, and Fort Defiance, Arizona. The Army National Guard had started this road reconstruction as an IRT project earlier in the summer and had obtained all the required clearances. The Seabees regraded 11 miles of road, graveled 1.5 miles, and installed culverts where needed. The Navajo Nation Council reported that the reconstructed Blue Canyon Road will provide people residing in the area with an all-weather road that is passable during inclement weather. Because additional IRT funds were available, the project was expanded to include building handicap ramps. Air Force Reserve officials told us they had been aware of the need for ramps and took advantage of the available funding to build them. Five Navy Reserve Seabees spent 10 days to construct 14 ramps at the homes of disabled Native Americans. They were supported by three Air Force personnel (two active duty and one reservist). Four of the eight participants (all of the Air Force personnel and one Seabee) had been involved in the road construction effort and stayed on to build the ramps. The other four participants were additional Seabees who joined the effort. On this project, 25 Seabees from several Naval Reserve units reconstructed the road. Seven of them had military specialties unrelated to the road construction tasks they performed. In addition, three of the five Seabees who constructed the ramps for the handicapped had military specialties unrelated to their tasks. The total DOD cost for Operation Good Neighbor in fiscal year 1997 is not known, but it was at least $230,000 (over $28,000 of which was spent during the ramp-building portion of the project). Supplemental IRT funds spent on the project were at least $203,000 and were used for such expenses as military pay and allowances, equipment rental, supplies, and fuel. Additional service contributions were at least $27,000 and included some pay and allowances. The officials were not able to determine all costs, however. For example, the amount did not include the cost of military airlift. In addition to DOD, many organizations have contributed to the project, including the Navajo Nation, the Bureau of Indian Affairs, the Southwest Indian Foundation, and the Western Health Foundation. MIRT 97 - Adams County was a medical project conducted over a 4-day period in fiscal year 1997 by approximately 120 medical personnel from the Ohio Army National Guard. The National Guard Bureau sponsored the project, and the Ohio Army National Guard planned and coordinated it. This project involved providing medical services such as immunizations, pediatric wellness clinics, dental evaluations, vision and blood testing, physical examinations, and referrals to about 500 people from a medically underserved community located in the Appalachian region of Ohio. Adams County, which was designated by the U.S. Department of Health and Human Services in the Federal Register as having a primary medical care health professional shortage in 1997, was selected as the participating county by the Ohio Department of Health. This project was completed over 2 weekends, with approximately 60 medical personnel participating each weekend. Medical personnel screened about 165 people the first weekend and about 335 the second weekend. Unit and individual training tasks were accomplished, either partially or totally, during this project. Unit training tasks accomplished included deploying a medical company to a new operating site, establishing an area of operations, performing health service support operations, and redeploying to the units’ home stations. Individual tasks accomplished included taking vital signs, administering medication, collecting specimens, and providing dental care. The total DOD cost of this project is not known, but it was at least $41,400. Supplemental IRT funds used on the project were approximately $8,800 and were used to pay for meals, lodging, supplies, and equipment rental. Ohio Army National Guard contributions were at least $32,600. This amount included fuel and some pay and allowances for project participants. Project officials were unable to provide all costs. For example, the amount does not include the cost of some of the initial project planning meetings. In addition to DOD, a number of state and local organizations were involved in the project, including the Ohio Department of Health, the Ohio Family and Children First Initiative - Office of the Governor of Ohio, and the Adams County Family and Children First Council. Operation REEFEX is a multiyear engineering/infrastructure project that has been ongoing since the early 1990s. Project officials told us the 1997 project, conducted for New Jersey, involved creating artificial reefs by placing excess and obsolete combat vehicles, which were demilitarized and cleaned, at designated offshore areas. In fiscal year 1997, the Army National Guard sponsored the project and dropped 85 obsolete combat vehicles off the coast of New Jersey over a 7-day period. There was no documentation of a request or a certification of noncompetition for this project. The New Jersey Army National Guard coordinated the project and hired a civilian to manage it. About 100 military personnel from the New Jersey Army National Guard (about 45 participants), the Navy Reserve (about 37 participants), the Air Force Reserve (6 participants), and the Coast Guard (about 18 participants) carried out the project. Most of these participants were in inactive duty training status. In addition, the Guard hired seven civilians to demilitarize the vehicles. New Jersey Army National Guard truck operators used military vehicles to transport the demilitarized vehicles to a holding area for temporary storage and subsequently transported the vehicles to the barge loading site. Once the vehicles were aboard a commercial barge, military personnel from the New Jersey Army National Guard, Navy Reserve cargo handling personnel, and Air Force Reserve air transportation specialists secured the vehicles to the barge. A commercial tug then moved the barge to the designated locations and the vehicles were released into the ocean. Coast Guard crews and personnel from a Navy Reserve inshore boat unit provided water transportation to and from the reef site for the work crews and provided security during the water transportation of the vehicles. Unit officials stated that participation in this project provided their personnel with valuable hands-on training in, for example, transporting vehicles, on- and off-loading vehicles, and securing vehicles for movement. The total DOD cost for Operation REEFEX 97 is not known, but it is at least $584,000. Supplemental IRT funds spent for the project in fiscal year 1997 were approximately $399,000. These funds were used to pay the eight civilians hired in support of the project and to pay for supplies and equipment needed to demilitarize vehicles; contracted services such as meals, hotels, and equipment repairs; building rental and maintenance; and some costs for commercial tug and barge rental, fuel, and military pay and allowances. Service and component contributions were at least $185,000 and primarily consisted of pay and allowances for some of the personnel working on the project. Program officials were not able to provide the total cost of service and component contributions. For example, the amount did not include the cost of some fuel and of operating some military vehicles and boats. In addition to DOD, many organizations were involved in the project, including the U.S. Environmental Protection Agency, the New Jersey Department of Environmental Protection, the New Jersey State Fish and Game Office, and the Artificial Reef Association. The Marine Corps Reserve sponsored and planned Operation Crescent City 97, which was to have involved the demolition and reconstruction of a basketball court. The Reserve planned the project, and OSD approved supplemental IRT funding for it. However, according to Reserve officials the project was canceled the day before work was to have begun because they and the community failed to reach an agreement that would allow them to meet some of the statutory requirements. For example, there was no written request letter; no agreement on who would provide services unrelated to the Marine Corps unit’s mission-essential tasks, such as security of the construction equipment; and no agreement on who would pay for certain aspects of the project that had no training value, such as the removal and disposal of the demolished materials. Had this project proceeded as planned, 13 Marines from an engineering support battalion would have participated on the project for a period of 15 days. Their participation was expected to fulfill annual training requirements. When the project was canceled, alternate training was arranged at a military base, where the Marines accomplished a variety of construction projects in support of base facilities, such as concrete pad construction, wood frame construction, and roofing work. The total cost of planning this project is not known. A total of about $4,400 in supplemental IRT funds was spent, but Marine Corps Reserve officials said they could not provide the service contribution. Janet Keller, Evaluator in Charge Sharon Reid, Site Senior Henry Arzadon, Evaluator Linda Koetter, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Department of Defense's (DOD) training projects that support nondefense activities, focusing on the: (1) extent, nature, and cost of civil military projects; (2) consistency of DOD's guidance on the Innovative Readiness Training (IRT) Program with statutory requirements; (3) conformity of selected projects to statutory requirements, especially those dealing with military training; and (4) effectiveness of the Office of the Secretary of Defense's (OSD) and service secretaries' oversight of such projects. GAO noted that: (1) DOD does not know the full extent and nature of the IRT program because some project information is not consistently compiled and reported; (2) furthermore, although DOD knows the amount of supplemental funds spent on the program, it does not know the full cost of the program because the services and components do not capture those costs, which are absorbed from their own appropriations; (3) available records indicate that at least 129 projects were conducted in fiscal year (FY) 1997 and that most of these were engineering, infrastructure, or medical projects; (4) the DOD directive for civil military projects is consistent with the statutory requirements for such projects; (5) specifically, it reiterates the statutory requirements and provides further delineation of how the projects are to be selected and implemented; (6) the directive does not, however, provide any additional guidance for military organizations to use in meeting the statutory requirement that the provision of assistance not result in a significant increase in the cost of training; (7) the six projects GAO reviewed generally met the statutory requirements; (8) for example, the benefitting organizations were eligible for the assistance and the provision of assistance did not interfere with units' or individuals' military functions; (9) however, while the statute requires that individuals providing assistance perform tasks directly related to their military specialties, GAO found that in two cases some individuals' tasks were not directly related to their specialties; (10) thus, it appeared that the goal of completing a project took priority over the goal of providing valid military training; (11) in addition, GAO could not determine whether the assistance had resulted in a significant increase in the cost of training for any of the six projects because DOD has established no basis for making such a determination; (12) OSD has provided limited and inconsistent oversight of IRT projects and the delivery of support and services under them; (13) for the most part, OSD limited oversight to those projects that received supplemental program funding; (14) even for those projects, OSD did not always follow its own processes for ensuring that statutory requirements for civil military projects were met and did not have procedures in place to ensure that military organizations were not providing assistance that significantly increased training costs; and (15) the service secretaries have not established any additional formal oversight procedures. |
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Federal, state, and local government agencies have differing roles with regard to public health emergency preparedness and response. The federal government conducts a variety of activities, including developing interagency response plans, increasing state and local response capabilities, developing and deploying federal response teams, increasing the availability of medical treatments, participating in and sponsoring exercises, planning for victim aid, and providing support in times of disaster and during special events such as the Olympic games. One of its main functions is to provide support for the primary responders at the state and local level, including emergency medical service personnel, public health officials, doctors, and nurses. This support is critical because the burden of response falls initially on state and local emergency response agencies. The President’s proposal transfers control over many of the programs that provide preparedness and response support for the state and local governments to a new Department of Homeland Security. Among other changes, the proposed bill transfers HHS’s Office of the Assistant Secretary for Public Health Emergency Preparedness to the new department. Included in this transfer is the Office of Emergency Preparedness (OEP), which currently leads the National Disaster Medical System (NDMS) in conjunction with several other agencies and the Metropolitan Medical Response System (MMRS). The Strategic National Stockpile, currently administered by the Centers for Disease Control and Prevention (CDC), would also be transferred, although the Secretary of Health and Human Services would still manage the stockpile and continue to determine its contents. Under the President’s proposal, the new department would also be responsible for all current HHS public health emergency preparedness activities carried out to assist state and local governments or private organizations to plan, prepare for, prevent, identify, and respond to biological, chemical, radiological, and nuclear events and public health emergencies. Although not specifically named in the proposal, this would include CDC’s Bioterrorism Preparedness and Response program and the Health Resources and Services Administration’s (HRSA) Bioterrorism Hospital Preparedness Program. These programs provide grants to states and cities to develop plans and build capacity for communication, disease surveillance, epidemiology, hospital planning, laboratory analysis, and other basic public health functions. Except as directed by the President, the Secretary of Homeland Security would carry out these activities through HHS under agreements to be negotiated with the Secretary of HHS. Further, the Secretary of Homeland Security would be authorized to set the priorities for these preparedness and response activities. The consolidation of federal assets and resources in the President’s proposed legislation has the potential to improve coordination of public health preparedness and response activities at the federal, state, and local levels. Our past work has detailed a lack of coordination in the programs that house these activities, which are currently dispersed across numerous federal agencies. In addition, we have discussed the need for an institutionalized responsibility for homeland security in federal statute.The proposal provides the potential to consolidate programs, thereby reducing the number of points of contact with which state and local officials have to contend, but coordination would still be required with multiple agencies across departments. Many of the agencies involved in these programs have differing perspectives and priorities, and the proposal does not sufficiently clarify the lines of authority of different parties in the event of an emergency, such as between the Federal Bureau of Investigation (FBI) and public health officials investigating a suspected bioterrorist incident. Let me provide you more details. We have reported that many state and local officials have expressed concerns about the coordination of federal public health preparedness and response efforts. Officials from state public health agencies and state emergency management agencies have told us that federal programs for improving state and local preparedness are not carefully coordinated or well organized. For example, federal programs managed by the Federal Emergency Management Agency (FEMA), Department of Justice (DOJ), and OEP and CDC all currently provide funds to assist state and local governments. Each program conditions the receipt of funds on the completion of a plan, but officials have told us that the preparation of multiple, generally overlapping plans can be an inefficient process. In addition, state and local officials told us that having so many federal entities involved in preparedness and response has led to confusion, making it difficult for them to identify available federal preparedness resources and effectively partner with the federal government. The proposed transfer of numerous federal response teams and assets to the new department would enhance efficiency and accountability for these activities. This would involve a number of separate federal programs for emergency preparedness and response, including FEMA; certain units of DOJ; and HHS’s Office of the Assistant Secretary for Public Health Emergency Preparedness, including OEP and its NDMS and MMRS programs, along with the Strategic National Stockpile. In our previous work, we found that in spite of numerous efforts to improve coordination of the separate federal programs, problems remained, and we recommended consolidating the FEMA and DOJ programs to improve the coordination. The proposal places these programs under the control of one person, the Under Secretary for Emergency Preparedness and Response, who could potentially reduce overlap and improve coordination. This change would make one individual accountable for these programs and would provide a central source for federal assistance. The proposed transfer of MMRS, a collection of local response systems funded by HHS in metropolitan areas, has the potential to enhance its communication and coordination. Officials from one state told us that their state has MMRSs in multiple cities but there is no mechanism in place to allow communication and coordination among them. Although the proposed department has the potential to facilitate the coordination of this program, this example highlights the need for greater regional coordination, an issue on which the proposal is silent. Because the new department would not include all agencies having public health responsibilities related to homeland security, coordination across departments would still be required for some programs. For example, NDMS functions as a partnership among HHS, the Department of Defense (DOD), the Department of Veterans Affairs (VA), FEMA, state and local governments, and the private sector. However, as the DOD and VA programs are not included in the proposal, only some of these federal organizations would be brought under the umbrella of the Department of Homeland Security. Similarly, the Strategic National Stockpile currently involves multiple agencies. It is administered by CDC, which contracts with VA to purchase and store pharmaceutical and medical supplies that could be used in the event of a terrorist incident. Recently expanded and reorganized, the program will now include management of the nation’s inventory of smallpox vaccine. Under the President’s proposal, CDC’s responsibilities for the stockpile would be transferred to the new department, but VA and HHS involvement would be retained, including continuing review by experts of the contents of the stockpile to ensure that emerging threats, advanced technologies, and new countermeasures are adequately considered. Although the proposed department has the potential to improve emergency response functions, its success is contingent on several factors. In addition to facilitating coordination and maintaining key relationships with other departments, these include merging the perspectives of the various programs that would be integrated under the proposal, and clarifying the lines of authority of different parties in the event of an emergency. As an example, in the recent anthrax events, local officials complained about differing priorities between the FBI and the public health officials in handling suspicious specimens. According to the public health officials, FBI officials insisted on first informing FBI managers of any test results, which delayed getting test results to treating physicians. The public health officials viewed contacting physicians as the first priority in order to ensure that effective treatment could begin as quickly as possible. The President’s proposal to shift the responsibility for all programs assisting state and local agencies in public health emergency preparedness and response from HHS to the new department raises concern because of the dual-purpose nature of these activities. These programs include essential public health functions that, while important for homeland security, are critical to basic public health core capacities. Therefore, we are concerned about the transfer of control over the programs, including priority setting, that the proposal would give to the new department. We recognize the need for coordination of these activities with other homeland security functions, but the President’s proposal is not clear on how the public health and homeland security objectives would be balanced. Under the President’s proposal, responsibility for programs with dual homeland security and public health purposes would be transferred to the new department. These include such current HHS assistance programs as CDC’s Bioterrorism Preparedness and Response program and HRSA’s Bioterrorism Hospital Preparedness Program. Functions funded through these programs are central to investigations of naturally occurring infectious disease outbreaks and to regular public health communications, as well as to identifying and responding to a bioterrorist event. For example, CDC has used funds from these programs to help state and local health agencies build an electronic infrastructure for public health communications to improve the collection and transmission of information related to both bioterrorist incidents and other public health events. Just as with the West Nile virus outbreak in New York City, which initially was feared to be the result of bioterrorism, when an unusual case of disease occurs public health officials must investigate to determine whether it is naturally occurring or intentionally caused. Although the origin of the disease may not be clear at the outset, the same public health resources are needed to investigate, regardless of the source. States are planning to use funds from these assistance programs to build the dual-purpose public health infrastructure and core capacities that the recently enacted Public Health Security and Bioterrorism Preparedness and Response Act of 2002 stated are needed. States plan to expand laboratory capacity, enhance their ability to conduct infectious disease surveillance and epidemiological investigations, improve communication among public health agencies, and develop plans for communicating with the public. States also plan to use these funds to hire and train additional staff in many of these areas, including epidemiology. Our concern regarding these dual-purpose programs relates to the structure provided for in the President’s proposal. The Secretary of Homeland Security would be given control over programs to be carried out by another department. The proposal also authorizes the President to direct that these programs no longer be carried out in this manner, without addressing the circumstances under which such authority would be exercised. We are concerned that this approach may disrupt the synergy that exists in these dual-purpose programs. We are also concerned that the separation of control over the programs from their operations could lead to difficulty in balancing priorities. Although the HHS programs are important for homeland security, they are just as important to the day-to- day needs of public health agencies and hospitals, such as reporting on disease outbreaks and providing alerts to the medical community. The current proposal does not clearly provide a structure that ensures that both the goals of homeland security and public health will be met. Many aspects of the proposed consolidation of response activities are in line with our previous recommendations to consolidate programs, coordinate functions, and provide a statutory basis for leadership of homeland security. The transfer of the HHS medical response programs has the potential to reduce overlap among programs and facilitate response in times of disaster. However, we are concerned that the proposal does not provide the clear delineation of roles and responsibilities that we have stated is needed. We are also concerned about the broad control the proposal grants to the new department for public health preparedness programs. Although there is a need to coordinate these activities with the other homeland security preparedness and response programs that would be brought into the new department, there is also a need to maintain the priorities for basic public health capacities that are currently funded through these dual-purpose programs. We do not believe that the President’s proposal adequately addresses how to accomplish both objectives. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information about this testimony, please contact me at (202) 512-7118. Marcia Crosse, Greg Ferrante, Deborah Miller, and Roseanne Price also made key contributions to this statement. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. Homeland Security: Responsibility and Accountability for Achieving National Goals. GAO-02-627T. Washington, D.C.: April 11, 2002. Homeland Security: Progress Made; More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs. GAO-02-160T. Washington, D.C.: November 7, 2001. Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts. GAO-02-208T. Washington, D.C.: October 31, 2001. Homeland Security: Need to Consider VA’s Role in Strengthening Federal Preparedness. GAO-02-145T. Washington, D.C.: October 15, 2001. Homeland Security: Key Elements of a Risk Management Approach. GAO-02-150T. Washington, D.C.: October 12, 2001. Homeland Security: A Framework for Addressing the Nation’s Efforts. GAO-01-1158T. Washington, D.C.: September 21, 2001. Bioterrorism: The Centers for Disease Control and Prevention’s Role in Public Health Protection. GAO-02-235T. Washington, D.C.: November 15, 2001. Bioterrorism: Review of Public Health Preparedness Programs. GAO-02- 149T. Washington, D.C.: October 10, 2001. Bioterrorism: Public Health and Medical Preparedness. GAO-02-141T. Washington, D.C.: October 9, 2001. Bioterrorism: Coordination and Preparedness. GAO-02-129T. Washington, D.C.: October 5, 2001. Bioterrorism: Federal Research and Preparedness Activities. GAO-01- 915. Washington, D.C.: September 28, 2001. Chemical and Biological Defense: Improved Risk Assessment and Inventory Management Are Needed. GAO-01-667. Washington, D.C.: September 28, 2001. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 14, 1999. West Nile Virus Outbreak: Lessons for Public Health Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework. GAO/NSIAD-99-159. Washington, D.C.: August 16, 1999. Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives. GAO/T-NSIAD-99-112. Washington, D.C.: March 16, 1999. National Preparedness: Technologies to Secure Federal Buildings. GAO- 02-687T. Washington, D.C.: April 25, 2002. National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security. GAO-02-621T. Washington, D.C.: April 11, 2002. Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness. GAO-02-550T. Washington, D.C.: April 2, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness. GAO-02-548T. Washington, D.C.: March 25, 2002. Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness. GAO-02-547T. Washington, D.C.: March 22, 2002. Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1, 2002. Chemical and Biological Defense: DOD Should Clarify Expectations for Medical Readiness. GAO-02-219T. Washington, D.C.: November 7, 2001. Anthrax Vaccine: Changes to the Manufacturing Process. GAO-02-181T. Washington, D.C.: October 23, 2001. Chemical and Biological Defense: DOD Needs to Clarify Expectations for Medical Readiness. GAO-02-38. Washington, D.C.: October 19, 2001. Combating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness. GAO-02-162T. Washington, D.C.: October 17, 2001. Combating Terrorism: Selected Challenges and Related Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001. Combating Terrorism: Actions Needed to Improve DOD Antiterrorism Program Implementation and Management. GAO-01-909. Washington, D.C.: September 19, 2001. Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Terrorism Preparedness. GAO-01-555T. Washington, D.C.: May 9, 2001. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement. GAO-01-666T. Washington, D.C.: May 1, 2001. Combating Terrorism: Observations on Options to Improve the Federal Response. GAO-01-660T. Washington, DC: April 24, 2001. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement. GAO-01-463. Washington, D.C.: March 30, 2001. Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy. GAO-01-556T. Washington, D.C.: March 27, 2001. Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response. GAO-01-15. Washington, D.C.: March 20, 2001. Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination. GAO-01- 14. Washington, D.C.: November 30, 2000. Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training. GAO/NSIAD-00-64. Washington, D.C.: March 21, 2000. Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed. GAO/T-HEHS/AIMD-00-59. Washington, D.C.: March 8, 2000. Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed. GAO/HEHS/AIMD-00-36. Washington, D.C.: October 29, 1999. Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism. GAO/T-NSIAD-00-50. Washington, D.C.: October 20, 1999. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 14, 1999 Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/T-NSIAD-99-184. Washington, D.C.: June 23, 1999. Combating Terrorism: Observations on Growth in Federal Programs. GAO/T-NSIAD-99-181. Washington, D.C.: June 9, 1999. Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs. GAO/NSIAD-99-151. Washington, D.C.: June 9, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/NSIAD-99-110. Washington, D.C.: May 21, 1999. Combating Terrorism: Observations on Federal Spending to Combat Terrorism. GAO/T-NSIAD/GGD-99-107. Washington, D.C.: March 11, 1999. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency. GAO/NSIAD-99-3. Washington, D.C.: November 12, 1998. Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program. GAO/T-NSIAD-99-16. Washington, D.C.: October 2, 1998. Combating Terrorism: Observations on Crosscutting Issues. GAO/T- NSIAD-98-164. Washington, D.C.: April 23, 1998. Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments. GAO/NSIAD-98-74. Washington, D.C.: April 9, 1998. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination. GAO/NSIAD-98-39. Washington, D.C.: December 1, 1997. Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures. GAO-01-837. Washington, D.C.: August 31, 2001. Chemical Weapons: FEMA and Army Must Be Proactive in Preparing States for Emergencies. GAO-01-850. Washington, D.C.: August 13, 2001. Federal Emergency Management Agency: Status of Achieving Key Outcomes and Addressing Major Management Challenges. GAO-01-832. Washington, D.C.: July 9, 2001. Budget Issues: Long-Term Fiscal Challenges. GAO-02-467T. Washington, D.C.: February 27, 2002. Results-Oriented Budget Practices in Federal Agencies. GAO-01-1084SP. Washington, D.C.: August 2001. Managing for Results: Federal Managers’ Views on Key Management Issues Vary Widely Across Agencies. GAO-01-592. Washington, D.C.: May 25, 2001. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000. | Since the terrorist attacks of September 2001, and the subsequent anthrax incidents, there has been concern about the ability of the federal government to prepare for and coordinate an effective public health response to such events. More than 20 federal departments and agencies carry some responsibility for bioterrorism preparedness and response. Emergency response is further complicated by the need to coordinate actions with agencies at the state and local level, where much of the response activity would occur. The President's proposed Homeland Security Act of 2002 would bring many of the federal entities with public health preparedness and response responsibilities into one department to mobilize and focus assets and resources at all levels of government. The proposed reorganization has the potential to repair the fragmentation in the coordination of public health preparedness and response at the federal, state, and local levels. In addition to improving overall coordination, the transfer of programs from multiple agencies to the new department could reduce overlap among programs and facilitate response in times of disaster. However, there are concerns about the proposed transfer of control from the Department of Health and Human Services to the new department for public health assistance programs that have both basic public health and homeland security functions. Transferring control over these programs, including priority setting, to the new department has the potential to disrupt some programs that are critical to basic public health responsibilities. The President's proposal is not clear on how both the homeland security and the public health objectives would be accomplished. |
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The State Partnership Program grew from the former Joint Contact Team Program, a program comprised of active component personnel that sought to establish professional contacts between the U.S. military and the militaries of newly independent nations of the former Soviet Union. The Joint Contact Team Program was intended to promote subordination to civilian leadership, respect for human rights, and a defensively oriented military posture. In 1993, the National Guard Bureau was integrated into the Joint Contact Team Program to initiate the first state partnerships, as it was believed that Russia would find the National Guard less provocative than a U.S. active duty full-time military presence. The program has since expanded to 63 partnerships covering all combatant commands, with nearly all state National Guards participating. Figure 1 illustrates the number of partner country relationships within each combatant command. Both the 2010 Quadrennial Defense Review Report and the 2011 National Military Strategy of the United States of America identify security cooperation and building partner capacity as priorities in multiple regions, including the Middle East, Africa, and Asia. In addition, both documents emphasize the need to strengthen and expand the United States’ network of international partnerships to enhance security, and the National Military Strategy instructs the combatant commands, among others, to partner with other agencies to pursue theater security cooperation. As such, the State Partnership Program acts as a force enabler for the combatant commands, and State Partnership Program activities are part of the combatant commands’ theater security cooperation plans. State Partnership Program activities are to be approved by the combatant commands, as well as the U.S. ambassador in their respective partner nations, before they can be executed. Any nation requesting a state partnership sends its official request to its respective U.S. ambassador. Once the partnership is endorsed, the request is forwarded to the appropriate combatant command. If the combatant command finds that the partnership meets strategic objectives and priorities, the combatant command sends the request to the National Guard Bureau. The Chief of the National Guard Bureau reviews the request to determine the viability of the partnership. If the Chief accepts the request, he or she notifies the combatant command and solicits proposals from the adjutants general of the state Guards. State Guard proposals include a statement of intent; background on the state Guard and its capabilities; proposed areas of military engagement with the partner nation; potential benefits to both the state Guard and partner nation; discussion of historical, cultural, and academic similarities between the state and the partner nation; and any documentation supporting the state Guard’s nomination. The proposals go through three levels of review within DOD, and the Chief of the National Guard Bureau forwards a recommended nominee to the combatant command and the partner country’s U.S. embassy for final approval. Figure 2 illustrates the request and approval process. State Partnership Program stakeholders, including State Partnership Program Coordinators, Bilateral Affairs Officers, and combatant command officials, cited benefits of the program, but the program lacks clear goals, objectives, and performance metrics. Without a comprehensive oversight framework for defining and measuring progress, DOD cannot fully assess whether the program is an effective and efficient use of resources. State Partnership Program Coordinators provided examples of how the program benefits their states and their National Guard units, including providing experience and training for guardsmen and developing relationships between the state and the partner country. For example, 39 of the 50 State Partnership Program Coordinators who responded to our questions reported that the State Partnership Program provides experience to participating guardsmen. In another instance, one State Partnership Program Coordinator reported that by demonstrating medical techniques to partner country participants, the guardsmen simultaneously gain direct experience performing those techniques. Three State Partnership Program Coordinators specifically noted that the program allows participants to deploy and complete realistic military training outside a warzone. In addition, 17 State Partnership Program Coordinators noted the value of the State Partnership Program in providing a mechanism for developing relationships between the state Guard units and the partner countries. Another State Partnership Program Coordinator noted that establishing such relationships improves long-term international security, and several State Partnership Program Coordinators noted that the relationships fostered by the program were instrumental in the partner countries’ deployments to Afghanistan or Iraq. All six combatant commands and all 23 Bilateral Affairs Officers who responded to our questions reported that the State Partnership Program supports their missions and objectives, including promoting stability and security cooperation and assisting with building partner capacity. For example, one Bilateral Affairs Officer reported that a State Partnership Program activity on women’s leadership in the military met the geographic combatant command’s objective of building partner capacity, as well as U.S. country team objectives to advance human rights, advance public diplomacy, and strengthen regional security capabilities. The activity covered deployment preparations, leadership development, and sexual assault prevention. Three of the six combatant commands specifically noted that the National Guard units are uniquely suited to assist the combatant command in building the capacity of partner countries as a result of their civilian and military experiences. For example, in one combatant command, State Partnership Program activities were used to support combatant command objectives by providing subject matter expertise to Royal Bahamas Police Force Drug Enforcement Unit officers in the field of combat trauma care. Thirteen Bilateral Affairs Officers also cited the benefit of the State Partnership Program’s ability to develop and maintain relationships between the state Guard units and the partner countries. For example, one Bilateral Affairs Officer stated that the relationship between one state Guard unit and its partner country was leveraged to assist the country in making progress toward the country team’s goal of anchoring the country in European and Euro-Atlantic institutions. The partner country was originally reluctant to accept assistance with military personnel management due to cultural sensitivities, but based on the established relationship, the state Guard unit was granted full access and made suggestions that were implemented by the partner country. Table 1 summarizes the key benefits of the program as described by State Partnership Program Coordinators, Bilateral Affairs Officers, and officials from the combatant commands. In addition, European Command’s combatant commander testified to Congress in February 2012 that the State Partnership Program develops important strategic relationships that benefit ongoing military activities. The European Command indicated in written responses to our questions that this program helps maintain access to partner countries’ leadership and is vital to defense institution building. Similarly, the National Guard Bureau describes the State Partnership Program as fitting within the building partner capacity portfolio of DOD, and views the program as an integral component of DOD’s global security cooperation strategy that can contribute to enhanced security. Further, it sees the program as integral to the combatant commands’ theater engagement plans and the U.S. Ambassadors’ Mission Strategic Resource Plans. Moreover, the National Guard Bureau told us that it found that the State Partnership Program is valuable to U.S. ambassadors. In October 2010, the National Guard Bureau, in conjunction with the Department of State, surveyed the ambassadors of U.S. embassies with State Partnership Program partnerships as part of an effort to conduct a strategic review of the program. Forty-one of the 62 ambassadors surveyed provided responses, and 40 of the respondents agreed that the State Partnership Program is a valuable tool in advancing their mission goals and objectives. Respondents noted that the activities and relationships developed by the program—fostering activities to support joint military exercises and deployments, providing support for international peacekeeping operations, and embedding training teams—promote overall national security and strategic interests. Thirty-nine ambassadors agreed that there are mechanisms to ensure that activities are properly integrated with U.S. country team priorities. Despite considerable anecdotal evidence from many State Partnership Program stakeholders about the program’s benefits, we were unable to comprehensively assess the State Partnership Program because the National Guard Bureau has not updated its program goals or objectives to match the program’s current operations. The National Guard Bureau developed goals and objectives for the program in 2007, but officials told us that these goals and objectives need to be updated to reflect the program as it currently operates. The previous goals and supporting objectives were broadly stated and reflected the desire to build partner capacity, but did little to clarify the specific goals for the State Partnership Program. We have previously reported that achieving results in government requires a comprehensive oversight framework that includes clear goals, measurable objectives, and metrics for assessing progress.Officials stated that they recognize the need to update program goals and objectives to more accurately reflect the current environment and the focus on military-to-military activities, and reported that they have initiated such efforts and expect the new goals and objectives to be finalized by July 2012. Officials also indicated that the new program goals and objectives will be more closely aligned with the combatant commands’ strategic goals and objectives. National Guard Bureau officials also acknowledged that once they update program goals and objectives, they will need to develop metrics to measure results of the program. However, they indicated that due to the relationship-building nature of the program, it is difficult to establish appropriate metrics that capture the effects of the program. As we have previously reported, performance measurement is the ongoing monitoring and reporting of program accomplishments, focused on regularly collected data on the level and type of program activities, direct products and services delivered by the program, and the results of those activities. As we have previously reported, it is sometimes difficult to establish performance measures for outcomes that are not readily observable and that in those cases, more in-depth program evaluation may be needed in addition to performance measures. Program evaluations are systematic studies conducted periodically that examine programs in-depth and include context in order to examine the extent to which a program is meeting its objectives. The RAND Corporation, a nonpartisan nonprofit organization that conducts public policy research, has reported on performance measures that programs like the State Partnership Program, which engage in building partner capacity and other security cooperation activities, can use to demonstrate results. Further, other federal agencies engaged in security cooperation activities use program evaluations in addition to performance measures. For example, the United States Agency for International Development has implemented multiple program evaluations for its foreign assistance programs, and the Global Peace Operations Initiative within the Department of State uses program evaluations to gauge the effectiveness of its training programs. National Guard Bureau officials told us that they are working with experts from other organizations including RAND and the Defense Security Cooperation Agency and have begun to develop metrics for the program. They provided us with a draft document containing some key assessment indicators in the areas of operational and mission support, doctrine and training, and systemic support. Under the area of mission support, for example, officials stated they are planning to track how effective State Partnership Program activities are in meeting combatant command and country team priorities. Officials further stated that these metrics are expected to be finalized during the summer of 2012. Such goals and metrics would form the foundation for a comprehensive oversight framework and, until they are put into place, DOD cannot fully assess whether the program is an effective and efficient use of resources. We cannot provide complete information on the types and frequency of State Partnership Program activities or the total funding amounts for these activities for fiscal years 2007 to 2011 because activity data are incomplete as well as inconsistent and funding data are incomplete. According to Standards for Internal Control in the Federal Government, program managers and decision makers should have reliable data to determine whether they are meeting goals and using resources effectively and efficiently. Without complete and consistent data on the State Partnership Program, we and DOD cannot assess the program’s efficiency nor provide complete information to decision makers, including Congress. Data on State Partnership Program activities from the combatant commands and the National Guard Bureau are incomplete and inconsistent. The National Guard Bureau and the combatant commands maintain separate databases for tracking events. Each entity independently tracks its activities and funding in databases that are not interoperable. According to National Guard Bureau officials, DOD’s Guidance for Employment of the Force mandates that all security cooperation activities be tracked, including State Partnership Program activities, in management information system databases. The National Guard Bureau uses its own system to track State Partnership Program events that it funds. National Guard Bureau officials indicated that events funded by a combatant command and the National Guard Bureau would be tracked in both databases.that as a result, data must be pulled from both the combatant commands’ and the National Guard Bureau’s data systems to glean the most complete information on the funding of State Partnership Program activities. National Guard Bureau officials told us We asked the combatant commands and the National Guard Bureau to provide us with a list of all State Partnership Program activities since fiscal year 2007, but the data that they provided to us were incomplete. Africa Command could only provide data since fiscal year 2009, when the command became fully operational, but officials told us that it is possible not all State Partnership Program activities are included in the data it provided because there is no way to electronically search for State Partnership Program activities in its database since they are not annotated as State Partnership Program activities. According to an Africa Command official, the data provided were selected manually, and some activities may have been overlooked. Activity data provided to us by European Command were also incomplete in that the location of events was missing for 482 of 753 (64 percent) activities. European Command officials told us that while the database does not always contain information on the location of events, individual records, such as after- action reviews for specific events, would have this information. In addition, the National Guard Bureau data were missing for fiscal year 2009 because the data system was not yet operational and data were not centrally maintained. National Guard Bureau officials told us that data were incomplete for 2010 because it was the first year that the National Guard Bureau began to use this data system to collect State Partnership Program data and staff had to learn how to use the system. Further, we found that some activity information that should have been contained in both combatant command and National Guard Bureau databases was not. For example, Northern Command and Pacific Command reported that a majority of State Partnership Program activities in their areas of responsibility were funded by the National Guard Bureau. As a result, we expected that the activity data would be maintained in both the combatant commands’ and the National Guard Bureau’s databases. However, when we compared the data provided by the combatant commands, including Northern Command, to the data provided by the National Guard Bureau, we found that both had records of State Partnership Program activities that were not accounted for in the other’s database. In addition, we compared a sample of the data provided to us by the combatant commanders and the National Guard Bureau to the activities listed in a DOD report to Congress on a subset of State Partnership Program activities involving civilians. Our analysis showed that 32 activities in the report to Congress were not accounted for in the data provided to us, despite the broader scope of our data request. The National Guard Bureau officials told us that their database was not used to meet the data request for the DOD report because they don’t have data from the required years. Instead, individual state Guard units were asked through a data call from the National Guard Bureau to provide lists of activities. Through our data analysis, we also found that activities in the National Guard Bureau and the combatant command databases were inconsistently defined, which hindered our ability to report on the types and frequency of activities. The combatant commands and the National Guard Bureau reported a broad range of activities conducted for fiscal years 2007 through 2011, but common activities included knowledge sharing on an area of expertise by National Guard personnel with partner nation participants, demonstrations of National Guard capabilities, and visits between an adjutant general or other high ranking U.S. military official with senior leaders of the partner nation’s armed forces. However, the terminology used to identify activity types varied both across the combatant commands and between the combatant commands and the National Guard Bureau. An August 2011 Directive Type Memorandum from the Under Secretary of Defense for Policy provides a definition for a State Partnership Program activity, but it does not define specific activity types. We found that the combatant commands use different terms to define similar activities. For example, one combatant command used the term orientation to describe the partner country observances of U.S. forces in action, whereas another combatant command referred to those activities as familiarizations. The user’s manual for the National Guard Bureau’s database contains a list of different activity types, but the types themselves are not consistent with the terminology used by the combatant commands. For example, in their respective databases, the National Guard Bureau used the term military-to-military for most of its activities that involve U.S. military activities conducted with host country militaries, whereas the combatant commands used terms like familiarization or traveling contact team, making it difficult to identify if the data in different databases were describing the same activity or two separate activities. In addition, although State Partnership Program activities that are funded by both a combatant command and the National Guard Bureau should be entered into each entity’s database for its respective funded amount, four combatant commands and the National Guard Bureau reported that there is no standard method for all the combatant commands and the National Guard Bureau to ensure the separate entries can be easily compiled in order to see all data maintained on a particular activity, including the total funding amount of the activity. Because of these inconsistencies, we could not summarize the types or frequency of activities that have taken place under the State Partnership Program. The funding data for State Partnership Program activities from fiscal years 2007 through 2011 are incomplete, thus preventing us from providing complete information on the total cost of the program. As previously discussed, funding data on State Partnership Program activities are maintained in multiple databases, depending primarily on the funding source for the activity. We found that funding data from the National Guard Bureau and some of the combatant commands were incomplete. For example, National Guard Bureau officials told us that that there was no standardized method for collecting and centrally managing its own State Partnership Program data prior to fiscal year 2009, when their database was first implemented. While the National Guard Bureau could tell us the total amount of money it spent on the program since 2007, it could not tell us how much money the National Guard Bureau spent on individual activities. In addition, our analysis also indicated that the funding data maintained by the combatant commands are incomplete, as described below. European Command: From fiscal years 2007 through 2011, European Command’s funding data were missing for 415 out of 753 activities (about 55 percent). European Command officials told us that missing information could indicate that an event had not been executed, that the activity was funded by a source other than the combatant command, or that the information was not updated in the database. Officials stated that business processes were put into place at the end of fiscal year 2010 to prevent this problem from recurring and our analysis showed that data were improved in fiscal year 2011. Africa Command: For fiscal years 2009 through 2011, Africa Command was missing funding data for 9 out of 70 (about 13 percent) State Partnership Program events. An Africa Command official explained that this could indicate that the event had not yet occurred or had been canceled, or it could indicate that the data were missing. Pacific Command: Data provided by Pacific Command showed that 118 events took place in its area of responsibility from fiscal years 2007 through 2011, but information on the source of funding for 41 events (about 35 percent) was missing. According to Pacific Command officials, most of the State Partnership Program activities in Pacific Command’s area of responsibility were funded by the National Guard Bureau rather than the command. However, for the activities that it did fund, it could only provide projected funding amounts and not expenditure data. According to a Pacific Command official, missing data were most likely due to personnel turnover at the state level. Southern Command: Data provided by Southern Command were likely complete, but Southern Command officials stated that gathering the data was difficult due to the lack of interoperability of the multiple databases containing the data. Central Command: Data provided by Central Command were also likely complete but officials told us that Central Command’s data systems do not always update accurately and therefore officials manually track events on a spreadsheet outside of the database. Data provided to us were based on this spreadsheet, rather than the database. Northern Command: Officials from Northern Command told us that it did not fund any State Partnership Program events as all events within Northern Command’s area of responsibility were funded by the National Guard Bureau. As a result, funding data for 2007 through 2010 are unavailable due to the incompleteness of the data. Funding data for fiscal year 2011 are the most complete, but the amount presented is only an estimate, as some data are still missing. We found that for fiscal year 2011 the National Guard Bureau and the combatant commands spent at least $13.2 million on State Partnership Program activities. Figure 3 below depicts available expenditure information for fiscal year 2011. DOD is developing a single global data system, but currently there are no common methods for tracking data on the State Partnership Program or coordinated efforts to address inconsistencies. Specifically, DOD has recognized that multiple databases, operating independently and lacking interoperability, are a problem and is developing a single, global data system—the Global Theater Security Cooperation Management Information System—to replace the multiple databases now being used to capture theater security-type information from various programs, of which the State Partnership Program is one. However, the development of this global data system is still in its early stages and the department does not know when the system is expected to have full operational capabilities. In the absence of a common data system, we found that currently there is no guidance from the Under Secretary of Defense for Policy, the National Guard Bureau, or the combatant commands on what data need to be tracked or how the data should be entered to ensure it is complete and consistent across all the databases, and that current efforts to improve the accuracy of the data are not coordinated. For example, officials from the National Guard Bureau told us that the efforts they have initiated are specific to the database the National Guard Bureau uses and that they have not coordinated with the combatant commands to address the inconsistency issues that occur across databases. Moreover, there is not agreement among stakeholders on common terms to use in describing how to annotate activities in their respective databases so that they can be easily identified and reconciled from one database to another. Given the current inconsistency and incompleteness of the data, DOD cannot assess the program’s performance and neither we nor DOD can provide complete and accurate information on activity types, frequency, and funding to decision makers. State Partnership Program stakeholders that we contacted, including combatant commands, State Partnership Program Coordinators, and Bilateral Affairs Officers, cited several types of challenges in funding State Partnership Program activities and in incorporating U.S. and foreign partner civilians into events. Specifically, stakeholders cited funding challenges such as concerns about funding availability and funding for events that included civilians. Although guidance and training exist on funding for the program, stakeholders expressed confusion in response to our questions. Until clarifying guidance and training are developed and provided, the National Guard Bureau and the combatant commanders may not be able to fully maximize the State Partnership Program in meeting their missions. When we asked stakeholders a broad, open-ended question about challenges facing the program, funding was a frequently cited problem. Four combatant commands, six Bilateral Affairs Officers, and 20 State Partnership Program Coordinators told us that funding was a challenge to the program. The combatant commands expressed concerns about the availability of funding for the program. For example, one combatant command stated that the most challenging aspect of the State Partnership Program is the funding of the guardsmen because they need to be put on special orders that are not necessary when using active duty personnel. Another combatant command stated that additional funding for the program “is critical for the continued success of the program” as several other countries would like to join the program, and two combatant commands expressed concerns that State Partnership Program funding would be cut in the future. Bilateral Affairs Officers also expressed similar challenges with funding. For example, one Bilateral Affairs Officer told us that obtaining pay and allowances for guardsmen is difficult compared to active duty forces. Further, three Bilateral Affairs Officers mentioned that they would like to have additional funding to conduct more events and one State Partnership Program Coordinator told us that the National Guard Bureau and the combatant commands do not always have the necessary funds available to support an event. State Partnership Program Coordinators also expressed concerns about the funding process that extended beyond funding availability. For example, one State Partnership Program Coordinator commented that because funds come from dual sources—the National Guard Bureau and the combatant commands—there is sometimes confusion and funding uncertainties as the two organizations negotiate who will pay for what events or portions of events. Another commented that “the myriad of funding authorizations and their specific peculiarities a challenge to even the most experienced State Partnership Program Coordinator.” Further, one State Partnership Program Coordinator told us that because he was not active duty, he did not have access to training offered by the Air Force that he felt would be beneficial to understanding how to better fund events. The most prominent challenge cited by State Partnership Program stakeholders involved concerns about conducting and funding activities that include civilian participants. In the past, the State Partnership Program has incorporated both U.S. and foreign partner civilians into a variety of activities. These included activities such as subject matter expert exchanges with members of the state’s fire department and the host nation on military support to civil authorities; a familiarization on 911 system operations between U.S. and host country civilians; and a subject matter expert exchange with U.S. and foreign partner law enforcement officials on maritime border security issues. However, in response to our question about challenges facing the program, 31 State Partnership Program Coordinators cited difficulties in conducting activities with civilians. In response to our question about how the program should be changed, 36 State Partnership Program Coordinators stated that the program should be changed to better facilitate civilian engagements. Further, many of the State Partnership Program Coordinators expressed the opinion that they were not allowed to conduct activities with civilians at all, even though DOD officials told us that civilians are permitted to participate in activities as long as the proper funding authority is used. For example, one State Partnership Program Coordinator told us that his state’s greatest challenge is the current DOD guidance which, based on his understanding, restricts all events to strict military-to-military events. Another State Partnership Program Coordinator told us that the state recently had to cancel planned events with its partner country’s civilian authorities because of its interpretation of this guidance. A third State Partnership Program Coordinator stated that the perceived “requirement strictly limit operations to military-to-military engagements limits ability to support” the needs of the embassy and of the partner country. Another State Partnership Program Coordinator told us that the perceived restriction in the DOD guidance prevents his state’s capabilities from being fully used. Bilateral Affairs Officers from the partner country embassies and combatant commands had similar perceptions about civilian participation in State Partnership Program activities. Out of the 23 Bilateral Affairs Officers who provided answers to our questions, 9 cited this area as a challenge for the program. For example, in regard to the challenges posed for the program, one Bilateral Affairs Officer told us that the inability of the National Guard Bureau to bring civilian subject matter experts to the partner countries diminishes the value of events. In addition, 14 of the 23 Bilateral Affairs Officers that responded to our questions expressed the opinion that the State Partnership Program should be changed to better facilitate civilian engagements. For example, one Bilateral Affairs Officer told us that expanding activities into other sectors, such as medical or law enforcement, would help to fulfill embassy and combatant command missions. In addition, one combatant command stated that the restrictions on funding civilians are a challenge facing the program. However, according to DOD officials, the combatant commands have certain funds, such as Traditional Combatant Commander’s Activities funds, which may be available to use for funding events involving civilians. DOD has issued some guidance on the State Partnership Program, including guidance on the use of funds for civilians, in part to respond to congressional direction. The National Defense Authorization Act for Fiscal Year 2010 required the Secretary of Defense to prescribe regulations on the use of funds appropriated to DOD to pay the costs incurred by the National Guard in conducting activities under the State Partnership Program, and also required the Secretary to submit annual reports to the appropriate congressional committees describing the civilian engagement activities conducted under the State Partnership Program. In response to the requirement to issue regulations, DOD issued its Directive Type Memorandum in August 2011. The Directive Type Memorandum does not explicitly prohibit the involvement of civilians in State Partnership Program activities; however, it stipulates that funds appropriated to DOD shall not be used to conduct activities with civilians unless those activities are based on legal authority that allows the use of such funds for those activities. National Guard Bureau officials told us that since the issuance of the Directive Type Memorandum, states have become cautious about conducting events with civilians, and many have chosen to not conduct any events with civilians due to a concern about violating DOD guidance. The Directive Type Memorandum will expire in August 2012 and the Under Secretary of Defense, Policy, has drafted an instruction that is intended to further clarify the use of funds appropriated to DOD, including funds for civilian participation, under the State Partnership Program. Officials indicate that this instruction is currently undergoing review within DOD and should be issued sometime during 2012, but could not provide us with a confirmed issuance date. In addition, the National Guard Bureau is working on guidance for implementing the State Partnership Program. According to National Guard Bureau officials, an instruction will establish policy, assign responsibilities, and provide guidance for the execution of the State Partnership Program. An accompanying manual will provide more details on how to implement the program. National Guard Bureau officials indicated that the instruction and the manual are expected to be issued sometime during 2012, but also could not provide us with a confirmed issuance date. During the course of our review, Congress enacted the National Defense Authorization Act for Fiscal Year 2012, which provides authority for the use of up to $3 million to pay for some costs associated with civilian participation. However, National Guard Bureau officials stated that DOD has not issued guidance on the implementation of this provision. According to officials, due to this lack of guidance, funds have not been used for this purpose. The draft DOD instruction is still undergoing review and is intended to provide clarifying information on the use of funds appropriated to DOD prior to the enactment of the National Defense Authorization Act for Fiscal Year 2012. Therefore, it may be appropriate for the Under Secretary of Defense, Policy, to determine whether or not the draft instruction is the right mechanism for conveying additional guidance addressing section 1085 of the National Defense Authorization Act for Fiscal Year 2012, or determine alternative plans for how to address the confusion expressed by National Guard Bureau officials. Without additional guidance, however, the National Guard Bureau does not plan to use this authority so the concerns about how to fund civilian participation are likely to persist. Beyond the lack of guidance, the responses stakeholders provided to our questions revealed that there is widespread confusion about aspects of program implementation, including addressing funding concerns. We have previously reported that challenges facing such programs can be mitigated by improving training and that training can help ensure that program policies and procedures are consistently adhered to by program offices. Further, DOD guidance emphasizes the need for proper training and staffing to increase effectiveness in budgeting. The National Guard Bureau has taken steps to provide training but told us that their efforts needed improvement in some areas. For example, State Partnership Program Coordinators have the opportunity to attend the Defense Institute of Security Assistance Management course, which in 2012 and several years prior, included topics such as an introduction to security cooperation, understanding the State Partnership Program, emphasizing security cooperation administration as well as emphasizing the interaction and constraints of the State Partnership Program with other DOD security cooperation activities. Moreover, officials indicated that the National Guard Bureau holds annual State Partnership Program conferences and participates in combatant commands’ conferences, where some training on the processes and authorities are presented. National Guard Bureau officials stated that they are planning some training for State Partnership Program Coordinators for the summer of 2012 and plan to include an overview of funding, but have not determined the specific content related to funding for this training event. Without further guidance and training in this area, the National Guard Bureau and the combatant commands may miss additional opportunities to use the program to fulfill their missions. In recent years, DOD has emphasized the importance of strengthening security cooperation with other countries as a way of promoting stability and partner capacity around the world, and the State Partnership Program is one of many efforts in this area. While many State Partnership Program stakeholders cited anecdotal benefits to the program such as training and experience for guardsmen and supporting combatant commanders’ goals and priorities, DOD and Congress do not have an effective means to assess the program because fundamental elements such as agreed-upon goals are missing. As a result, little oversight of the program has been conducted in the past. Officials informed us that they are working on goals, objectives, and metrics and expect to implement them in the next few months. Such goals and measures are critical because they form the foundation of an oversight framework that would enable decision makers and stakeholders to objectively judge the program’s effectiveness and gauge progress over time. However, in order to make use of metrics, DOD and the National Guard Bureau will need complete and consistent data from the combatant commands and state National Guards engaged in State Partnership Program activities. In the interim period until DOD fully implements its global data system, guidance that establishes an agreed-upon set of definitions and rules for inputting data, and that would apply to the National Guard Bureau, all combatant commands, and state National Guards, could provide a foundation for measuring the State Partnership Program’s effectiveness and efficiency. Finally, some activities that stakeholders believe could have a broad impact—such as those involving civilians—are not being conducted due primarily to a lack of guidance and understanding on how to fund those activities. Ensuring that stakeholders understand how to use funding from the National Guard Bureau, combatant commands, and other sources to support the State Partnership Program would help state National Guards fully utilize the program. We recommend that the Secretary of Defense take the following four actions: To improve the management of the State Partnership Program, direct the Chief of the National Guard Bureau, in coordination with the combatant commands and the embassy country teams, to complete and implement the program’s comprehensive oversight framework by using the goals, objectives, and metrics currently being developed as its basis. To enable oversight and improve the completeness and consistency of data needed to manage the State Partnership Program, direct the Under Secretary of Defense for Policy and Joint Staff, in coordination with the Chief of the National Guard Bureau, the combatant commands, and the embassy country teams, to develop guidance for all stakeholders that includes agreed-upon definitions for data fields and rules for maintaining data until the global data system is fully implemented. To address concerns about how funds can be used to include civilians in State Partnership Program activities, direct the Under Secretary of Defense for Policy, to develop guidance that clarifies how to use funds for civilian participation in the State Partnership Program. To improve program implementation, direct the Chief of the National Guard Bureau to develop additional training for State Partnership Program Coordinators and Bilateral Affairs Officers on the appropriate use of funds for supporting the State Partnership Program, especially in regard to including civilians in program events. In written comments on a draft of this report, DOD concurred with our findings and recommendations. Regarding our first recommendation to complete and implement the program’s comprehensive oversight framework, DOD concurred and noted that these efforts are underway with target implementation for the end of fiscal year 2012. In response to our second recommendation to develop guidance for all stakeholders that includes agreed-upon definitions for data fields and rules for maintaining data, and our third recommendation to develop guidance that clarifies the use of funds for civilian participation in State Partnership Program activities, DOD concurred and stated that it is currently developing a DOD instruction that will provide additional guidance to stakeholders on these issues. DOD did not, however, indicate timelines for the issuance of this instruction. We believe that prompt action in this regard will help DOD achieve greater visibility over the State Partnership Program, and we urge DOD to determine a timeline for issuance. Regarding our final recommendation to develop additional training for State Partnership Program Coordinators and Bilateral Affairs Officers on the appropriate use of funds for supporting the State Partnership Program, especially in regard to including civilians in program events, DOD concurred and stated that the National Guard Bureau has developed some additional training and will use existing workshops to increase training opportunities. We are pleased with DOD’s efforts and continue to believe that increased training in this area will help DOD fully utilize the State Partnership Program. DOD’s comments are printed in their entirety in appendix III. We also provided a draft of this report to the Department of State and the United States Agency for International Development, but they did not provide any comments. We are sending copies of this report to appropriate congressional committees, the Secretary of Defense, the Secretary of State, and the Administrator of the United States Agency for International Development. This report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-3489 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To address our objectives, we collected perspectives on the program from the Office of the Secretary of Defense, Policy; Joint Staff; National Guard Bureau; and program stakeholders including State Partnership Program coordinating officials at the geographic combatant commands; State Partnership Program Coordinators; and Bilateral Affairs Officers, including their views on the benefits of the program. We also collected information on the process that the Department of Defense (DOD) uses to establish partnerships and the steps taken by all U.S. program stakeholders, including State Partnership Program Coordinators, Bilateral Affairs Officers, and combatant commanders, to coordinate State Partnership Program activities and prevent duplication of effort. We also obtained and reviewed DOD documents, including Defense Strategic Guidance, the Quadrennial Defense Review, and The National Military Strategy of the United States of America to place the State Partnership Program within the broader context of DOD’s strategic efforts. To determine the extent to which State Partnership Program activities are meeting the goals and objectives of the program, we gathered documentation; interviewed National Guard Bureau officials about the development of goals, objectives, and performance metrics for the program; and assessed their efforts based on criteria from our previous work. We also reviewed an improvement plan for the State Partnership Program provided by the National Guard Bureau and assessed the extent to which the plan addressed the need for goals, objectives, and metrics and identified timeframes for implementation. In addition, we obtained and reviewed DOD guidance, including the Directive Type Memorandum released in August 2011, to determine if goals and objectives for the State Partnership Program were specified in those documents. To identify benefits of the program, we contacted all State Partnership Program Coordinators and Bilateral Affairs Officers via e-mail with a standard set of questions. In addition to program benefits, the questions addressed roles in implementing the State Partnership Program, steps to avoid duplication of program activities, any challenges faced when implementing the program, and any suggested areas for improvement. We received and analyzed responses from 50 of the 52 State Partnership Program Coordinators and from 23 out of 47 Bilateral Affairs Officers.We also collected and analyzed written responses to similar questions from coordinating officials at the six U.S. geographic combatant commands. In conducting our content analysis, a GAO analyst independently reviewed each response from the State Partnership Program Coordinators and Bilateral Affairs Officers to identify recurring themes in the answers to each question. A second GAO analyst independently reviewed the responses from the State Partnership Program Coordinators and Bilateral Affairs Officers and reviewed the recurring themes identified by the first analyst to reach concurrence and identify any themes that the first analyst may have overlooked. Using the identified recurring themes, the analysts developed categories and definitions for what should and should not be included under each category when coding the responses. A GAO analyst then independently reviewed the answers to each question and placed them into one or more of the relevant categories. In some cases, the respondent may have provided information to answer the question in other areas of the response. When that occurred, the analyst also coded that information and noted that it was provided in an answer to a different question. A second GAO analyst independently reviewed the answers to each question and placed them into one or more of the relevant categories. The coding of both analysts was compared to identify areas of disagreement. For items in which there was not agreement, the two analysts met to discuss reasons for selecting the categories they did until an agreement about the category that was most appropriate was reached. To determine the completeness and consistency of activity and funding data for the program, we collected and analyzed data on State Partnership Program activities from fiscal years 2007 through 2011— including types of activities, funding sources, and funding amounts— obtained from the National Guard Bureau and the six U.S. geographic combatant commands. To assess the reliability of the data, we collected written information from the combatant commands to gain an understanding of the processes and databases used to collect and record data and to identify any known limitations to the data. We also collected written information on any data quality control procedures in place for data on State Partnership Program activities and reviewed user manuals for the various databases, where provided. We discussed the procedures for generating and verifying the data with knowledgeable combatant command and National Guard Bureau officials. We examined the data provided for obvious anomalies and compared the data to DOD’s report to Congress on State Partnership Program activities involving civilians. We found missing information and inconsistencies as well as a lack of guidance on data inputs to ensure complete and consistent information. We discussed these limitations with the officials in an attempt to obtain more complete information and reconcile the differences. We ultimately determined that the data we received were not reliable for the purposes of providing complete information on the types and frequency of activities, the funding sources used, or the total cost of the activities because of our concerns about the completeness and consistency of the data, which we discuss in our report. As a result, the data we included in the report do not represent the complete scope of the State Partnership Program. The data do, however, illustrate the limitations we found. To identify challenges that DOD faces in implementing the program, we included a question on any challenges in implementing the program and any areas for improvement in our email to all State Partnership Program Coordinators and all Bilateral Affairs Officers who participate in this program, as described above. Our content analysis included categories for challenges and areas for improvement. We also collected and analyzed written responses to similar questions from the six U.S. geographic combatant commands. On the basis of the challenges cited by stakeholders, we also reviewed legislation and guidance on the State Partnership Program, including the Directive Type Memorandum and internal National Guard Bureau memoranda on the use of funds for State Partnership Program activities, to identify areas of confusion that might require clarification or additional training. We also identified criteria in our previous work for combating the challenges identified by State Partnership Program stakeholders. We discussed these areas with National Guard Bureau officials and any efforts in place to address the challenges. We conducted this performance audit from August 2011 to May 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. Appendix II: State Partnership Program Participating States and Countries, by Combatant Command *Indicates country has a Bilateral Affairs Officer. *Indicates country has a Bilateral Affairs Officer. *Indicates country has a Bilateral Affairs Officer. In addition to the contact named above, key contributors to this report were Marie Mak, Assistant Director; Leslie Bharadwaja; Michele Fejfar; Kelly Liptan; Erik Wilkins-McKee; Amie Steele; and Nicole Willems. | The National Guards State Partnership Program is a DOD security cooperation program that matches state National Guards with foreign countries to conduct joint activitiesincluding visits between senior military leaders and knowledge sharing in areas such as disaster managementthat further U.S. national security goals. The program has partnerships between 52 U.S. state and territory National Guards and 69 countries. In fiscal year 2011, program expenditures were at least $13.2 million. The 2012 National Defense Authorization Act directed GAO to study the program. GAO determined (1) the extent to which State Partnership Program activities are meeting program goals and objectives; (2) the types and frequency of activities and funding levels of the program; and (3) any challenges DOD faces in the programs implementation. GAO collected written responses to questions from State Partnership Program Coordinators at the state level, Bilateral Affairs Officers at the U.S. embassies in the partner nations, and officials at the combatant commands, reviewed documents, and interviewed DOD officials. Many State Partnership Program stakeholders, including State Partnership Program Coordinators, Bilateral Affairs Officers, and combatant command officials, cited benefits to the program, but the program lacks a comprehensive oversight framework that includes clear program goals, objectives, and metrics to measure progress against those goals, which limits the Department of Defenses (DOD) and Congress ability to assess whether the program is an effective and efficient use of resources. The benefits described by all stakeholders focused on the programs contributions to meeting their specific missions, such as building security relationships, providing experience to guardsmen, and supporting combatant commands missions. Goals, objectives, and metrics to measure progress are necessary for management oversight, and National Guard Bureau officials told GAO that they recognize the need to update the programs goals and develop metrics and have initiated efforts in these areas. Officials expect completion of these efforts in summer 2012. Until program goals and metrics are implemented, DOD cannot fully assess or adequately oversee the program. State Partnership Program activity data are incomplete as well as inconsistent and funding data are incomplete for fiscal years 2007 through 2011; therefore GAO cannot provide complete information on the types and frequency of activities or total funding amounts for those years. GAO found that the multiple data systems used to track program activities and funding are not interoperable and users apply varying methods and definitions to guide data inputs. The terminology used to identify activity types is inconsistent across the combatant commands and the National Guard Bureau. Further, funding data from the National Guard Bureau and the combatant commands were incomplete, and while the National Guard Bureau provided its total spending on the program since 2007, it could not provide information on the cost of individual activities. Although the National Guard Bureau has initiated efforts to improve the accuracy of its own State Partnership Program data, without common agreement with the combatant commands on what types of data need to be tracked and how to define activities, the data cannot be easily reconciled across databases. The most prominent challenge cited by State Partnership Program stakeholders involved how to fund activities that include U.S. and foreign partner civilian participants. Activities involving civilians, for example, have included subject-matter expert exchanges on military support to civil authorities and maritime border security. Although DOD guidance does not prohibit civilian involvement in activities, many stakeholders have the impression that the U.S. military is not permitted to engage civilians in State Partnership Program activities and some states may have chosen not to conduct any events with civilians due to the perception that it may violate DOD guidance. DOD and the National Guard Bureau are working on developing additional guidance and training in this area. Until these efforts are completed, confusion may continue to exist and hinder the programs full potential to fulfill National Guard and combatant command missions. GAO recommends that DOD complete its comprehensive oversight framework for the State Partnership Program, develop guidance to achieve reliable data on the program, and issue guidance and conduct additional training on the appropriate use of funding for program activities, including those involving civilians. DOD concurred with all recommendations. |
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The contracting processes, activities, and challenges associated with rebuilding Iraq can be viewed as similar to, albeit more complicated than, those DOD normally confronts. We and others have already reported on the large and continuing drain on reconstruction dollars to meet unanticipated security needs. Further, multiple players with diffuse and changing responsibilities have had large roles in rebuilding Iraq, complicating lines of authority and accountability. Additionally, rebuilding a nation after decades of neglect and multiple wars is an inherently complex, challenging, and costly undertaking. From May 2003 through June 2004, the Coalition Provisional Authority (CPA), led by the United States and the United Kingdom, was the United Nations recognized authority responsible for the temporary governance of Iraq and for overseeing, directing, and coordinating reconstruction efforts. During 2003, several agencies, most notably the U.S. Agency for International Development (USAID) and the U.S. Army Corps of Engineers, played a role in awarding and managing initial reconstruction contracts. To coordinate and manage the $18.4 billion in reconstruction funding provided in fiscal year 2004, the CPA established a multi-tiered contracting approach for Iraq reconstruction activities. The CPA, through various military organizations, awarded the following contracts: 1 program management support contract to oversee reconstruction efforts; 6 sector program management contracts to coordinate reconstruction efforts specific to each sector; and 12 design-build contracts to execute specific construction tasks. DOD is now emphasizing greater use of local Iraqi firms to perform reconstruction work that was previously intended to be performed by the design-build contractors. With the establishment of Iraq’s interim government in June 2004, the CPA’s responsibilities were transferred to the Iraqi government or to U.S. agencies. The Department of State is now responsible for overseeing U.S. efforts to rebuild Iraq. The Project and Contracting Office (PCO), a temporary DOD organization, was tasked with providing acquisition and project management support. In December 2005, DOD merged the PCO with the U.S. Army Corps of Engineers Gulf Region Division, which now supervises DOD reconstruction activities in Iraq. Additionally, the State Department’s Iraq Reconstruction and Management Office is responsible for strategic planning and for prioritizing requirements, monitoring spending, and coordinating with the military commander. USAID continues to award its own contracts, which are generally associated with economic assistance, education and governance, and certain infrastructure projects. The United States has made some progress in restoring Iraq’s essential services, but as of August 2006, such efforts generally have not met prewar production levels or U.S. goals. Reconstruction activities have focused on restoring essential services, such as refurbishing and repairing oil facilities, increasing electrical generating capacity, and restoring water treatment plants. About one-third of DOD’s construction work remains, and DOD estimates that some work is not planned for completion until late 2008. Continued violence, however, may make it difficult for the United States to achieve its goals. For August 2006, the U.S. embassy reported that the oil, electricity, and water sectors generally performed below the planned U.S. goals. Specifically, Crude oil production capacity was reported as about 2.4 million barrels per day (mbpd), below the prewar level of 2.6 mbpd and the desired goal of 3 mbpd. In the electricity sector, peak generation capacity was reported at 4,855 megawatts, above the prewar level of 4,300 megawatts, but below the U.S. goal of 6,000 megawatts. Further, the current demand for power continues to outstrip the available supply of electricity as more Iraqis purchase consumer items and devices requiring electricity to operate. In the water sector, new or restored treatment capacity was reported at about 1.44 million cubic meters per day, compared to the U.S. goal of 2.4 million cubic meters. According to senior CPA and State officials responsible for the U.S. strategy, the CPA’s 2003 reconstruction plan assumed that (1) creating or restoring basic essential services for the Iraqi people took priority over jobs creation and the economy and (2) the United States should focus on long-term infrastructure projects because of the expertise the United States could provide. Further, the strategy assumed that reconstruction efforts would take place in a relatively benign environment. The difficult security environment and persistent attacks on U.S.-funded infrastructure, among other challenges, contributed to project delays, increased costs, and canceling or reducing the scope of some reconstruction projects. As we reported on September 11, 2006, the overall security conditions have grown more complex, as evidenced by increased numbers of attacks and Sunni/Shi’a sectarian strife. The continuing violence may make it difficult for the United States to achieve its goals. The contracting challenges encountered in Iraq are emblematic of systemic issues faced by DOD. A fundamental prerequisite to having good outcomes is a match between well-defined requirements and available resources. At the sector, program, and project levels, the failure to define realistic requirements has had a cascading effect on contracts and made it difficult to take subsequent steps necessary to get to successful outcomes. For example, in the absence of settled requirements, DOD has sometimes relied on what are known as undefinitized contractual actions, which were used extensively in Iraq and can leave the government exposed to increased costs. Managing risks when requirements are in flux requires effective oversight, but DOD lacked the capacity to provide a sufficient acquisition workforce, thereby hindering oversight efforts. In Iraq, as elsewhere, we found instances in which DOD improperly used interagency contracts to meet reconstruction needs. Finally, the underlying market discipline offered by competition can help promote better outcomes, but DOD, like other agencies, was challenged, particularly early on, in its ability to realize the benefits of competition. One or more of these factors can contribute to unsatisfactory outcomes on individual projects; the net effect, however, is that many reconstruction projects did not achieve their intended goals and DOD has incurred unanticipated costs and schedule delays. One of the factors that can contribute to poor DOD acquisition outcomes is the mismatch between wants, needs, affordability, and sustainability. This mismatch was evident in the reconstruction efforts in Iraq. U.S. reconstruction goals were based on assumptions about the money and time needed, which have proven unfounded. U.S. funding was not meant to rebuild Iraq’s entire infrastructure, but rather to lay the groundwork for a longer-term reconstruction effort that anticipated significant assistance from international donors. To provide that foundation, the CPA allocated $18.4 billion in fiscal year 2004 reconstruction funds among various projects in each reconstruction sector, such as oil, electricity, and water and sanitation. As noted by the Special Inspector General, almost immediately after the CPA dissolved, the Department of State initiated an examination of the priorities and programs with the objectives of reprioritizing funding for projects that would not begin until mid- to late-2005 and using those funds to target key high-impact projects. By July 2005, the State Department had conducted a series of funding reallocations to address new priorities, including increasing support for security and law enforcement efforts and oil infrastructure enhancements. One of the consequences of these reallocations was to reduce funding for the water and sanitation sector by about 44 percent, from $4.6 billion to $2.6 billion. One reallocation of $1.9 billion in September 2004 led the PCO to cancel some projects, most of which were planned to start in mid-2005. Changes, even those made for good reasons, make it more difficult to manage individual projects to successful outcomes. Further, such changes invariably have a cascading effect on individual contracts. To produce desired outcomes within available funding and required time frames, DOD and its contractors need to have a clear understanding of reconstruction objectives and how they translate into the terms and conditions of a contract: what goods or services are needed, when they are needed, the level of performance or quality desired, and what the cost will be. When such requirements were not clear, DOD often entered into contract arrangements on reconstruction efforts that posed additional risks. For example, In June 2004, we reported that faced with uncertainty as to the full extent of the rebuilding effort, DOD often authorized contractors to begin work before key terms and conditions, including the work to be performed and its projected costs, were fully defined. The use of undefinitized contract actions, while allowing needed work to begin quickly, can result in additional costs and risks to the government. We found that as of March 2004, about $1.8 billion had been obligated on reconstruction contract actions without DOD and the contractors reaching agreement on the final scope and price of the work. In one case, we found a contract action that had been modified nine times between March and September 2003, increasing estimated costs from $858,503 to about $204.1 million without DOD and the contractor reaching agreement on the scope of work or final price. In September 2005, we reported that difficulties in defining the cost, schedule, and work to be performed associated with projects in the water sector contributed to project delays and reduced scopes of work. We reported that DOD had obligated about $873 million on 24 task orders to rebuild Iraq’s water and sanitation infrastructure, including municipal water supplies, sewage collection systems, dams, and a major irrigation project. We found, however, that agreement between the government and the contractors on the final cost, schedule, and scope of 18 of the 24 task orders we reviewed had been delayed. These delays occurred, in part, because Iraqi authorities, U.S. agencies, and contractors could not agree on scopes of work and construction details. For example, at one wastewater project, local officials wanted a certain type of sewer design that increased that project’s cost. Earlier this week, we issued a report on how DOD addressed issues raised by the Defense Contract Audit Agency (DCAA) in audits of Iraq- related contract costs. We again noted that DOD frequently authorized contractors to begin work before reaching agreement on the scope or price of the work. In such cases, we found that DOD contracting officials were less likely to remove costs questioned by DCAA from a contractor’s proposal when the contractor had already incurred these costs. For example, of the 18 audit reports we reviewed, DCAA issued 11 reports on contract actions where more than 180 days had elapsed between the beginning of the period of performance to final negotiations. For 9 of these audits, the period of performance DOD initially authorized for each contract action concluded before final negotiations took place. In one case, DCAA questioned $84 million in its audit of a task order proposal for an oil mission. In this case, the contractor did not submit a proposal until a year after the work was authorized, and DOD and the contractor did not negotiate the final terms of the task order until more than a year after the contractor had completed work (see fig. 1). In the final negotiation documentation, the DOD contracting official stated that the payment of incurred costs is required for cost-type contracts, absent unusual circumstances. In contrast, in the few audit reports we reviewed where the government negotiated prior to starting work, we found that the portion of questioned costs removed from the proposal was substantial. Instability—such as when wants, needs, and contract requirements are in a state of flux—requires greater attention to oversight, which in turn relies on a capable government workforce. Managing the attendant risks in unstable situations grows in both importance and difficulty. Unfortunately, attention to oversight and a capable government workforce has not always been evident during the reconstruction effort. Such workforce challenges are not unique to Iraq. DOD’s civilian workforce shrank by about 38 percent between fiscal years 1989 and 2002, but DOD performed this downsizing without ensuring that remaining staff had the specific skills and competencies needed to accomplish future DOD missions. In other cases, contractors have taken over support positions that were traditionally filled by government personnel. For example, a contractor began providing intelligence support to the Army in Germany in 1999 and deployed with the Army to Iraq in 2003. The Army, however, found itself unprepared for the volume of Iraqi detainees and the need for interrogation and other intelligence and logistics services. We and others have reported on the impact of the lack of adequate acquisition personnel and high turnover rates on reconstruction efforts. For example, among the lessons learned identified by the Special Inspector General was that one of the CPA’s critical personnel shortcomings was the inadequate link between position requirements and necessary skills. In this case, gaps existed in the experience levels of those hired, as well as in the quality and depth of their experiences relative to their assigned jobs. Similarly, in January 2004, an interagency assessment team was sent to Iraq to review the CPA’s contracting capability. The team found that existing contracting personnel were insufficient to handle the increased workload that was expected with the influx of fiscal year 2004 reconstruction funding and that the CPA needed more individuals with acquisition expertise who could help the programmatic side of the operation. In part, the CPA’s decision to award seven contracts in early 2004 to help better coordinate and manage the fiscal year 2004 reconstruction efforts was in recognition of this shortfall. As a result, DOD finds itself in the position of relying on contractors to help manage and oversee the work of other contractors. At the contract level, having personnel who are trained to conduct oversight, assigned at or prior to contract award, and held accountable for their oversight responsibilities is essential for effective oversight. Our work has shown that if oversight is not conducted, is insufficient, or is not well documented, DOD, and other reconstruction agencies, risk not identifying and correcting poor contractor performance in a timely manner and paying contractors more than the value of the services they perform. For example, Our June 2004 report found that early contract administration challenges were caused, in part, by the lack of sufficient personnel. We found that, due to the lack of government personnel to provide oversight, one contractor may have purchased $7 million in equipment and services that were not specifically authorized under the contract. Similarly, on another contract, to provide subject matter experts to the CPA and Iraqi ministries, DOD officials stated that some experts failed to report to duty or when they did, did not perform as expected. DOD officials attributed such performance issues to the lack of personnel to provide oversight when the experts arrived in Iraq. In July 2005, we noted that USAID obligated an additional $33 million on one of its contracts to pay for unanticipated increases in security costs, which left it short of funds to pay for construction oversight and quality assurance efforts, as well as to fund administrative costs. Our September 2005 report on water and sanitation efforts found that frequent staff turnover affected both the definitization process and the overall pace and cost of reconstruction efforts. For example, new contracting officers had to be brought up to speed and would sometimes ask the contractor to resubmit information in formats different from those previously required. A PCO official also noted that the contracting office in Iraq lacked sufficient staff and equipment and that some of the staff assigned as contracting officers lacked experience with the type of projects the PCO managed. Another area in which workforce shortfalls proved problematic was in DOD’s use and management of interagency contracting vehicles. We identified management of interagency contracting as a high-risk area in January 2005. In recent years, federal agencies have been making a major shift in the way they procure many goods and services. Rather than developing and awarding their own contracts, agencies are making greater use of contracts already awarded by other agencies, referred to as interagency contracting. This practice offers the benefits of improved efficiency and timeliness. Such contracts, however, need to be effectively managed, and their use demands a higher than usual degree of business acumen and flexibility on the part of the acquisition workforce. Our work and that of some agency inspectors general found instances of improper use of interagency contracting, resulting from increasing demands on the acquisition workforce, insufficient training, inadequate guidance, an inordinate focus on meeting customer demands at the expense of complying with sound contracting policy and required procedures, and the lack of clear lines of responsibility and accountability. During the initial stages of reconstruction, we and the DOD Inspector General found instances in which DOD improperly used interagency contracts for many of the same reasons. For example, In March 2004, the DOD Inspector General reported that a review of 24 contract actions awarded by a DOD component on behalf of the CPA revealed that DOD circumvented contracting rules, including improperly using General Services Administration federal supply schedule contracts and improperly contracting for personal services. The Inspector General attributed this condition to the need to quickly award contracts and to DOD’s failure to plan for the acquisition support the CPA needed to perform its mission. In June 2004, we noted that a task order awarded by the Air Force to provide logistical support and equipment to support USAID’s mission in Baghdad and at other sites in Iraq was, in part, outside the scope of the contract. The Air Force indicated that it was issuing additional guidance to ensure that future task orders were within the scope of the contract. In April 2005 we reported that a lack of effective management controls—in particular insufficient management oversight and a lack of adequate training—led to breakdowns in the issuance and administration of task orders for interrogation and other services by the Department of the Interior on behalf of DOD. These breakdowns included issuing 10 out of 11 task orders that were beyond the scope of underlying contracts, in violation of competition rules; not complying with additional DOD competition requirements when issuing task orders for services on existing contracts; not properly justifying the decision to use interagency contracting; not complying with ordering procedures meant to ensure best value for the government; and not adequately monitoring contractor performance. Because officials at Interior and the Army responsible for the orders did not fully carry out their roles and responsibilities, the contractor was allowed to play a role in the procurement process normally performed by the government. Further, the Army officials responsible for overseeing the contractor, for the most part, lacked knowledge of contracting issues and were not aware of their basic duties and responsibilities. Finally, one tool that can help mitigate acquisition risks is to rely on the discipline provided by market forces when contracts are awarded under full and open competition—that is, when all responsible prospective contractors are afforded the opportunity to compete. During the initial stages of reconstruction, we found that agencies were unable to take full advantage of competition, in part because of the relatively short time— often only weeks—to award the first contracts. Our June 2004 report found that agencies generally complied with applicable requirements for competition when awarding new contracts but did not always do so when issuing task orders against existing contracts. We found that 7 of the 11 task orders we reviewed were for work that was, in whole or in part, outside the scope of the existing contracts. In each of these cases, the out- of-scope work should have been awarded using competitive procedures or supported with a justification and approval for using other than full and open competition in accordance with legal requirements. Given the urgent need for reconstruction efforts, we noted that the authorities under the competition laws provided agencies ample latitude to justify their approach. Such latitude presupposes that the rationale for such actions is valid; if not, then the loss of the benefits from competition cannot be easily justified. For example, in November 2005, we sustained a protest of a sole- source contract awarded by the Air Force in December 2004 for bilingual- bicultural advisers that was placed under an environmental services contract, which, on its face, did not include within its scope the bilingual- bicultural adviser requirement. We concluded that the agency’s efforts were so fundamentally flawed as to indicate an unreasonable level of advance planning. In the same decision, we sustained a protest of a second, follow-on sole-source contract awarded by the Air Force in July 2005 to the same company, in which the justification and approval prepared in support of the contract was premised on the conclusion that the contractor was the only responsible source, yet the capabilities of other firms were not in fact considered. The lack of advance planning, the failure to meaningfully consider other sources, and the attempts to justify the use of sole-source contracts originated, in large part, from the desire and pressure to meet the customer’s needs in a short time frame. At the time of our decision, the initial contract was substantially complete, but we recommended that the agency promptly obtain competition for the requirement or prepare a properly documented and supported justification and approval for the second contract. Overall, the Special Inspector General has reported that competition has improved for Iraq reconstruction projects since the early reconstruction efforts. Next month we will issue a congressionally mandated report that will provide an assessment of competition for actions subsequent to our June 2004 report. The reconstruction contracting problems we and others have reported on over the last several years are emblematic of contracting problems we have identified in numerous other situations but with more dramatic consequences for failure, as the nature of the task for the United States is so large and so costly. While some of the factors I discussed today— mismatches between needs, wants, affordability, and sustainability; oversight and workforce challenges; improper use of contracting approaches; and competition issues—were more prevalent in the initial stages of reconstruction, the risks posed by others have not yet been fully mitigated. Understanding not just where we are today, but why, is important to enable DOD to make corrections and prevent repeating mistakes. Just as multiple factors contribute to success or failure, multiple actors play a role in achieving successful acquisition outcomes, including policy makers, program managers, contracting officers, and the contractors themselves. Looking to the future, about one-third of DOD’s planned construction work remains to be completed, including some work that is not planned for completion until the end of 2008. It is not too late for DOD to learn from its past difficulties and provide adequate oversight on these remaining projects. Delivering these projects on time and within cost is essential if we are to maximize the return on this investment and make a difference in the daily lives of the Iraqi people and help to provide the services they need—safe streets, clean water, reliable electricity, and affordable health care. - - - - - Mr. Chairman and members of the committee, this concludes my prepared statement. I will be happy to answer any questions you may have. In preparing this testimony, we relied primarily on our completed and ongoing reviews of efforts to rebuild Iraq that we have undertaken since 2003, as well as our work related to selected DOD contract management issues. We conducted these reviews in accordance with generally accepted government auditing standards. We also reviewed audit reports and lessons learned reports issued by the Special Inspector General for Iraq Reconstruction and work completed by the Inspector General, Department of Defense. We conducted this work in accordance with generally accepted government auditing standards in September 2006. For questions regarding this testimony, please call Katherine V. Schinasi at (202) 512-4841 or on [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the back page of this statement. Key contributors to this statement were Daniel Chen, Lily Chin, Tim DiNapoli, Kate France, Dave Groves, John Hutton, Chris Kunitz, Steve Lord, Micah McMillan, Kate Monahan, Mary Moutsos, Ken Patton, Jose Ramos, and Bill Woods. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The United States, along with its coalition partners and various international organizations, has undertaken a challenging, complex, and costly effort to stabilize and rebuild Iraq. The Department of Defense (DOD) has responsibility for a significant portion of the reconstruction effort. Amid signs of progress, the coalition faces numerous political, security, and economic challenges in rebuilding Iraq. Within this environment, many reconstruction projects have fallen short of expectations, resulting in increased costs, schedule delays, reduced scopes of work, and in some cases project cancellations. This testimony (1) discusses the overall progress that has been made in rebuilding Iraq and (2) describes challenges faced by DOD in achieving successful outcomes on individual projects. This testimony reflects our reviews of reconstruction and DOD contract management issues, as well as work of the Special Inspector General for Iraq Reconstruction. In our previous reports, we have made several recommendations to improve outcomes in Iraq. DOD generally agreed with our recommendations. Overall, the United States generally has not met its goals for reconstruction activities in Iraq with respect to the oil, electricity, and water sectors. As of August 2006, oil production is below the prewar level, and the restoration of electricity and new or restored water treatment capacity remain below stated goals. One-third of DOD's planned construction work still needs to be completed and some work is not planned for completion until late 2008. Continuing violence in the region is one of the reasons that DOD is having difficulty achieving its goals. The contracting challenges encountered in Iraq are emblematic of systemic issues faced by DOD. When setting requirements for work to be done, DOD made assumptions about funding and time frames that later proved to be unfounded. The failure to define realistic requirements has had a cascading effect on contracts and has made it difficult to take subsequent steps to get successful outcomes. For example, in the absence of settled requirements, agencies sometimes rely on what are known as undefinitized contract actions, which can leave the government exposed to increased costs. Further, DOD lacked the capacity to provide effective oversight and manage risks. We also found that DOD, at times, improperly used interagency contracts and was not able to take advantage of full and open competition during the initial stages of reconstruction. Just as multiple factors contribute to success or failure, multiple actors play a role in achieving successful acquisition outcomes, including policy makers, program managers, contracting officers, and the contractors themselves. |
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About 14 percent of the near elderly are uninsured—a rate comparable to that of 45- to 54-year-olds and lower than that among the entire nonelderly population. Differences in labor force attachment, health status, and family income, however, distinguish the near elderly from younger Americans and foreshadow some of the difficulties this age cohort could have in accessing health insurance other than that offered by an employer. The near elderly are a group in transition from the active workforce to retirement. Almost three-quarters of those between the ages of 55 and 61 were employed in 1996, and about half worked full time. In contrast, however, less than one-half of those between the ages of 62 and 64 were employed at all during 1996, with only about one-quarter working full time. Concurrent with leaving the workforce, both the health and income of this group are beginning to decline (see app. I). Compared with individuals between the ages of 45 and 54, the near elderly are more likely to experience health conditions such as diabetes, hypertension, and heart disease. In addition, the near elderly are the most frequent users of many health care services. Their hospital discharge rates and days of hospital care were 51 percent and 66 percent higher, respectively, than those of 45- to 54-year-olds. Furthermore, their expenditures on health care services are estimated to be about 45 percent higher than those of the younger group, while their median family income is about 25 percent less. through the individual market and Medicare. It is not surprising that the near elderly are among the most likely age groups to have insurance and the least likely to be uninsured. Because aging is associated with greater use of health care services, the importance attached to having health insurance should increase with age. In fact, the extent to which the near-elderly purchase individual insurance suggests that this is the case. Whether the near elderly obtained their health insurance through the individual market or through public sources was related to their employment, health, and income status. For example, a relatively high percentage of the near elderly with individual insurance reported that they worked (67 percent) and had excellent or good health (85 percent). In contrast, those with public sources of coverage were more likely to report that they were unemployed (87 percent) or in poor health (69 percent). And compared with those who purchased individual insurance, twice as many with public coverage had incomes under $20,000. The relationship between insurance status and income is not entirely predictable, however, since about 20 percent of the uninsured near elderly had family incomes of $50,000 or more, while almost one-third of those with individual insurance earned less than $20,000. Despite their limited resources, about the same share of the near elderly with low incomes purchased individual insurance as did those with higher incomes. Given the cost of comprehensive coverage in the individual market, those with lower incomes may be purchasing less expensive, limited-benefit products. At the same time, however, income alone may not be the only resource available to individuals. a higher percentage of both groups had low incomes, were minorities, were not working, or were in poor health. Again, however, there were important differences, as the uninsured were more likely to work, be married, have better health, and have higher incomes than those with public insurance. While an estimated 60 to 70 percent of large employers offered retiree health coverage during the 1980s, fewer than 40 percent do so today, and that number is continuing to decline despite the recent period of strong economic growth. Surveys from two benefit consulting firms show that the number of employers offering coverage to early retirees dropped by 8 to 9 percentage points between 1991 and 1997 (see fig. 2). Concurrently, employment has shifted away from firms more likely to offer coverage, that is, from manufacturing to service industries. The decision by some large employers not to offer retiree health benefits will primarily affect future retirees. In fact, one survey sponsored by the Department of Labor suggests that very few of those who were retired in 1994—only about 2 percent—had lost coverage as a result of an employer’s subsequent decision to terminate retiree coverage. income in 1994 on health care—an amount that includes not only insurance premiums or employer-required cost sharing but also out-of-pocket expenses for copayments, deductibles, and services not covered by health insurance. (App. II compares the affordability of employer-based early retiree health insurance with that purchased in the individual market.) At the same time employers have increased retiree cost sharing, they have also tightened the eligibility requirements for participation in postemployment health benefits. Most firms now have a minimum service and age requirement, and some tie their own contribution to these minimums. For example, one employer we interviewed required retirees to have 35 years of service to qualify for the maximum employer contribution of 75 percent. In contrast, retirees with 19 years of service are eligible for only a 30-percent employer contribution. Furthermore, if workers change jobs frequently, especially as they become older, they may not qualify for retiree health benefits in the future. According to surveys sponsored by the Labor Department in 1988 and 1994, higher costs for individuals could result in fewer participating in employer-based retiree health plans when such coverage is available. Between 1988 and 1994, the proportion of workers who continued coverage into retirement declined by 8 percentage points. Among those already retired, the proportion covered also declined, falling 10 percentage points over the same 6-year period. Of the approximately 5.3 million retirees who discontinued employer-based benefits in 1994, an estimated 27 percent cited the expense as a factor—up by over one-fifth from the earlier survey. For some retirees, coverage with lower cost sharing through a working or retired spouse may have influenced their decision to decline health benefits from a former employer. are eligible to elect continuation coverage if their former employer had 20 or more workers and offered health insurance. Because the employer is not required to pay any portion of the premium, COBRA may be an expensive alternative for the near elderly—especially since the loss in employer-based coverage is probably accompanied by a decrease in earnings. In 1997, the annual per-employee cost of health insurance for employer-based coverage was about $3,800. However, there is significant variation in premiums as a result of differences in firm size, benefit structure, locale, demographics, or aggressiveness in negotiating rates. For early retirees in one company, annual premiums in 1996 for family coverage ranged, depending on the plan, from about $5,600 to almost $8,000. Since this firm paid the total cost of practically all of the health plans it offered to current workers, the COBRA cost would have come as a rude awakening to retirees. The limited information available on eligibility for and use of COBRA by Americans in general and the near elderly in particular leaves many important questions unanswered. On the one hand, the data suggest that relatively few near elderly use COBRA; on the other hand, compared with younger age groups, 55- to 64-year-olds are more likely to elect continuation coverage. One database suggests that, on average, 61- to 64-year-olds only keep continuation coverage for a year. The fact that it makes sense for the near elderly who lack an alternate source of coverage and can afford the premium to elect COBRA raises concerns among employers about the impact on overall employer health insurance costs. Employers contend that COBRA’s voluntary nature and high costs that result from the lack of an employer subsidy or contribution could result in the enrollment of only those individuals who expect their health care costs to exceed the premium. The costs of near-elderly COBRA enrollees in excess of the premium would, in turn, push up the employer’s overall health care expenditures. However, there is no systematically collected evidence on the extent to which such elections affect employer costs. The election of COBRA coverage by some near elderly as well as younger individuals may simply reflect an antipathy to living without health insurance. On the other hand, since COBRA election is associated with job turnover, the demographics of a firm or industry will also affect an employer’s insurance costs. For example, a firm with an older workforce that does not offer retiree health benefits may indeed experience higher insurance costs as a result of COBRA elections. In the majority of states, some individuals aged 55 to 64 may be denied coverage in the individual insurance market, may have certain conditions or body parts excluded from coverage, or may pay premiums that are significantly higher than the standard rate. Unlike employer-sponsored coverage, in which risk is spread over the entire group, premiums in the individual markets of many states reflect each enrollee’s demographic characteristics and health status. For example, on the basis of experience, carriers anticipate that the likelihood of requiring medical care increases with age. Thus, a 60-year-old in the individual market of most states pays more than a 30-year-old for the same coverage. Likewise, a carrier may also adjust premiums on the basis of its assessment of the applicant’s health status. This latter process is called medical underwriting. Since health tends to decline with age, some near elderly may face serious obstacles in their efforts to obtain needed coverage through the individual market. On the basis of the underwriting results, a carrier may deny coverage to an applicant determined to be in poorer health. Individuals with serious health conditions such as heart disease and diabetes are frequently denied coverage, as are those with such non-life-threatening conditions as chronic back pain and migraine headaches. The most recent denial rates for carriers with whom we spoke in February 1998 ranged from zero in states where guaranteed issue is required to about 23 percent, with carriers typically denying coverage to about 15 percent of all applicants. Carriers may also offer coverage that excludes a certain condition or part of the body. A person with asthma or glaucoma, for example, may have all costs associated with treatment of those conditions excluded from coverage. products available in the individual markets of Colorado and Vermont are at least 10 percent and 8.4 percent, respectively, of the 1996 median family income of married near-elderly couples. In contrast, the average retiree contribution for employer-subsidized family coverage is about one-half of these percentages. While at least 27 states have high-risk insurance pools that act as a safety net to help ensure that individuals with health problems can obtain coverage, the cost is generally 125 to 200 percent of the average or standard rate charged to healthy individuals in the individual market for a comparable plan. Individuals who have been rejected for coverage by at least one carrier generally qualify for their state’s high-risk pool. However, participation in some state pools is limited by enrollment caps. In addition to state initiatives, federal standards established by HIPAA guarantee some people leaving group coverage access to the individual market—a guarantee referred to as group-to-individual portability. Each state establishes a mechanism so that these “HIPAA eligibles” have access to coverage regardless of their health status, and insurance carriers may not impose coverage exclusions. To be eligible for a portability product, however, an individual must have had at least 18 months of coverage under a group plan without a break of more than 63 days, and have exhausted any COBRA or other conversion coverage available. One survey estimates that 61- to 64-year-olds typically remain enrolled in COBRA for only 12 months—6 to 24 months short of exhausting COBRA coverage. Since HIPAA changes the incentives for electing and exhausting COBRA coverage, past evidence may not be a guide to future use. However, depending on their state’s mechanism, the premiums faced by unhealthy individuals who are eligible for a HIPAA product, like those faced by unhealthy individuals who have always relied on the individual market for coverage, may be very expensive. baby-boom generation. Experts are divided about the impact on employer-based coverage of actions that increase costs for the private sector, such as increasing the eligibility age for Medicare. In responding to Medicare’s financial crisis, policymakers need to be aware of the potential for the unintended consequences of their actions. In addition to events that could affect the erosion in employer-based retiree coverage, use of the HIPAA guaranteed-access provision by eligible individuals may improve entry into the individual market for those with preexisting health conditions who lack an alternative way to obtain a comprehensive benefits package. Depending on the manner in which each state has chosen to implement HIPAA, however, cost may remain an impediment to such entry. Since group-to-individual portability is only available to qualified individuals who exhaust available COBRA or other conversion coverage, HIPAA may lead to an increased use of employer-based continuation coverage. Moreover, additional state reforms of the individual market may improve access and affordability for those who have never had group coverage or who fail to qualify for portability under HIPAA rules. Mr. Chairman, this concludes my statement. I will be happy to answer your questions. Rate per 1,000 people per year Rate per 1,000 people per year Average length of stay (days) Using data from the March 1997 CPS and 1995 and 1996 information on insurance premiums, we estimated the percentage of median income that a 55-to 64-year-old would have to commit to health insurance under a number of possible scenarios, including purchasing coverage through the individual market in a community-rated state (Vermont) as well as one that had no restrictions on the premiums that could be charged (Colorado), using 1996 rates for a commonly purchased health insurance product; and cost sharing under employer-based coverage using 1995 Peat Marwick estimates of the lowest, highest, and average retiree contribution. While no official affordability standard exists, research suggests that older Americans commit a much higher percentage of their income to health insurance than do younger age groups. Congressional Budget Office calculations based on data from the Bureau of Labor Statistics’ Consumer Expenditure Survey indicate that between 1984 and 1994, spending by elderly Americans aged 65 and older on health care ranged from 10.2 percent to 12.9 percent of household income. In 1994, elderly Americans spent 11.2 percent of household income, about three times as much as younger age groups. These estimates include costs other than premiums or employer-imposed cost sharing—for example, copayments, deductibles, and expenditures for medical services not covered by insurance. Table II.1 compares the cost of health insurance purchased in the individual market and employer-imposed cost sharing for early retirees with the median income for the near elderly in 1996. As demonstrated by table II.1, the near elderly’s share of employer-subsidized coverage is generally lower than that for coverage purchased through the individual market. For example, on average, employer-based family coverage for retirees at $2,340 annually represents 4.7 percent of median family income. In contrast, costs in the individual market can be significantly higher—in part because they lack an employer subsidy. In Colorado, the annual premium for a commonly purchased individual insurance product in 1996 was about $2,500 for single coverage and $5,000 for a couple—representing about 12 percent and 10 percent, respectively, of median income for 55- to 64-year-olds. While less expensive than the Colorado example, premiums for health insurance through the individual market in Vermont—a community-rated state—would represent 9.9 percent of median income for single coverage and 8.4 percent of median income for a couple. For more than one-half of the near elderly, these individual market costs typically exceed average health care spending for Americans under age 65—in some cases significantly. In April 1998, the Center for Studying Health System Change reported that older adults who purchased individual coverage typically spent a considerably higher proportion of their income on premiums than other adult age groups—about 9 percent for the 60- to 64-year-old group. Preferred provider organization/$250 Preferred provider organization/$500 Preferred provider organization/$500 $214-$602 (low end and high end)$160-$309 (rural/urban) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed access to health insurance by near-elderly Americans aged 55 to 64, focusing on the near elderly's: (1) health, employment, income, and health insurance status; (2) ability to obtain employer-based health insurance if they retire before they are eligible for Medicare; and (3) access to individually purchased coverage or employer-based continuation insurance and the associated costs. GAO noted that: (1) the overall insurance picture of the near elderly is no worse than that of other segments of the under-65 population and is better than that of some younger age groups; (2) the current insurance status of the near elderly is largely due to: (a) the fact that many current retirees still have access to employer-based health benefits; (b) the willingness of near-elderly Americans to devote a significant portion of their income to health insurance purchased through the individual market; and (c) the availability of public programs to disabled 55- to 64-year-olds; (3) the individual market and Medicare and Medicaid for the disabled often mitigate declining access to employer-based coverage for near-elderly Americans and may prevent a larger portion of this age group from becoming uninsured; (4) the steady decline in the proportion of large employers who offer health benefits to early retirees, however, clouds the outlook for future retirees; (5) in the absence of countervailing trends, it is less likely that future 55- to 64-year-olds will be offered health insurance as a retirement benefit, and those who are will bear an increased share of the cost; (6) access and affordability problems may prevent future early retirees who lose employer-based health benefits from obtaining comprehensive private insurance; (7) the two principal private insurance alternatives are continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the individual market; (8) although 55- to 64-year-olds who become eligible for COBRA are more likely than younger age groups to enroll, the use of continuation coverage by early retirees is relatively low; (9) with respect to individual insurance, the cost may put it out of reach of some 55- to 64-year-olds; (10) some states have taken steps to make individual insurance products more accessible; (11) for eligible individuals leaving group coverage who exhaust any available COBRA or other conversion coverage, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) guarantees access to the individual market, regardless of health status and without coverage exclusions; (12) since the new federal protections under HIPAA hinge on exhausting COBRA, the incentives for enrolling and the length of time enrolled could change; and (13) the premiums faced by some individuals eligible for a HIPAA guaranteed-access product, however, may be substantially higher than the prices charged to those in the individual market who are healthy. |
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The Comanche program was established in 1983 to replace the Army’s light helicopter fleet. The contractor team of Sikorsky Aircraft Corporation and Boeing Helicopter Company were expected to design a low-cost, lightweight, advanced technology helicopter capable of performing the primary missions of armed reconnaissance and attack. Critical to achieving these capabilities are the successful development of advanced technologies, including composite materials, advanced avionics and propulsion systems, and sophisticated software and hardware. The Army must meet ambitious maintainability goals in order to (1) realize significantly lower operating and support costs predicted for this program and (2) achieve a wartime operational availability for the Comanche of 6 hours per day. In December 1994, the Secretary of Defense directed the Army to restructure the Comanche helicopter program as part of efforts to meet budgetary constraints. The Secretary’s restructure decision reduced funding for the program from $4.2 billion to $2.2 billion for fiscal years 1996 through 2001. In addition to extending the development phase by 3 years, it also called for two flyable prototypes to be produced and the Comanche production decision to be deferred. In response to the Secretary’s decision, the Army proposed a program restructure that would allow it to acquire, within the Secretary’s funding constraint, six aircraft in addition to the two prototypes by deferring developmental efforts to fiscal year 2002 and beyond. DOD approved the proposal in March 1995. The Army’s restructuring of the Comanche program continues risks (1) associated with making production decisions before knowing whether the aircraft will be able to perform as required and (2) of higher program costs. According to DOD’s April 1990 guidelines for determining degrees of concurrency, a program with high concurrency typically proceeds into low-rate initial production before significant initial operational test and evaluation is completed. Regarding the need to keep concurrency low, the guidelines note that establishing programs with no concurrency, or a low degree of concurrency, avoids the risks that (1) production items have to be retrofitted to make them work properly and (2) system design will not be thoroughly tested. As we recently reported, aircraft systems, including the T-45A and C-17, that entered low-rate initial production before successfully completing initial operational testing and evaluation experienced significant and sometimes costly modifications to achieve satisfactory performance. Under the Army’s restructured program, operational testing will not begin until after the low-rate initial production decision is made, continuing the risks associated with the highly concurrent Comanche program. In responding to the Secretary’s restructure decision, the Army proposed, and was subsequently granted approval, to buy six “early operational capability” aircraft, in addition to the two prototypes that were to be acquired under the Secretary’s decision. According to program officials, these aircraft are estimated to cost in excess of $300 million. The Army does not consider these aircraft as either prototype or low-rate initial production aircraft; however, program officials believe that when these aircraft are fielded, the Army will be able to better evaluate the Comanche’s mission capability. The Army intends to fund these aircraft by deferring additional developmental efforts to fiscal years 2002 and beyond. Under the Army’s restructured program, operational testing will not begin until well after funds are committed to buy production aircraft. Armed reconnaissance and attack mission equipment packages are to be integrated into the six early operational aircraft by fiscal year 2004. The Army plans to use these aircraft to start operational testing by about August 2005. However, long-lead production decisions are scheduled for November 2003, and low-rate initial production is planned to start in November 2004, about 9 months before operational testing begins. According to DOD’s guidelines, the amount of risk associated with concurrency can be limited by reducing production aircraft to the minimum necessary to perform initial operational testing. The Army maintains that under the stretched out program it can conduct initial operational testing with the six early operational aircraft. Because the restructure has provided the additional time and aircraft, the Army has an opportunity to significantly reduce or eliminate program concurrency and its associated risks by completing operational testing before committing funds to any production decisions. The Comanche was originally justified to the Congress as a relatively inexpensive aircraft. However, since 1985, the program has experienced significant increases in program acquisition unit cost. Funding reductions have caused the program to undergo significant restructuring, resulting in sharp decreases in planned acquisition quantities and lengthening of development schedules, thereby increasing Comanche program costs. In 1985, the Comanche had estimated total program acquisition costs of about $61 billion for 5,023 aircraft (or $12.1 million per aircraft). In 1992, we reported that (1) as of October 1991, the program acquisition unit cost had increased to $27.4 million, (2) acquisition quantities had been reduced to 1,292 aircraft, and (3) future increases in cost per aircraft were likely.As of February 1995, the Comanche’s estimated program acquisition unit cost was $34.4 million per aircraft, a 185-percent increase from the 1985 estimate. The estimated total program acquisition cost for the planned acquisition of 1,292 aircraft is now more than $44 billion. Both the Secretary’s decision and the Army’s restructure would extend the development program by about 3 years and, under either, increase the risk of higher total program cost and cost per aircraft. However, in reviewing the Army’s restructure proposal, DOD noted some concern over Comanche program costs for fiscal year 2002 and beyond and the large increase in investment programs projected to occur about that time. We are also concerned that the Army’s plan to defer additional developmental efforts to fiscal year 2002 and beyond may increase the risk that needed funds may not be available to perform the deferred developmental effort. The Comanche program’s uncertainties in software development and aircraft maintainability increase the risk that the aircraft will not perform successfully. We believe the restructuring provides additional time to resolve these issues before the decision to enter production is made. The Comanche will be the most computerized, software-intensive Army helicopter ever built. The Army estimates that about 1.4 million lines of code are required to perform and integrate mission critical functions. With additional ground support and training software to be developed, the total program will have more than 2.7 million lines of code. This compares to about 573,000 lines of code for the upgraded Apache attack helicopter with fire control radar. The Army estimates 95 percent of the Comanche’s total software will be written in Ada, a DOD-developed programming language. The Army plans to demonstrate initial software performance with the mission equipment package, which includes the flight control system, during first flight of the Comanche, scheduled for November 1995. The development and integration of on-board, embedded computer systems is a significant program objective. The Comanche’s performance and capability depend heavily on these systems and efforts have been ongoing to solve the problems associated with these systems. Nevertheless, (1) software development problems still exist with the Ada compilation system, (2) delays in software development and testing are occurring, and (3) improvements are needed in configuration management. If these issues are not resolved, the aircraft’s performance and capability will be degraded and first flight could be delayed. Almost all of the Comanche software will be developed in the Ada programming language; however, software developers are not using the same version of the Ada compilation system. The Ada compilation system translates Ada code into machine language so that software can be used by the Comanche’s computers. For example, it is being used to help develop software for use on the mission equipment package that is critical for first flight. Subcontractors and the contractor team should be using the same, qualified version of this compilation system to ensure effective software integration. However, fixes to individual compiler software problems are not being shared with all developers; therefore, they are not using a common compilation system. These problems have already delayed qualification testing of the compilation system by 1 year. The lack of a uniform, qualified compilation system among software developers could put first flight at risk, according to the Defense Plant Representative Office. Problems with software integration may show up once integration testing begins in the June to November 1995 time frame. If that occurs, there may not be time to fix problems prior to scheduled first flight. The program is experiencing high turnover of software engineers at one of the contractor team’s facilities. In its December 1994, monthly assessment report, the Defense Plant Representative Office, which is responsible for contract oversight, observed that high turnover of software personnel was putting scheduled first flight at risk. Loss of key personnel has already contributed to schedule slippage in several critical software development areas. Software development for the following areas has been affected: the airborne engine monitoring system, aircraft systems management, control database, and crewstation interface management. The contractor team has formulated a “get well” plan that is dependent on being able to hire additional personnel in these areas. However, hiring additional qualified personnel is difficult, according to the Defense Plant Representative Office, because employment would be short term. The flight control system software verification testing is also being delayed. As of February 8, 1995, Boeing had conducted only 163 of approximately 500 tests originally planned to be completed by that date. The subcontractor responsible for developing this software has been late delivering software for testing and has provided faulty software to Boeing, according to the Defense Plant Representative Office. Boeing established a recovery plan for this area that would have resulted in a completion date in March 1995—about a 1-month delay from the original plan. However, in February 1995, the contractor revised the recovery plan to reflect a completion date of July 1995—a 5-month delay. The flight control system is critical to first flight, according to the Defense Plant Representative Office. However, because of delays with verification testing, the Defense Plant Representative Office is concerned that the remaining verification testing, as well as, the validation and formal qualification testing will not be completed in a timely manner. As a result, first flight may be delayed. Boeing is scheduled to complete these tests prior to first flight. According to the program office, Boeing’s plan to complete the testing calls for it to be conducted concurrently. If major problems occur in any one of the testing phases, there may not be enough time to fix the problem and complete all testing before first flight. Configuration management is the discipline of applying technical and administrative direction and surveillance to (a) control the flow of information between organizations and activities within a project; (b) manage the ownership of, and changes to, controlled information; (c) ensure information consistency; and (d) enable product release, acceptance, and maintenance. The part of configuration management used to report software problems and changes among the contractor team and subcontractors has shortcomings that put software development at risk. In its November 1994 monthly assessment report, the Defense Plant Representative Office observed that the lack of a common problem reporting system made proper handling of software related changes difficult. Furthermore, the report noted that this situation could adversely impact scheduled first flight of the Comanche. As of February 1995, the contractor team still did not have a common, automated database available to track problem change reports. Thus, the contractor team, as well as subcontractors, did not have visibility over changes made to software. Maintainability requirements are important to achieving lower operating and support costs and wartime availability goals. However, these goals are at risk because key maintainability requirements such as direct maintenance man-hours per flight hour (MMH/FH), the mean time to repair (MTTR), and fault isolation may not be achievable. Individually, failure to meet these parameters may not be a significant problem; however, collectively they affect the ability of the Comanche to achieve lower operating and support cost and wartime availability objectives. In March 1987, the Army established a 2.6 direct MMH/FH requirement for the Comanche. It represents the corrective and preventive maintenance per flight hour expected to be performed at the unit level. The Army formulated its planned wartime operating tempo for a Comanche battalion based on 6 hours a day per aircraft, or 2,200 flying hours per year. It then determined the maintenance factor needed to support this operating tempo—2.6 MMH/FH. As the MMH/FH level increases, the number of maintainers needed to sustain the 2,200 wartime flying hour goal increases, as do operating and support costs. Conversely, if the Army could not increase the number of maintainers, the planned operating tempo would have to be reduced. The reasonableness of the Comanche’s 2.6 direct MMH/FH requirement has been debated for several years within the Army and DOD. Representatives from the program office; the Army Materiel Systems Analysis Activity, which independently evaluates program testing results; the Office of the Assistant Secretary of the Army for Research, Development, and Acquisition; and the Army Cost and Economic Analysis Center met on October 28, 1994, to discuss the direct MMH/FH goal for the Comanche program. They agreed that the 2.6-MMH/FH requirement was not a realistic, achievable goal. Consequently, Army officials reached consensus and agreed on 3.2 direct MMH/FH as the Army-wide position for this parameter. However, during these discussions, Army Materiel Systems Analysis Activity personnel noted that attaining a 3.2-MMH/FH goal represented a medium to high risk, while a 4.3-MMH/FH goal had a low to medium risk. Increasing the maintenance factor increased the number of maintainers needed and will increase estimated operating and support costs by about $800 million over a 20-year period. The direct MMH/FH requirement does not represent the total maintenance burden for the Comanche because it does not include indirect maintenance time. The Army does not normally collect data on indirect maintenance time. According to the program office, its best estimate of indirect maintenance time, following Army guidance, is 2.5 MMH/FH, and this figure has been used for calculating manpower needs for crew chief personnel on the Comanche. Thus, the total maintenance burden assumed for the Comanche is currently 5.7 MMH/FH (3.2 direct MMH/FH plus 2.5 indirect MMH/FH). To minimize turnaround time for repairs at the unit and depot, the Army established MTTR requirements of 52 minutes for repairs at the unit level and up to 12 hours at the depot level for the Comanche. These requirements represents the average time expected to diagnose a fault, remove and repair an item, and perform an operational check and/or test flight. We determined that any increase in MTTR above 1 hour will begin to impact the Army’s wartime availability goal of 2,200 hours per year, unless additional maintenance personnel are available. As of January 1995, the contractor team was estimating that the Army would achieve 59 minutes for unit level repairs. According to contractor team officials, the requirement was not being met because the cure time required for composite material used on the aircraft was greater than expected. The contractor team discussed changing the MTTR requirement to 1 hour; however, the program office believes the problem could be resolved and did not believe the specification should be changed. The contractor team has not yet developed MTTR estimates for depot-level repair. The Comanche’s diagnostic system is required to correctly isolate failed mechanical and electrical components at least 80 percent of the time with a high degree of accuracy. A high level of accuracy is essential as it allows maintainers to isolate and fix problems at the unit level. If the fault isolation requirement is not met, the Comanche is unlikely to achieve its MTTR requirement, thereby adversely affecting the Army’s ability to execute its maintenance concept and its wartime availability goals. Contractor team officials stated the fault isolation requirement was very optimistic, and although they are striving to meet this requirement, it may eventually have to be changed. As of January 1995, the contractor team predicted the system could achieve an overall 69-percent fault isolation rate; however, this rate would not meet the specification for mechanical and electrical component fault isolation. There are design limitations on two components, according to the program office, and changes to bring these components into conformance with specifications would be costly and increase the weight of the aircraft. Therefore, as of January 1995, the contractor team and the program office have agreed not to take action on these components. The Army established a requirement of a 1-percent false removal rate for the Comanche. A false removal occurs when a part removed from the aircraft shows no evidence of failure when tested. This requirement is dependent, to a large extent, on the success of the fault detection/isolation system in detecting and isolating failed components. Program personnel characterize the 1-percent requirement as stringent and one that will be challenging to achieve. An Army Materiel Systems Analysis Activity official believes some design improvements have occurred in this area, but the risk associated with achieving this requirement still remains high. If the Comanche does not meet this requirement, estimated operating and support costs for the Comanche will be higher than previously predicted. The Army has not had good experience in developing fault detection/isolation and false removal systems for other aircraft. In September 1990, we reported that the fault detection and isolation system on the Apache aircraft did not always accurately detect the component that caused a particular fault, and the system detected faults that did not actually exist about 40 percent of the time. As a result, Apache maintainers had to perform additional work to locate failed components. Recently, through a reliability program, the false removal rate for the targeting and night vision systems on the Apache improved to about 10 to 15 percent, according to Army officials. This is still significantly higher than the 1-percent requirement established for the Comanche program. Although the program is experiencing technical problems, it is currently meeting its goals of reducing maintenance levels and keeping overall weight growth within acceptable limits for the Comanche. The Army’s maintenance concept for the Comanche program is predicated on two levels of maintenance—unit- and depot-level maintenance. This concept is important to achieving operating and support savings predicted for the program because it eliminates the intermediate level of maintenance. Unit-level maintenance entails removing and replacing components required to return the aircraft to a serviceable condition. Depot-level maintenance requires higher level maintenance skills and sophisticated capital equipment and facilities not found at the unit level. The Army traditionally uses a three-level maintenance concept that includes intermediate-level maintenance to handle component repairs. Intermediate-level maintenance is usually located close to the battalion. It is performed on components that cannot be easily repaired at the unit level and do not require the more sophisticated repairs done at the depot level. As of January 1995, no Comanche component had been designated for repair at the intermediate level, according to the program office. Contractor team personnel are conducting repair level analysis on Comanche components to determine whether components should be repaired at unit, intermediate, or depot facilities, according to program and contractor team officials. Any candidates identified for intermediate-level repair are reviewed for possible design changes that could allow maintenance at the unit or depot level. If economically feasible, the contractor team will make design changes to the component to preclude the need for intermediate-level repair. As of February 7, 1995, the Comanche’s empty weight increased from its original specification of 7,500 pounds to 7,883 pounds. Although the Comanche’s weight continues to increase, it remains within the allowable design limit of 7,997 pounds. Weight increases affect vertical rate of climb performance on the Comanche. The Army established a limit of 500 feet-per-minute as the minimum acceptable vertical rate of climb performance. If the Comanche’s weight exceeds 8,231 pounds, the engine will have to be redesigned to produce enough power at 95 percent maximum rated engine power to sustain the minimum 500 feet-per-minute vertical rate of climb requirement. We recommend that the Secretary of Defense require the Army to complete operational testing to validate the Comanche’s operational effectiveness and suitability before committing any funds to acquire long-lead production items or enter low-rate initial production. DOD generally concurred with the findings and original recommendations in our draft report. In commenting on the draft report, DOD offered explanations about why the problems that we identified were occurring and what they were doing to fix those problems. DOD disagreed with the report’s conclusion about false removals and stated that we had not presented any evidence that the Comanche’s 1-percent false removal rate may not be achievable. We still believe that the false removal goal is high risk and adjusted the report to more clearly reflect our concern. Regarding our draft report recommendation that DOD develop program fixes that achieve program goals and reduce the risks we identified, DOD concurred and noted that the approved restructuring will significantly reduce risk. DOD concurred with our other draft recommendation not to commit production funds to the program until performance and mission requirements are met and noted that the program would be reviewed by DOD before approving the Army’s request to proceed to the engineering and manufacturing development phase—the Milestone II decision scheduled for October 2001. Because DOD concurred in our draft report recommendations and is taking action on them, we are no longer including them in this report. However, our analysis of information on the restructuring obtained after we had submitted our draft report to DOD has further heightened our concerns about the risk of concurrency; therefore, we have revised the report and added a new recommendation. Under the stretched out, restructured Comanche program, operational testing is not even scheduled to begin until after the low-rate initial production decision is made. This approach continues the risks associated with making production decisions before knowing whether the aircraft will be able to perform as required. Prior to the restructure, the Army planned to start operational testing with eight aircraft in May 2003. Under the restructured program, the Army plans to start operational testing with six helicopters by about August 2005. We believe that the stretched out time frame and the six aircraft acquired under the restructure provide sufficient time and aircraft to operationally test the Comanche prior to making any production decisions. Additionally, because operational testing is not scheduled until about August 2005, DOD will not be in a position at Milestone II in October 2001 to adequately address whether the Comanche program is meeting its performance requirements. DOD’s comments are presented in their entirety in appendix I, along with our evaluation. To assess cost changes, software development, maintainability, and weight growth issues, we reviewed program documents and interviewed officials from the Department of the Army headquarters, Washington, D.C.; the Comanche Program Manager’s Office, St. Louis, Missouri; the U.S. Army Materiel Systems Analysis Activity, Aberdeen Proving Ground, Maryland; the Ada Validation Facility, Wright-Patterson Air Force Base, Ohio; and the Office of the Assistant Secretary of Defense for Program Analysis and Evaluation, Washington, D.C. We also reviewed program documents and interviewed contractor and Defense Plant Representative Office officials at the Boeing Helicopter Company, Philadelphia, Pennsylvania; the Sikorsky Aircraft Corporation, Stratford, Connecticut; and the Comanche Joint Program Office, Trumbull, Connecticut. We conducted our review between August 1994 and February 1995 in accordance with generally accepted government auditing standards. We are also sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations, the Senate Committee on Governmental Affairs, and the House Committee on Government Reform and Oversight; the Director, Office of Management and Budget; and the Secretaries of Defense and the Army. We will also provide copies to others upon request. This report was prepared under the direction of Thomas J. Schulz, Associate Director, Systems Development and Production Issues. Please contact Mr. Schulz at (202) 512-4841 if you or your staff have any questions concerning this report. Other major contributors to this report are listed in appendix II. The following are GAO’s comments on the Department of Defense’s (DOD) letter dated April 20, 1995. 1. As DOD’s comments note, there are many measures of unit cost, such as average unit flyaway cost, program acquisition unit cost, and unit procurement cost. We believe that the program unit cost that we used in the report—which the footnote in the report defines as total research, development, and acquisition costs in current dollars—is as valid as flyaway cost to portray program cost growth over time. We have adjusted the report to more clearly define the basis of the unit cost we use. 2. These comments are dealt with on pages 11 and 12 of the report and in our responses to the specific DOD comments that follow. Report material on costs and concurrency has been revised to reflect information obtained after our fieldwork had been concluded. 3. The report does not say that maintainability goals will never be met. We pointed out that some key maintainability requirements are not being met and, therefore, there is a risk that the Army may not achieve the lower operating and support costs and wartime availability goals that it has established for this program. We also said that individually, failure to meet these parameters may not be a significant problem; however, collectively they affect the ability of the Comanche to achieve the cost and availability goals. This point is clearly illustrated in DOD’s comments on the failure of the fault isolation system. According to DOD, “Fault isolation is one of the key diagnostic system requirements. The DOD agrees that if the fault isolation requirement is not met, the Comanche is unlikely to achieve its mean-time-to-repair requirement, . . .”. 4. We still believe that this goal is very aggressive. DOD acknowledges that this goal is stringent and the Army has not had good experience in the past with false removals on other aircraft. Additionally, as noted in the report, Army Materiel Systems Analysis Activity said the risk associated with achieving this requirement remains high. We changed the section heading to emphasize the high risk. Gary L. Billen Robert D. Spence Lauri A. Bischof Michael W. Buell Karen A. Rieger 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. | GAO reviewed the Army's Comanche helicopter program, focusing on cost and technical issues associated with the restructured program. GAO found that: (1) the past risks associated with the Comanche's development and production will continue under the Army's restructured program; (2) production decisions will be made before operational testing of the Comanche begins and the development phase will be extended beyond fiscal year 2002; (3) the acquisition of six additional aircraft will allow the Army to conduct operational testing before committing funds to any further production decisions; (4) the Comanche's unit costs have tripled in the last 10 years due to program restructuring and a 74-percent decrease in procurement quantities; (5) the Comanche may not meet its wartime availability and operating cost requirements due to technical problems; and (6) the Comanche program is currently meeting its maintenance requirements and weight growth limits. |
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Beginning January 1, 2014, PPACA required most citizens and legal residents of the United States to maintain health insurance that qualifies as minimum essential coverage for themselves and their dependents or pay a tax penalty. Most Medicaid coverage and private health insurance coverage purchased through the exchanges qualifies as minimum essential coverage. To expand individuals’ access to minimum essential coverage, PPACA provided states the option to expand eligibility for Medicaid coverage, with increased federal financing for the newly eligible population. As of January 2014, 25 states had expanded their Medicaid programs, and an additional 4 states had expanded as of March 2015. Beginning in October 2013, individuals were able to shop for private health insurance qualifying as minimum essential coverage through the exchanges, with coverage effective beginning as early as January 1, 2014. As of March 2015, the federal government operated an FFE in 34 states, and 17 states were approved to operate SBEs (see fig. 1). States with SBEs may use the FFE IT systems for eligibility and enrollment functions. In 2014, two states with SBEs used the FFE IT systems for eligibility and enrollment, while in 2015 three states with SBEs did so. PPACA also created federal subsidies for exchange coverage, most notably the premium tax credit available to eligible individuals with household incomes between 100 and 400 percent of the FPL. Individuals eligible for Medicaid or other minimum essential coverage, such as qualifying employer-sponsored coverage, are not eligible for the premium tax credit. The tax credit is refundable and is generally paid to issuers in advance to reduce enrollees’ premium costs for exchange plans. Advance payments of this tax credit are known as advance premium tax credits (APTC) and are calculated based on an eligible individual’s family size and anticipated household income relative to the cost of premiums for a benchmark plan. According to HHS, approximately 87 percent of individuals selecting a plan for the 2015 coverage year in FFE states qualified for the APTC, with an average per person, monthly APTC amount ranging from $155 in Arizona to $534 in Alaska, and an average reduction in premiums of about 72 percent. In addition to the premium tax credit, PPACA provides for cost-sharing reductions to reduce out-of- pocket costs, such as deductibles and copayments, for eligible individuals with household incomes between 100 and 250 percent of the FPL. PPACA required the establishment in all states of a coordinated eligibility and enrollment process for Medicaid and the exchanges. Since the enactment of the law in March 2010, CMS has issued regulations and technical guidance outlining aspects of this coordination. In particular, exchanges and state Medicaid agencies must enter into agreements with one another to ensure prompt eligibility determinations and enrollment of individuals in the appropriate programs regardless of where they apply, and must transmit individuals’ account information—that is, their records—via secure electronic interface. However, the mechanisms through which this coordination occurs may vary depending on the state. In FFE states, CMS has established an account transfer process through which accounts for individuals enrolled in or applying for exchange or Medicaid coverage are electronically transmitted between CMS and state Medicaid agencies where appropriate. If individuals apply for coverage in an FFE state, CMS is responsible for determining or assessing individuals’ eligibility for Medicaid and determining eligibility for exchange coverage, including exchange subsidies and, if applicable, facilitating enrollment in an exchange plan. If CMS determines or assesses that an individual is or may be eligible for Medicaid, it must transfer the individual’s account to the appropriate state Medicaid agency for enrollment, where appropriate. Individuals may also apply for coverage directly through the state Medicaid agency. In this case, the state is responsible for determining eligibility for Medicaid and, for individuals determined ineligible, transferring accounts to CMS for a determination of eligibility to enroll in subsidized exchange coverage. Conversely, states with SBEs are responsible for determining eligibility for both Medicaid and exchange coverage, including exchange subsidies, as well as enrolling individuals in the appropriate programs. There are differences in eligibility and enrollment policies for Medicaid and exchange coverage. Medicaid. Individuals may enroll in Medicaid coverage at any point in time during the year, with their coverage effective as of the date of application, reported eligibility change, or earlier. Individuals enrolled in Medicaid are generally required to report any changes—such as changes to income or household composition—that may affect their Medicaid eligibility. Outside of self-reported changes, eligibility for Medicaid must generally be redetermined every 12 months. When individuals are determined ineligible for Medicaid, states are required to send them notification that their coverage will be terminating at least 10 days prior to their Medicaid termination date. In addition, states may opt to extend Medicaid coverage through the end of the month if it would otherwise be terminated earlier in the month. Exchange coverage. Individuals’ options for enrollment in exchange coverage are generally restricted to an annual open enrollment period that starts near the end of the calendar year, unless they experience a change that qualifies them for a special enrollment period. Exchange coverage is generally prospective, meaning that individuals must select an exchange plan by a certain date in order to have coverage effective the following month. If individuals choose to end their exchange coverage, they must generally provide advance notice at least 14 days before the requested termination date. As with Medicaid, individuals enrolled in subsidized exchange coverage are required to report any changes that may affect their eligibility. Eligibility for subsidized exchange coverage is redetermined during open enrollment and any time an individual reports a change, regardless of when coverage began during the year. If individuals are determined ineligible for continued subsidized exchange coverage, such subsidies must be terminated or they may be held liable for repayment of the APTC as part of the reconciliation process with IRS. The coordination of federal payments for individuals transitioning between Medicaid and subsidized exchange coverage is addressed through Medicaid’s third party liability rule and IRS’s reconciliation process for the APTC. Specifically: Third party liability in Medicaid. Where individuals are enrolled in Medicaid along with another form of coverage, Medicaid operates as the payer of last resort. This means that the other source of coverage must pay to the extent of its liability before Medicaid pays, referred to as third party liability. For example, for individuals enrolled in both Medicaid and exchange coverage for some period of time, the issuer of exchange coverage is required to pay to the extent of its liability before Medicaid does. Reconciliation of the APTC with the IRS. Individuals enrolled in exchange coverage and receiving the APTC must file federal income tax returns with the IRS to reconcile the amount of the premium tax credit allowed with the amount received in advance, and may be liable to pay back any excess credits received during the taxable year. For individuals transitioning from exchange coverage to Medicaid during the year, this reconciliation could include repayment of APTC received after an individual was determined eligible for Medicaid. Most state Medicaid programs have implemented managed care systems, under which the state pays contracted issuers a set amount per beneficiary per month to arrange for all covered services and the issuer assumes the risk for the cost of providing those services. In states that offer managed care in their Medicaid programs, issuers have the potential to participate in both Medicaid and the exchange market. Issuers approved to offer Medicaid managed care, exchange coverage, or both, must comply with applicable state and federal requirements for the respective programs. For example, issuers offering Medicaid managed care must comply with any applicable state and federal restrictions on marketing their plans to Medicaid beneficiaries. In addition, some states may require issuers contracting with the Medicaid program to offer such coverage statewide, while in other states issuers may offer their Medicaid coverage statewide or to enrollees in selected geographic regions within the state. Issuers of exchange coverage have the option of offering their exchange plans statewide or within selected geographic regions. Information from CMS and selected states and issuers indicates that individuals transitioning from Medicaid to exchange coverage may experience coverage gaps, and that duplicate coverage is occurring under several scenarios. CMS and our selected states had a number of enrollment policies, IT mechanisms, and consumer education efforts that minimize the potential for coverage gaps and duplicate coverage; however, our assessment of CMS’s policies and procedures for FFE states found that additional controls are needed. Officials from CMS and four of our eight selected states told us that individuals may experience gaps in coverage when transitioning between Medicaid and exchange coverage, though they did not have information on the extent to which such gaps were occurring. Specifically, as Medicaid coverage is effective as of the date an eligibility change is reported or earlier, officials from two states explained that coverage gaps should generally not occur for individuals who lose eligibility for exchange coverage and are transitioning to Medicaid. However, as exchange coverage is generally prospective, coverage gaps could occur in the other direction. In particular, officials from one state told us that individuals who lose eligibility for Medicaid toward the end of a month may be more likely to experience coverage gaps because they would have a short window of time to enroll in exchange coverage so that coverage is effective the first day of the following month. Individuals who experience gaps in coverage may decide to forgo necessary care rather than pay out-of- pocket, which could negatively affect health outcomes and result in sicker individuals enrolling in exchange coverage. Information from selected states and issuers indicated that duplicate coverage—that is, enrollment in both Medicaid and subsidized exchange coverage—was occurring under the three scenarios outlined below, the first of which is permitted under federal law. However, the full extent to which duplicate coverage was occurring was unknown. Scenario 1: Individuals who are completing the transition from subsidized exchange to Medicaid coverage. According to officials from three of our eight selected states, some amount of duplicate coverage may be expected for individuals transitioning from subsidized exchange coverage to Medicaid. For example, if an individual with subsidized exchange coverage reports a change and is determined eligible for Medicaid on September 16th, the individual could have duplicate coverage for the period of September 16th through September 30th. This is primarily due to differences in the effective dates of coverage. Medicaid coverage is effective as of the date an eligibility change is reported or earlier—while in general exchange coverage can only be terminated prospectively, generally with at least 14 days advance notice. The period of duplicate coverage could be extended if the Medicaid eligibility determination takes longer—and per federal regulations it can take up to 45 days for applicants not applying on the basis of disability. This transitional period of duplicate coverage is permitted under the law; that is, individuals are permitted to be enrolled in both types of coverage through the end of the month of the Medicaid eligibility determination. Scenario 2: Individuals who do not end their subsidized exchange coverage after being determined eligible for Medicaid. One of our selected states identified that 3,500 individuals had duplicate coverage at some point from January to July 2014, in part because some of the individuals did not end their subsidized coverage after being determined eligible for Medicaid. Individuals may not end subsidized exchange coverage for a variety of reasons, including that, depending on their income level and plan selection, some individuals receiving subsidies may not have to make a premium payment and thus may not realize they are still enrolled and need to take steps to end their coverage. If individuals do not end coverage, but stop paying premiums once Medicaid coverage begins, the APTC must still be paid out for a 3-month grace period after premium payments have ceased, though issuers must return the APTC amount for the final 2 months of this period under certain circumstances. Scenario 3: Individuals who enroll in subsidized exchange coverage when already enrolled in Medicaid. One of our selected issuers reported that a small number of individuals enrolled in one of the issuer’s Medicaid plans and later also obtained subsidized coverage through one of its exchange plans—18 individuals as of February 2015. Officials from the Medicaid agency in the state where this issuer operates also told us that they had identified cases of duplicate coverage by selecting a small sample of individuals from one of their Medicaid issuers, and that they had heard from some other issuers in the state that they had members enrolled in both coverage types. Additionally, another of our selected issuers reported that one of its plans had experienced a number of instances of duplicate coverage—which tended to last for many months—and that the volume had increased during 2015 open enrollment for exchange coverage, likely because Medicaid coverage was not identified. To the extent duplicate coverage occurs, there could be financial implications for the federal government. In cases where the state Medicaid program has identified that an individual is enrolled in exchange coverage—and Medicaid is operating as the payer of last resort—there may not be a significant difference in federal costs for the individual during the period of duplicate coverage compared with what would have been spent if duplicate coverage had not occurred. However, evidence suggests that some states may face challenges identifying exchange coverage. We recently found that states face challenges identifying whether Medicaid enrollees have other sources of coverage, which could include exchange coverage. In addition, officials from our four selected FFE states told us that they do not currently have access to exchange enrollment information, and that such information could help them better identify information on Medicaid enrollees’ other sources of coverage. CMS officials told us that CMS has provided exchange enrollment data to one state that requested it for third-party liability purposes, and the agency would consider the appropriateness of providing such data to other states if requested. If the state is not aware of an individual’s exchange coverage, the federal government could be paying twice—that is, subsidizing exchange coverage and reimbursing states for Medicaid spending for the same individual. The risk of duplicate payments may be higher in states with higher Medicaid managed care penetration as the state pays issuers a monthly fee for each enrolled individual, regardless of whether services are received. The tax reconciliation process for the APTC has the potential to reduce the financial implications of any duplicate payments. However, according to IRS officials, the IRS will generally not have the information necessary to identify duplicate coverage as part of reconciling the amount of the APTC an individual may owe until 2016—that is, the tax filing season for tax year 2015—when states are required to report Medicaid enrollment data to IRS. Officials told us that once IRS begins receiving the data their ability to identify the need for repayment due to duplicate coverage will depend on the quality of the data and the IRS’s available resources. Officials said that depending on resources, they may check for Medicaid coverage for each individual receiving the APTC or for a sample of individuals. Duplicate coverage could also have financial implications for individuals. As long as individuals end subsidized exchange coverage upon receiving their Medicaid eligibility determination, they would generally not be liable for repaying the APTC received during the transitional period of duplicate coverage discussed in the first scenario above; however, according to CMS officials, individuals would be responsible for their portion of the exchange premiums during this period. To the extent duplicate coverage occurs outside of the transitional period and the IRS identifies duplicate coverage during the tax reconciliation, individuals may be liable for repaying all or a portion of the APTC received. CMS and our selected states had policies and procedures that minimize the potential for coverage gaps or duplicate coverage when individuals transition between Medicaid and the exchanges. Enrollment-related: CMS and selected states had enrollment policies and procedures that minimize the potential for coverage gaps by facilitating alignment of Medicaid and exchange coverage periods. For example, for individuals transitioning from Medicaid to exchange coverage, CMS requires that, as long as individuals select an exchange plan on or before the day that Medicaid coverage ends, exchanges must ensure that coverage is effective on the first day of the following month. In contrast, most individuals enrolling in exchange coverage must select a plan by the fifteenth of the month in order to have a coverage effective date for the first day of the following month. Additionally, in February 2015, CMS adopted a new regulation governing premium payments in FFE states, allowing individuals transitioning from Medicaid 30 calendar days from enrolling in exchange coverage to pay their first premium. At the state level, officials from one state told us they increased the deadline for mailing notification of Medicaid coverage termination to 20 days prior to termination instead of the minimum required 10, so that individuals have more time to shop for a plan on the exchange. Additionally, officials from all of our selected states reported extending Medicaid coverage to at least the end of a month even when an individual becomes ineligible for Medicaid coverage earlier in the month. IT-related: CMS and selected SBE states also had IT-related policies and procedures that minimize the potential for coverage gaps as well as duplicate coverage. For example, in FFE states, when individuals are determined potentially eligible for subsidized exchange coverage, CMS conducts automated checks of state IT systems to determine if individuals already have Medicaid coverage, thus helping to prevent duplicate coverage. At the state level, officials from all four of our selected SBE states reported that their states had implemented integrated eligibility and enrollment systems for Medicaid and exchange coverage that, among other things, helped avoid gaps in coverage by making eligibility determinations in real time: in other words, at the time an individual reports a change. Officials also said that these integrated systems included system rules that help prevent duplicate coverage by not allowing an individual to be determined eligible for Medicaid and exchange subsidies simultaneously. In addition, officials from three of these states noted that their systems automatically terminate subsidized exchange coverage once individuals are determined eligible for Medicaid, while officials in the fourth state said their systems would have this ability beginning in September 2015. Consumer education-related: Both CMS and an SBE state reported including guidance on exchange websites that could help individuals avoid coverage gaps and duplicate coverage during the transition between Medicaid and exchange coverage. For example, CMS has added guidance on coverage transitions on the FFE website that outlines the steps individuals must take when they have subsidized exchange coverage and are later determined eligible for Medicaid, including that they are responsible for ending subsidized exchange coverage. CMS also notifies individuals in FFE states of this responsibility when they are enrolling in exchange coverage. Similarly, officials from one of our SBE states said that they have tried to improve the clarity of instructions on their exchange website, because most individuals are making eligibility changes online. Despite the steps CMS has taken, its current policies and procedures do not sufficiently minimize the potential for coverage gaps and duplicate coverage in the 34 states that had an FFE in 2015. According to federal internal control standards, in its responsibilities for administering and overseeing Medicaid and the exchanges, CMS should design and implement necessary policies and procedures to enforce agency objectives and assess program risk. These policies and procedures should include internal controls, such as conducting monitoring to assess performance over time, that provide reasonable assurance that an agency has effective and efficient operations and that program participants are in compliance with applicable laws and regulations. We identified a number of weaknesses in CMS’s controls for minimizing coverage gaps and duplicate coverage for individuals transitioning between Medicaid and exchange coverage in FFE states. With regard to coverage gaps, we found that CMS’s controls do not provide reasonable assurance that the accounts of individuals transitioning from Medicaid to exchange coverage in FFE states are transferred by states in near real time, which puts individuals in these states at greater risk of experiencing such gaps. Specifically, federal regulations require that state Medicaid agencies should transfer accounts to CMS promptly and without undue delay. However, according to CMS officials, as of July 2015, the agency was not monitoring the timeliness of account transfers from states, and thus CMS would not be aware if account transfers from FFE states were happening promptly. CMS officials told us that account transfers are not happening in real time, but their understanding was that states typically send transfers at least daily. Officials from three of our four selected FFE states reported that account transfers were occurring at least daily, while officials from the remaining state reported that transfers were sent to CMS three times per week. Given the number of steps involved in the transition from Medicaid to exchange coverage, individuals may be more likely to have gaps in coverage to the extent account transfers from states to CMS are not happening in a timely fashion. For example, if a state sends a notification of termination on September 20, individuals could have just over a week to have their accounts transferred, apply for exchange coverage, and select a plan to avoid a coverage gap (see fig. 2). With regard to duplicate coverage, we found weaknesses in CMS’s controls for preventing, detecting, and resolving duplicate coverage in FFE states. Vulnerabilities in methods to prevent individuals from maintaining subsidized exchange coverage after being determined eligible for Medicaid. Individuals in FFE states might not end subsidized exchange coverage when they are determined eligible for Medicaid. According to CMS officials, in April 2015, the agency revised the notice individuals receive when they are determined eligible or potentially eligible for Medicaid to make clear individuals are responsible for doing so. However, individuals who apply for Medicaid directly through their state Medicaid agency may not receive such notification. In addition, CMS does not have procedures to automatically terminate subsidized exchange coverage when individuals are determined eligible for Medicaid, though CMS officials told us that they are considering options for doing so in the future. Vulnerabilities in methods to prevent individuals enrolled in Medicaid from enrolling in subsidized exchange coverage. While CMS generally checks for Medicaid coverage before initially determining someone eligible for subsidized exchange coverage, officials recognized that there are limitations to this check. Specifically, officials said these checks identify at a point in time whether the person is enrolled in Medicaid. Thus, if, for example, the Medicaid determination was pending, CMS would not know that from the check. Also, according to CMS officials, CMS is not able to conduct checks for Medicaid for the small percentage of individuals who do not provide social security numbers on their applications. Further, CMS did not perform a check for Medicaid coverage for the 1.96 million individuals who were auto-reenrolled in exchange coverage during 2015 open enrollment for FFE states. The absence of such a check increases the risk that duplicate coverage occurring during the year would continue when individuals are enrolled in subsidized exchange coverage for another year. No methods to detect and resolve duplicate coverage. As of July 2015, CMS did not have procedures to detect and resolve cases of duplicate coverage in FFE states. Further, CMS had generally not provided FFE states with exchange enrollment information that they would need to identify cases of duplicate coverage. While CMS has not conducted a formal risk assessment to identify the potential causes of duplicate coverage in FFE states, CMS officials told us that the agency has a number of planned steps to address the risk. The planned approach focuses on taking steps to identify and resolve rather than prevent duplicate coverage. Specifically, CMS has plans to implement periodic checks for duplicate coverage starting in the summer of 2015, and CMS officials told us in July 2015 that the first check would occur later that month. CMS officials estimated that the first check will take about 2 to 3 weeks to perform and will involve, among other steps, querying each FFE state’s Medicaid system. According to the officials, after the first check is complete CMS will notify individuals found to have duplicate coverage that they must contact the FFE to update their coverage information. Further, in 2016, if CMS can build the IT functionality to do so, the agency plans to begin automatically terminating exchange subsidies if individuals identified through the checks do not respond within 30 days of being notified. CMS officials told us that they are considering performing the periodic checks ahead of future open enrollment periods for exchange coverage, which could help prevent duplicate coverage among those automatically reenrolled in exchange coverage. CMS officials told us that the planned checks and notification process are a more efficient way of detecting and resolving duplicate coverage compared to providing exchange enrollment information to states and requiring them to identify duplicate coverage, which CMS would then need to resolve. The effectiveness of CMS’s plans to address duplicate coverage will depend in part on how frequently the checks are conducted and, as of July 2015, CMS had not yet decided the frequency. CMS officials told us that they are considering performing the checks on a regular basis— possibly quarterly—but said the frequency of the checks will depend in part on the agency’s analysis of the first check, including the level of effort required by state Medicaid agencies. Determining the frequency of the checks after completing an analysis of the first check is reasonable and could provide CMS with important insights. However, until CMS establishes the frequency of its checks, the risk of duplicate coverage going undetected continues to exist. Further, the less frequently the checks are conducted, the longer duplicate coverage could last if individuals do not independently take steps to end their subsidized exchange coverage. For example, for individuals who have subsidized exchange coverage and are determined eligible for Medicaid, if the checks are conducted monthly, duplicate coverage could last up to 2 months longer than what might be expected during the transition period; if quarterly, up to 4 months; and if biannually, up to 7 months (see fig. 3). In addition, while CMS officials told us that they intend to monitor the results of the periodic checks, they do not have a specific plan to routinely monitor the effectiveness of their planned checks and other procedures. According to CMS officials, the agency is exploring metrics to help measure the success of the periodic checks, such as identifying the number of people who received notification of duplicate coverage and subsequently ended their subsidized exchange coverage. However, CMS has not set a level of duplicate coverage that it deems acceptable, both in terms of the time period for which individuals have duplicate coverage and the proportion of Medicaid or exchange enrollees that experience duplicate coverage within a given time frame. Without such thresholds, it will be difficult for the agency to provide reasonable assurance that its procedures are sufficient or whether additional steps are needed. Data from three of our selected states—Kentucky, New York, and Washington—indicated that collectively over 70,000 individuals transitioned between Medicaid and exchange coverage in 2014. Specifically, the three states—all of which were SBE states that had expanded Medicaid—reported that about 73,000 individuals transitioned in 2014 (see table 1). These individuals accounted for between 7.5 percent and 12.2 percent of exchange coverage enrollment and less than 1 percent of Medicaid enrollment in those states. Data from the three states also indicated that most individuals transitioned to or from subsidized exchange coverage, rather than unsubsidized exchange coverage. While states were not able to provide data on the demographics of those transitioning, New York officials told us that it was likely mostly adults transitioning, because children have access to CHIP. In New York, CHIP covers children up to 400 percent of FPL—the same income limit as that set for the premium tax credit—compared with the Medicaid limit for adults of 133 percent of FPL. While individuals transitioning accounted for a relatively small percentage of enrollment, the total number of individuals transitioning across states could be significant. Out of the 25 states that had expanded Medicaid as of January 2014, we estimate that Kentucky, New York, and Washington accounted for 22.9 percent of total Medicaid and CHIP enrollment and 18.3 percent of total exchange enrollment in 2014. The data from the three states may understate the extent to which transitions between Medicaid and exchange coverage could occur in those states in future years. In particular, the number of individuals moving from Medicaid to exchange coverage may be greater in future years than in 2014. Individuals newly eligible for and enrolled in Medicaid in early 2014 would not have gone through their first annual redetermination of Medicaid eligibility, and officials in one state told us that they did not expect to see a lot of movement from Medicaid to exchange coverage until those redeterminations began. In addition, the number of individuals moving from exchange coverage to Medicaid in the three states may be greater in future years. Annual redeterminations of eligibility for subsidized exchange coverage are to occur during the annual open enrollment period for exchange coverage, which may extend from the end of a calendar year through the beginning of the following calendar year. As 2014 was the first year of exchange coverage, the data for this year reflected, at the maximum, only changes resulting from annual redeterminations of eligibility during the end of the calendar year— the beginning of the open enrollment period for 2015 exchange coverage. Where selected SBE states were not able to provide data on transitions between Medicaid and exchange coverage, officials told us they were developing or improving the functionality to track those data. In Colorado, which was not tracking transitions in 2014, officials told us that tracking transitions was considered a high priority. Officials told us that, as of July 2015, the state had made changes to its IT system that would provide the functionality to track transitions and they anticipated being able to do so later that year. In New York, officials reported being in the process of developing the functionality to track transitions from Medicaid to exchange coverage, and, in July 2015, the officials told us that they had recently started tracking these transitions. In Washington, a state already tracking transitions, officials told us that, as of July 2015, they had a project underway to begin looking at the demographics of those transitioning, including age and gender. Selected states and CMS could not provide data on the extent to which individuals are transitioning between Medicaid and exchange coverage in FFE states. Officials from all four of our selected FFE states told us that the state did not have access to exchange enrollment information, and therefore the state was not able to provide data on transitions between Medicaid and exchange coverage. Similarly, as of July 2015, CMS could not provide data on transitions between Medicaid and exchange coverage in FFE states. CMS officials told us that the FFE and state Medicaid IT systems are not integrated in a way that would allow for real-time tracking of transitions. Additionally, though CMS has access to both exchange and Medicaid enrollment data for FFE states, officials told us that, as of July 2015, they could not use those data to determine the number of individuals transitioning retrospectively. Officials explained that, for example, there was no single, unique identifier for an individual between the data sets, making it difficult to match people between the two data sets. CMS officials told us that, as of May 2015, representatives from CMS as well as from the Office of the Assistant Secretary for Planning and Evaluation had been working for about a year on a methodology for examining transitions. Officials said these efforts have primarily focused on analyzing transitions in SBE states, but that the findings may inform how to perform such an analysis for FFE states. Information from our selected states and CMS indicated that most states with Medicaid managed care had one or more Medicaid issuers that also offered coverage through the state’s exchange. Seven out of our 8 selected states—all but Iowa—reported having at least 1 issuer offering both Medicaid and exchange coverage in the state in 2014, ranging from 2 to 13 issuers. These results are consistent with an analysis completed by CMS that indicated, in the 40 states with Medicaid managed care, the majority—33—had 1 or more issuers offering both Medicaid and exchange coverage in 2014. CMS did not identify any issuers offering both types of coverage in the remaining 7 states. However, information from our selected states also indicated that in some states, the majority of Medicaid and exchange enrollees may not be enrolled with issuers offering both types of coverage. In the 7 selected states with issuers offering both types of coverage, the issuers accounted for between 8 and 76 percent of Medicaid enrollment and 19 and 74 percent of exchange enrollment where data were available from states (see table 2). The proportion of Medicaid enrollees in plans offered by issuers that also offer exchange coverage is affected by the proportion of Medicaid enrollees who participate in managed care in the state, as enrollees in fee-for-service Medicaid would not be enrolled with an issuer. For example, in Colorado, which had a relatively low percentage of Medicaid enrollees in plans offered by issuers also offering exchange coverage, the majority, or about two-thirds, of Medicaid enrollees were in fee-for-service as of February 2015 according to state officials. Additionally, not all individuals enrolled with issuers offering both types of coverage would be able to remain with their issuer when transitioning, due to differences in issuers’ service areas for their Medicaid and exchange coverage. For example, one of the two issuers that offered both types of coverage in Kentucky in 2014 offered Medicaid coverage statewide, but offered exchange coverage in just 15 of the 120 counties in the state, representing about 41 percent of the state’s population. The other issuer offered exchange coverage statewide and Medicaid coverage in 111 counties, representing about 76 percent of the population. In 7 counties, representing about 5 percent of the population, neither of the issuers offered both Medicaid and exchange coverage. A larger proportion of individuals may have the opportunity to remain with their issuer when transitioning between the coverage types in future years. In 2015, the total number of issuers offering both Medicaid and exchange coverage increased in 3 of our selected states. In addition, information from selected states indicated that in some cases, issuers that already offered both Medicaid and exchange coverage in some counties within a state began to do so in additional counties in 2015. Evidence from selected issuers also suggests that a growing number of individuals may have the opportunity to remain with their issuer moving forward—for example, representatives from one issuer reported that the number of states in which the issuer offered both types of coverage grew from 3 states in 2014 to 16 states in 2015. Representatives from another issuer told us that, given the complexities of offering two new types of coverage, it had so far chosen not to offer exchange coverage in some states in which it was newly participating in Medicaid but anticipated beginning to offer exchange coverage in those states in future years. While a growing number of individuals may have the opportunity to remain with their issuer when transitioning between the coverage types, the extent to which individuals will choose to do so will likely depend on a number of factors, including the following: Desire to change plans. Studies suggest that some individuals are likely to change plans—which may be offered by different issuers— when provided the option to do so. This change may be positive, such as in cases where the new plan better addresses the individual’s health care needs. Cost of exchange plans. Individuals may be less likely to remain with their issuer when transitioning from Medicaid to the exchange if issuers offering both types of coverage are unable to offer competitive premiums for their exchange plans. Representatives from two selected issuers that offered both types of coverage reported that they had relatively low exchange market share in 2014 most likely because they were unable to offer competitive premiums, but said they were able to offer lower premiums in 2015 and have seen or expected to see increased enrollment. Awareness of issuer participation in both types of coverage. Individuals transitioning between coverage types may not be aware that their issuer also offers plans in the new coverage type. For example, in some states Medicaid managed care marketing restrictions may prohibit issuers from marketing their exchange plans to existing Medicaid enrollees. For instance, representatives from one selected issuer reported piloting an outreach program in some states to inform Medicaid members whose coverage was terminating about the issuer’s exchange plans, but noted that the issuer was not permitted to operate this program in at least one state. In addition, issuers may operate under different names in Medicaid and for their exchange coverage, which could make it difficult for individuals to identify whether their issuer operates in the new coverage type. Auto-assignment in Medicaid managed care. Many states with managed care auto-assign individuals to issuers either at the initial eligibility determination or if an individual does not select his or her own plan within a certain time period. While such individuals may have the opportunity to change their Medicaid issuer after auto- assignment, they may choose not to do so or may not be aware of this ability, which may affect their likelihood of remaining with their issuer when transitioning from exchange coverage. Finally, for individuals transitioning between Medicaid and exchange coverage, the benefits of remaining with the same issuer for continuity of care are uncertain. Representatives of some selected issuers reported that covered benefits, cost-sharing, and drug formularies for their Medicaid and exchange plans differed to some extent due in part to differences in state and federal requirements for Medicaid and exchange coverage, with Medicaid requiring coverage of additional services and lower cost-sharing as compared to exchange coverage. These differences will likely persist regardless of whether individuals remain with the same issuer. However, officials from some selected states told us that remaining with the same issuer when transitioning may allow individuals to keep their health care providers, which could lead to improved continuity of care. There is some evidence to suggest that certain issuers offering both Medicaid and exchange coverage offer similar provider networks. Specifically, representatives of three selected issuers that traditionally offered Medicaid coverage reported leveraging their existing Medicaid provider networks when expanding to the exchange, and two of the issuers noted that most providers elected to participate. At the same time, some officials told us that provider networks for issuers offering both types of coverage could differ. Whether individuals transitioning between the coverage types are able to keep their providers may depend in part on the specific exchange plan they choose, as issuers often offer multiple plan options on the exchange, some of which may have more similar provider networks to Medicaid than others. Through the creation of subsidized exchange coverage and the state option to expand Medicaid eligibility under PPACA, many low-income individuals have a new pathway to maintain health coverage despite changes in income or other factors. Federal and state Medicaid and exchange policies and procedures influence the extent to which individuals are able to seamlessly transition between coverage types, including whether they are able to transition without a gap in coverage and whether they end up enrolled in both Medicaid and subsidized exchange coverage for extended periods of time. To the extent coverage gaps and duplicate coverage occur, individuals may decide to forgo needed care or may unnecessarily be paying any remaining share of exchange premiums after APTC when they should only be enrolled in Medicaid. Additionally, duplicate coverage could mean that the federal government is paying for both Medicaid and subsidized exchange coverage for some individuals. SBE states are better positioned to minimize the potential for coverage gaps and duplicate coverage to the extent they are able to share enrollment data across Medicaid and the exchange as well as build controls into their IT systems to prevent duplicate coverage. For FFE states as well as SBE states using the FFE IT systems, CMS implemented several policies and procedures and has additional controls planned that represent positive steps towards minimizing coverage gaps and duplicate coverage. However, as per federal internal control standards, those plans do not sufficiently address the risks. In particular, CMS does not currently track and has no plans to track the timeliness of account transfers from states, which could increase the potential that individuals transitioning from Medicaid to the exchange will experience coverage gaps. Additionally, CMS has not determined the frequency of its planned checks for duplicate coverage, a factor that will be critical to their effectiveness, and does not have a plan—including target levels of duplicate coverage the agency deems acceptable—for monitoring the checks and other procedures. Despite the addition of the checks, vulnerabilities related to preventing duplicate coverage are likely to persist, as, for example, the automated check for Medicaid during eligibility determinations for subsidized coverage will continue to have limitations. Thus, given the potential financial implications of duplicate coverage and if the checks identify that it is occurring at a significant rate, additional steps could protect the federal government and individuals from unnecessary and duplicative expenditures. Our findings indicate that a relatively small proportion of Medicaid and exchange enrollees may be transitioning between coverage types, and thus the incidence of coverage gaps and duplicate coverage could be limited. However, to the extent that transitions increase in the future— particularly if exchange enrollment continues to grow and if additional states expand Medicaid—improvements to CMS controls to minimize coverage gaps and duplicate coverage for these individuals will be increasingly important. To better minimize the risk of coverage gaps and duplicate coverage for individuals transitioning between Medicaid and the exchange in FFE states, we recommend that the Administrator of CMS take the following three actions: 1. Routinely monitor the timeliness of account transfers from state Medicaid programs to CMS and identify alternative procedures if near real time transfers are not feasible in a state. 2. Establish a schedule for regular checks for duplicate coverage and ensure that the checks are carried out according to schedule. 3. Develop a plan, including thresholds for the level of duplicate coverage it deems acceptable, to routinely monitor the effectiveness of the checks and other planned procedures to prevent and detect duplicate coverage, and take additional actions as appropriate. We provided a draft of this report to HHS and IRS for comment. In its written comments—reproduced in appendix II—HHS concurred with our recommendations. With regard to our first recommendation, HHS commented that HHS monitors and reviews account transfers through standard weekly reporting and that, if there are concerns with the frequency of transfers, HHS resolves any issues with the states. However, knowing the frequency of account transfers—that is, how often the state is sending them electronically to HHS—may not provide enough information without HHS also having information on the timeliness of states' transfers—that is, the amount of time it takes the state to transfer an individual's account after making a determination that the individual is no longer eligible for Medicaid. Thus, HHS using its weekly reporting process has the potential to meet our recommendation if the process monitors not only the frequency of transfers but also the timeliness of transfers. With regard to our other recommendations, HHS stated that its first check for duplicate coverage was underway in August 2015, and that HHS will analyze the rate of duplicate coverage identified and gather input from states on the level of effort needed to conduct the check in order to establish the frequency of checks going forward. HHS also stated that it will monitor the rate of duplicate coverage identified in periodic checks. Finally, HHS stated that it is working to implement additional internal controls to reduce duplicate coverage, including automatically ending subsidized exchange coverage for individuals also found to have been determined eligible for Medicaid or CHIP who have not ended this coverage themselves. HHS also provided technical comments, which we incorporated as appropriate. IRS had no comments on the draft report. 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 Health and Human Services 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 Carolyn L. Yocom at (202) 512-7114 or [email protected] or John E. Dicken at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. In addition to the contacts named above, Susan Barnidge, Assistant Director; Priyanka Sethi Bansal; Keith Haddock; Laurie Pachter; Vikki Porter; Rachel Svoboda; and Emily Wilson made key contributions to this report. | Due to changes in income and other factors, it is likely that under PPACA many low-income individuals will transition between Medicaid and subsidized exchange coverage. Federal regulations require that state Medicaid agencies and exchanges coordinate to facilitate these transitions, including transferring individuals' accounts to the appropriate form of coverage when eligibility changes occur. However, given the complexity of coordinating policies and procedures for both coverage types, challenges could arise during the transition process resulting in individuals experiencing coverage gaps or duplicate coverage. GAO was asked to review information related to transitions between Medicaid and exchange coverage. In this report, among other objectives, GAO examines the extent to which the federal government had policies and procedures that minimize the potential for coverage gaps and duplicate coverage. GAO reviewed relevant federal regulations, guidance, FFE documentation, and federal internal controls standards, and interviewed CMS officials. GAO also collected information from eight states selected, among other factors, to include four FFE states. CMS's policies and procedures do not sufficiently minimize the potential for coverage gaps and duplicate coverage in federal exchange states. GAO found that individuals transitioning from Medicaid to exchange coverage—that is, private health insurance purchased through the exchanges created under the Patient Protection and Affordable Care Act (PPACA)—may experience coverage gaps, for example, if they lose Medicaid eligibility toward the end of a month. Individuals who experience coverage gaps may decide to forgo necessary care. In addition, GAO found that some individuals had duplicate coverage, that is, were enrolled in Medicaid while also receiving federal subsidies for exchange coverage. While some amount of duplicate coverage may be expected during the transition from exchange to Medicaid coverage and is permissible under federal law, GAO found that duplicate coverage was also occurring under other scenarios. Individuals may be held liable for repaying certain exchange subsidies received during the period of duplicate coverage. Further, the federal government could be paying twice, subsidizing exchange coverage and reimbursing states for Medicaid spending for those enrolled in both. While the Centers for Medicare & Medicaid Services (CMS), the agency within the Department of Health and Human Services (HHS) that operates a federally facilitated exchange (FFE) in 34 states, has implemented policies and procedures that help minimize the potential for coverage gaps and duplicate coverage, GAO identified weaknesses in CMS's controls for FFE states based on federal internal control standards. Specifically: GAO found that CMS's controls do not provide reasonable assurance that accounts—that is, records—for individuals transitioning from Medicaid to exchange coverage in FFE states are transferred in near real time. CMS regulations require that such transfers occur promptly to facilitate eligibility determinations and enrollment. However, as of July 2015, CMS was not monitoring the timeliness of transfers. CMS officials told GAO that transfers are not happening in real time, but their understanding was that states typically send transfers at least daily. Officials from three of the four selected FFE states reported that account transfers were occurring at least daily; officials from the remaining state reported that transfers were sent to CMS three times per week. To the extent transfers are not happening in a timely fashion, individuals may be more likely to have gaps in coverage. GAO found weaknesses in CMS's controls for preventing, detecting, and resolving duplicate coverage in FFE states. For example, as of July 2015, CMS did not have procedures to detect cases of duplicate coverage. According to CMS officials, CMS planned to implement periodic checks for duplicate coverage beginning later that month. However, CMS had not yet determined the frequency of the checks, a key to their effectiveness. In addition, CMS had no specific plan for monitoring the effectiveness of the checks and other planned procedures, making it difficult for the agency to provide reasonable assurance that its procedures are sufficient or whether additional steps are needed to protect the federal government and individuals from duplicative and unnecessary expenditures. GAO recommends that CMS take three actions, including routinely monitoring the timeliness of account transfers from states, establishing a schedule for regular checks for duplicate coverage, and developing a plan to monitor the effectiveness of the checks. HHS concurred with GAO's recommendations. |
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NWS began a nationwide modernization program in the 1980s to upgrade observing systems, such as satellites and radars, and design and develop advanced forecaster computer workstations. The goals of the modernization are to achieve more uniform weather services across the nation, improve forecasts, provide better detection and prediction of severe weather and flooding, permit more cost-effective operations through staff and office reductions, and achieve higher productivity. Four major programs are included in this modernization: NEXRAD, the Automated Surface Observing System (ASOS), the Next Generation Geostationary Operational Environmental Satellite (GOES-Next), and the Advanced Weather Interactive Processing System (AWIPS). NEXRAD, ASOS, and GOES-Next—commonly referred to as the observing systems—are operational, while AWIPS is scheduled to be deployed nationwide in June 1999. Ongoing problems—both developmental and operational—have surrounded the modernization. For example, we have reported that the NEXRADs have not always been operating when severe weather threatened, and ASOS has fallen short of performance and user expectations. We have made specific recommendations and testified numerous times over the past several years on these performance problems, developmental problems, and problems relating to cost and schedule. As a result of its continuing problems, the NWS modernization has been included—both in 1995 and 1997—on our list of high-risk government programs. Although NWS acknowledges that key problems confront the new systems, it has found that the new radars and satellites have improved forecasts and warnings. As part of its modernization program, NWS plans to reorganize its field office structure from 256 offices (52 Weather Service Forecast Offices and 204 Weather Service Offices), to 121 Weather Forecast Offices (WFO). NWS field offices provide basic weather services such as forecasts, severe weather warnings (e.g., tornadoes, flash floods), warning preparedness, and, where applicable, aviation and marine forecasts. Warning preparedness includes coordinating with local emergency management, law enforcement agencies, and the media on notification of and response to severe weather events. It also relies on human observers to collect and report data on severe weather events. NEXRAD is a Doppler radar system that measures wind velocity in severe weather, tracks storm movement and intensity, and generates data and imagery for forecasters and other users, such as air traffic controllers. There are 141 operational NEXRADs in the conterminous United States: 120 are operated by NWS and 21 are operated by the Department of Defense.The system allows forecasters at each weather office to access radar information via dedicated and dial-up connections to neighboring radars. This information is very important for observing and tracking significant weather. The reported cost of the NEXRAD program was nearly $1.5 billion. NWS reports that the new radars have helped to increase the accuracy and timeliness of warnings for severe thunderstorms, tornadoes, and other hazardous weather events. In 1995, we reported that NWS did not know if its radars were meeting the availability requirement because it was not monitoring availability effectively. We recommended that NWS analyze and monitor NEXRAD system availability on a site-specific basis and correct any shortfalls in system availability that this analysis shows. NWS concurred with these recommendations and began monitoring system availability on a site-specific basis. However, as we reported in our February 1997 high-risk report, not all NEXRADs were meeting the availability requirement. Each NEXRAD consists of three major subsystems—the radar data acquisition (RDA) subsystem, the radar product generator (RPG) subsystem, and the principal user processor (PUP) subsystem—and associated communications among these subsystems. Each NEXRAD includes about 400,000 lines of code for operating the radar, processing radar signals, generating and transmitting data, and displaying data products. The RDA consists of a 10 centimeter wavelength Doppler weather radar that collects the raw data to, among other things, (1) measure wind velocity in severe weather, (2) provide improved estimates of precipitation amounts, and (3) track storm movement and intensity. The technology needed to perform this function includes an antenna, pedestal, radome (a dome-shaped covering to protect the antenna), transmitter, and receiver. Included in the RDA unit is hardware and software necessary for a variety of control functions, including signal processing, monitoring, and error detection, as well as archiving the radar data. A computer processes the radar signals to create digital data that can be further processed by the RPG. The RPG includes all hardware and software necessary for turning the data into displayable data products. Specifically, the RPG provides real-time generation, storage, and distribution of products for users. It includes hardware and software required for system control; status monitoring; and error detection, archiving, and data processing. The PUP is a workstation that consists of the hardware and software required for the request, display, local storage and annotation, and distribution of products by forecasters. It also includes the hardware and software required for local control, status monitoring, archiving, and communicating with other users. The PUP maintains a dedicated communication link to the RPG located on-site, and it routinely receives NEXRAD products. The PUP also has the capability to access data from RPGs at other NEXRAD sites. In addition, under an NWS administered NEXRAD information dissemination service, NWS has set aside four communications ports to allow access by commercial companies that provide data to other government agencies and the public. Figure 1 shows the key NEXRAD subsystems for a typical NWS weather forecast office. The Sulphur Mountain NEXRAD was delivered for installation during November 1993, tested from January 1994 through March 1994, accepted in March 1994, and commissioned in December 1994. It is located in southern Ventura County near the communities of Ojai and Sulphur Springs, controlled by the Los Angeles/Oxnard weather forecast office (WFO), and serves Los Angeles, Ventura, San Luis Obispo, and Santa Barbara counties. Prior to installation of this weather radar, no radar precipitation estimates were available for the Los Angeles area. The Los Angeles/Oxnard WFO also uses radar images from NEXRADs located in Santa Ana, and Vandenberg and Edwards Air Force bases. According to Los Angeles/Oxnard WFO officials, the four NEXRADs cover the following counties or parts thereof: Sulphur Mountain NEXRAD - eastern Santa Barbara County and offshore waters, Ventura County and offshore waters, western Los Angeles County and offshore waters. Vandenberg Air Force Base NEXRAD - San Luis Obispo County and offshore waters, Santa Barbara County and offshore waters. Santa Ana NEXRAD - eastern Los Angeles County and offshore waters. Edwards Air Force Base NEXRAD - extreme northern Ventura County, northern Los Angeles County. According to the National Weather Service, the offshore waters covered by these four NEXRADs are essential to obtain advance warning of storms as they approach the California coast. See figure 2 for the counties served by the Los Angeles/Oxnard WFO and the locations of the four NEXRADs used by this office. Southern California has some of the steepest terrain in the United States. The steep mountains and the Pacific Ocean create ideal conditions for the orographic enhancement of rainfall. This terrain combined with the fact that the soil does not readily absorb moisture make the rivers in this area prone to flooding during heavy rains. NWS officials told us that the heaviest rains that produce flooding in this area occur in the winter and typically approach from the southwest. When residents of the Upper Ojai Valley were informed that NWS was installing a weather radar system on Sulphur Mountain, they became concerned about the health effects of microwave radiation and asked the Rose Institute of State and Local Government at Claremont McKenna College to conduct a preliminary review of the issues. In August 1997, the Rose Institute issued the report, The National Weather Service’s Tower in the Upper Ojai: A Case History. The report’s conclusions were: “The initial siting decision seems to have been made without full compliance with ordinary regulatory procedures; and the administrator of the National Weather Service has issued incorrect and misleading statements in defense of the selection of the site.” “There is evidence that the Sulphur Mountain site prevents NEXRAD from performing its mission of accurate, timely warning of flash flooding in the San Gabriel mountain foothills, severe weather in the Basin or wind shear data for the Basin airports.” “There is evidence that Sulphur Mountain radar fails to provide the low-level data necessary to predict wind shear and clear air turbulence for Los Angeles International Airport and the Burbank/Pasadena Airport on a timely basis.” “Residents of the Sulphur Mountain area have been adversely affected, property values have dropped significantly, and the ability to sell property has virtually disappeared because of the presence of the radar. The National Weather Service has consistently refused to deal openly with the health issue raised by siting the radar in a residential area.” In November 1997, the NWS responded to the Rose Institute report and stated that it was “replete with misinformation concerning weather radars, weakly supported opinions, and several paradoxical conclusions.” Subsequent to that response, the Rose Institute issued another report in May 1998 that expanded on some of the issues raised in its November report, while also raising additional concerns, including whether the Sulphur Mountain NEXRAD coverage is needed since “ninety percent of the area that the Sulphur Mountain tower was installed to cover is covered by other NEXRAD stations.” The objectives of our review were to determine whether the Sulphur Mountain NEXRAD (1) can provide timely and accurate information for warning of flash floods and (2) is intended to provide low-level data necessary to predict wind shear for Los Angeles International Airport. Ventura and Los Angeles counties were selected because they are two counties that the Los Angeles/Oxnard WFO had responsibility for from January 1992 through February 1998 (from January 1992 to October 1993 the office was located in Los Angeles), and because they are the two primary counties that the Sulphur Mountain NEXRAD covers. compared the timeliness of the flash flood warning lead times to the requirement specified in Commerce’s 1999 Annual Performance Plan, obtained and reviewed Sulphur Mountain NEXRAD availability data from the Engineering Management Reporting System for the period from October 1995 through March 1998 to determine if the Sulphur Mountain radar was meeting the 96 percent availability requirement, reviewed three flash flood events that occurred on February 3, 6, and 23, 1998, to determine how data from the Sulphur Mountain NEXRAD is used in combination with rain gage information to issue flash flood warnings, and interviewed the following users to obtain their views of the quality, timeliness, and utility of the Sulphur Mountain NEXRAD data: officials from the Flood Control Department of the Ventura County Public Works Agency; the Los Angeles County Department of Public Works; Point Mugu Naval Air Warfare Center; U.S. Army Corps of Engineers, Los Angeles District, Reservoir Regulation Section; Ventura County Sheriff’s Department; the Assistant City Administrator from the Emergency Preparedness Division, City of Los Angeles; weathercasters from KCBS-TV and KCAL-TV; and the director of Fox Weather, a private meteorological service. To determine whether the Sulphur Mountain NEXRAD is intended to provide low-level data necessary to predict wind shear for Los Angeles International Airport, we reviewed documentation that established NEXRAD’s requirements, reviewed FAA documentation describing systems that predict wind shear at airports, including those systems at Los Angeles International Airport, and interviewed NWS and FAA officials. We performed our work at the National Oceanic and Atmospheric Administration (NOAA) and NWS headquarters in Silver Spring, Maryland, and at the Los Angeles/Oxnard WFO in Oxnard, California. Our work was performed from February 1998 to September 1998, in accordance with generally accepted government auditing standards. The Secretary of Commerce provided written comments on a draft of this report. These comments are discussed in the “Agency Comments” section of this report and are reprinted in appendix II. In addition, FAA officials, including the Acting Product Lead for Wind Shear and Radar, provided oral comments on a draft of this report. FAA’s comments are also discussed in the “Agency Comments” section. The accuracy and timeliness of flash flood warnings has increased in Los Angeles and Ventura counties since the Sulphur Mountain NEXRAD became operational in December 1994. Although other systems can contribute to the improved timing of the flash flood warnings, NWS officials believe that the system that is primarily responsible for improved flash flood warning lead times in Ventura and Los Angeles counties is the Sulphur Mountain NEXRAD. Users, in addition to NWS, also told us that they rely heavily on the Sulphur Mountain NEXRAD to alert the public to flash floods. Despite the improvements in flash flood warnings and overall user satisfaction, the Sulphur Mountain NEXRAD is not always available the required amount of time. The Department of Commerce’s Fiscal Year 1999 Annual Performance Plan specifies as one objective to “continue improving the timeliness and accuracy of short-term environmental predictions that have immediate impact on individuals and many sectors of the economy.” It further states that for fiscal year 1999, the goal is to increase flash flood warning lead time to 42 minutes. The accuracy and timeliness of flash flood warnings has increased in Los Angeles and Ventura counties since the Sulphur Mountain NEXRAD was commissioned in December 1994. From January 1992 through December 1994, 18 flash flood events were reported in Ventura and Los Angeles counties. There was no advanced warning for any of the 18 events. However, from January 1995 through February 1998, advanced warnings were issued for 17 of the 22 reported events; and the average warning lead time for these was just over 2 hours. For the 17 events, the warning lead time ranged from 8 minutes to 3 hours and 50 minutes, and exceeded the fiscal year 1999 flash flood warning lead time goal of 42 minutes for 14 of the 17 events. Figure 3 displays flash flood warning lead times for the 40 flash flood events that occurred in Ventura and Los Angeles counties from January 1992 through February 1998. Concerning the five events since January 1995 that were not preceded by a warning, Los Angeles/Oxnard WFO officials stated that two of the events were incorrectly recorded as flash floods and two were flash flood warning extensions that were issued after the initial warning and, therefore, none of the four should be counted as missed events. According to the Los Angeles/Oxnard WFO meteorologist-in-charge, one of the incorrectly recorded events was an urban flood event, while the other was the result of a controlled water release into the Los Angeles River. However, because no documentation was provided to substantiate NWS’ statements, we classified all five as missed events. Another measure of accuracy is the number of false warnings that occurred. From January 1992 through December 1994, NWS data shows that there were three false flash flood warnings, while from January 1995 through February 1998, NWS data shows five false flash flood warnings. See appendix I for details on each of the 40 events listed in figure 3 (e.g., date of the event, time of the flash flood, time the warning was issued), as well as the dates of the false warnings. Although NEXRAD is not the only source of data on which storms are tracked, Los Angeles/Oxnard WFO officials told us that the Sulphur Mountain NEXRAD is the primary reason for the increase in advanced warning lead time because it provides advanced warning of heavy precipitation oftentimes before severe weather hits the California coast. NWS officials told us that well before the NEXRAD imagery is used to issue a flash flood warning, forecasters use other sources of information to track storms as they approach the west coast, primarily high resolution satellite imagery from the GOES-Next satellites and detailed numerical models. However, as storms approach the counties covered by the Los Angeles/Oxnard WFO, the detailed imagery from the Sulphur Mountain NEXRAD is used to issue flash flood warnings, along with the neighboring NEXRADs (i.e., Vandenberg Air Force Base, Edwards Air Force Base, and Santa Ana). NEXRAD estimates of precipitation rate and amount are extremely important for flash flood forecasting; however, NWS officials at the Los Angeles/Oxnard WFO told us that these estimates are not always exact and are supplemented with rainfall sensors and human observers. For example, radar reflectivity is affected by many factors, including precipitation growth, evaporation, and type; thus, the precipitation observed by the NEXRAD beam is not absolute and may not be exactly representative of that reaching the ground. Therefore, to improve NEXRAD precipitations estimates, Los Angeles/Oxnard WFO officials rely on “ground truth” that is provided by surface observation networks and human observations. NWS officials and other users of the Sulphur Mountain NEXRAD data told us that the information it provides is valuable, accurate, and timely. NWS officials provided us with detailed case studies of three February 1998 El Nino-related flash flood events that show how the Sulphur Mountain NEXRAD imagery was used to issue flash flood warnings. For example, on February 6, 1998, NWS issued a flash flood warning for southern Ventura and western Los Angeles counties at 8:35 a.m. based on the Sulphur Mountain NEXRAD information. At 8:40 a.m., the Sulphur Mountain NEXRAD showed heavy thunderstorms moving on shore near Ventura Harbor. By 10 a.m., rafts were needed to evacuate a mobile home park in Camarillo. As the storm moved eastward, a 20-foot sinkhole opened near Moorpark road in Thousand Oaks and mudslides closed the Pacific Coast highway in Malibu. Eight of the nine other users of Sulphur Mountain NEXRAD data we interviewed told us that they are pleased with the information it provides, and that it was an important tool for performing their jobs accurately and timely. For example, officials from the Los Angeles County Department of Public Works, who are responsible for constructing, operating, and maintaining the flood control and water conservation facilities in Los Angeles County, told us that the Sulphur Mountain NEXRAD has significantly improved the quality and quantity of radar information they receive and that it is substantially more detailed, accurate, and timely than previous radars. An official from the Point Mugu Naval Air Warfare Center, who provides day-to-day forecasts during flight briefings to ensure the safety of aircraft, described the Sulphur Mountain NEXRAD data as “critical.” The Director of Emergency Services for Ventura County considers the radar “to be an effective tool for identifying the appropriate level of response for county emergency services during inclement weather.” The Los Angeles District Corps of Engineers, which manages water control projects in Southern California, including 10 Corps of Engineers reservoirs in the Los Angeles area that provide flood protection to downstream areas, said that data from the radar “has proven to be a very valuable water management tool.” One user, the director of Fox Weather, a private meteorological service, said that the radar was less useful for Ventura County than for the Los Angeles area because it had not significantly improved his ability to provide precipitation estimates for his clients. NWS officials acknowledge that precipitation estimates are not always exact and therefore are supplemented with surface observation networks and human observers. Several of the users also described specific incidents where data from the Sulphur Mountain NEXRAD was especially useful in informing the public and protecting lives and property. For example, the TV weathercaster for KCBS-TV used the radar during an intense storm on December 6, 1997, to track the storm and give people in Ventura County up-to-the-minute reports. With the data from the Sulphur Mountain NEXRAD, he was able to provide warnings to specific locations before the storm occurred. In addition, the program administrator of the Ventura County Sheriff’s Department’s Office of Emergency Services told us that 48 hours after the La Conchita landslide in March 1995, data from the Sulphur Mountain radar was used to provide a warning of another severe storm moving into the La Conchita area. The warnings, which were not available from other NEXRADs in the area, provided ample time to evacuate already deployed emergency services personnel, ground helicopters, and take other safety precautions. System availability is defined as the time that a system is operating satisfactorily, expressed as a percentage of the time the system is required to be operational. NWS requires that each NEXRAD be available 96 percent of the time. We reported in May 1995 that according to NWS officials, the 96 percent requirement is based on an analysis that considered factors such as equipment reliability, staff costs, and spare part costs. These officials stated that the additional costs (for example, redundant systems, spare parts, and additional maintenance technicians) associated with achieving availability above 96 percent were not worth the added benefits. The Sulphur Mountain NEXRAD is not consistently meeting the 96 percent availability requirement. From October 1995 through March 1998, NWS’ engineering management reporting system (EMRS) reports show that the Sulphur Mountain NEXRAD did not meet the 96 percent requirement for 10 of the 30 months reviewed. (See figure 4.) NWS officials from the Los Angeles/Oxnard weather forecasting office told us that the Sulphur Mountain NEXRAD is not consistently meeting the 96 percent availability requirement because of component failures and the time-consuming logistics process associated with fixing the failed components. If the NEXRAD is down for more than 28 hours in a 30-day month, the 96 percent availability requirement will not be met. The Los Angeles/Oxnard WFO technicians who troubleshoot outages and are responsible for making repairs told us that most of the outages associated with the months when the availability requirement was not met required ordering a part that was not on hand. They added that it usually takes at least 24 hours for the parts to arrive after they are ordered. The technicians told us that they strive to meet the 96 percent requirement, but that it is very difficult, considering that it takes 1 hour to get to the site from the Los Angeles/Oxnard WFO, time to analyze the problem, usually 24 hours to receive the needed part, 1 hour to get back to the site, and time to repair the NEXRAD. The technicians told us that they have tried using other shipping companies to hasten delivery of replacement parts, but these efforts have not resulted in improved delivery times. The technicians also told us that deliveries of parts are sometimes delayed because some ordered parts are not in stock and some replacement parts have been defective. For example, in May 1996, when the NEXRAD’s availability was only 90.3 percent, there was a 48-hour logistics delay because the required part was out of stock. In addition, the low availability reported in February 1997 occurred because the ordered part was defective. Until the Sulphur Mountain NEXRAD consistently meets the 96 percent availability requirements, NWS risks not having the data it needs to accurately and quickly predict flash floods and other severe weather. NWS headquarters officials acknowledged the availability shortfalls and stated that they are monitoring the failure rates of parts and are attempting to reduce the failure rates or to more quickly replace the parts that fail most often. For instance, they told us that they are installing fans to keep the transmitter, a component that has been unreliable since the inception of the NEXRAD program, from overheating. They added that the NEXRAD program has a 6-year modification plan which, among other things, identifies deficiencies in hardware performance and reliability and prioritizes NWS’ improvement activities. They are also attempting to stock those spare parts that fail frequently at each location; however, they added that their budget does not allow for a full set of spares at each location. In addition, NWS officials told us that spare part inventories at the National Logistics Supply Center have recently been bolstered to replenish those stocks that were below desired levels. Finally, NWS officials told us that they are working with different shipping companies to improve the shipping process. Although NEXRAD uses doppler technology that is capable of detecting changes in wind direction, such as wind shear and atmospheric conditions associated with tornadoes and other severe storms, the detection of low-level wind shear at airports is not part of the mission of the NEXRAD network, and it is not specifically designed to do that. FAA uses three different systems, either singly or in tandem, to predict wind shear at airports — Terminal Doppler Weather Radar (TDWR), Weather Systems Processor (WSP), and Low Level Wind Shear Alert System (LLWAS). Los Angeles International currently has LLWAS and is scheduled to get WSP in 2001. NEXRAD was originally designed to be a weather surveillance radar for general weather observation. It was not designed to detect wind-shear at airports. According to FAA officials, in the early 1980s, FAA studied whether NEXRAD could meet its requirements for detecting wind shear and microbursts. The study concluded that NEXRAD could not produce timely warnings of wind shear or other low altitude phenomena at the required 1 minute update rate required by FAA. NEXRAD information is updated every 5 to 6 minutes. In addition to not being designed to detect wind shear at airports, NEXRADs are not located to serve airports. NEXRADs were located throughout the contiguous United States to optimize national coverage for general weather observation. On the basis of NWS’, Department of Defense’s, and FAA’s collective mission needs and the Weather Service Modernization Act, which mandates that the Secretary of Commerce certify that there will be no degradation in radar coverage at the 10,000-foot level prior to closing, consolidating, automating, or relocating any of NWS’ field offices, the three agencies negotiated the radars’ locations to meet tri-agency radar coverage requirements. FAA uses three systems that are specifically designed to detect wind shear at airports. TDWR is the “state of the art” wind shear detection system that is currently being deployed at high traffic airports that experience severe weather. TDWR is a Doppler radar, typically located 8 to 12 miles from the airport, that is designed to detect wind shear, microbursts, precipitation, and storm motion. Its information update rates match the near real time requirement needed during aviation landings and departures. WSP is a modification to FAA’s air traffic control airport surveillance radar (ASR-9) that is to provide FAA with 80 to 95 percent of the capability of TDWR. WSP is to be installed at high to moderate traffic airports that experience limited severe weather. It adds a doppler processor to the ASR-9, giving it the capability to detect microbursts, gust fronts, precipitation intensity, storm cells and the motion of shifting gust fronts. A prototype WSP is installed in Albuquerque, New Mexico, and a production contract was awarded on September 14, 1998. LLWAS is a network of anemometers that were originally installed in the 1970s. LLWAS is used to supplement TDWR at nine high-traffic airports at greatest risk of severe weather and it is used at other airports that will not get TDWR or WSP—typically lower traffic airports. Los Angeles International currently has LLWAS and since it is an airport designated as having high to moderate traffic that typically experiences limited severe weather, it is scheduled to get WSP in 2001. The accuracy and timeliness of flash flood warning lead times has improved since the Sulphur Mountain NEXRAD was commissioned in December 1994. Although other systems, including the sophisticated network of ground sensors, have contributed to this improvement, NWS officials told us that the Sulphur Mountain NEXRAD is the primary reason for the improvement. NWS feedback on the NEXRAD’s performance is consistent with that of other users, who find its data accurate, timely, and valuable. However, the Sulphur Mountain NEXRAD is not consistently meeting its availability requirement, thus increasing the risk that NWS and other users will not always have the data needed to accurately and quickly predict flash floods and other severe weather. The risk is more serious in the winter months when Southern California experiences flash flooding. Until the Sulphur Mountain NEXRAD consistently meets the required availability requirement, lives and property are at increased risk. Consistent with our 1995 recommendation to correct shortfalls in NEXRAD system availability,NWS headquarters officials told us they are taking steps to improve systems availability. However, as the Sulphur Mountain NEXRAD data show, these steps have not been sufficient. It was never the intent of the NEXRAD systems to provide detailed data used to predict wind shear at airports, and NEXRAD was not designed for this purpose. FAA uses other systems to perform this mission. Since the Sulphur Mountain NEXRAD is not always available as required, we recommend that the Secretary of Commerce direct the NOAA Assistant Administrator for Weather Services to determine all the reasons why the Sulphur Mountain NEXRAD is not meeting the 96 percent availability requirement and to correct the problems so that the radar is available as required. In commenting on a draft of this report, the National Weather Service concurred with our recommendation and mentioned several key activities that are planned to improve radar availability. This written response is reprinted in appendix II. In addition, FAA officials said that the information presented in this report is accurate. We are providing copies of this report to the Secretaries of Commerce and Transportation, the Director of the Office of Management and Budget, and interested congressional committees. Copies will be available to others upon request. If you have any questions about this report, please call me at (202) 512-6253, or Dave Powner, Assistant Director, at (202) 512-4348. We can also be reached by e-mail at [email protected] and [email protected], respectively. Major contributors to this report are listed in appendix III. Warning lead time (hours:minutes) (continued) No flash flood events or warnings were recorded during 1996. Three false flash flood warnings were recorded prior to the commissioning of the Sulphur Mountain NEXRAD: 2/12/92, 2/15/92, and 2/8/94. Five false flash flood warnings were recorded after the commissioning of the Sulphur Mountain NEXRAD: 9/2/97, three on 12/6/97, and 2/3/98. Keith A. Rhodes, Technical Director David A. Powner, Assistant Director Barbarol J. James, Evaluator-in-Charge Robert D. Faggart, Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Rose Institute of Claremont McKenna College's study on the National Weather Service's (NWS) Next Generation Weather Radar (NEXRAD) located on Sulphur Mountain, California, focusing on whether the Sulphur Mountain NEXRAD: (1) can provide timely and accurate information for warning of flash floods; and (2) is intended to provide low-level data necessary to predict wind shear for Los Angeles International Airport. GAO noted that: (1) since the Sulphur Mountain NEXRAD was commissioned in December 1994, the accuracy and timeliness of flash flood warnings has improved for Ventura and Los Angeles counties; (2) from January 1992 through December 1994, 18 flash flood events were reported in Ventura and Los Angeles counties; (3) however, from January 1995 through February 1998, advanced warnings were issued for 17 of the 22 reported events; (3) although the Sulphur Mountain radar is not the only source of data on which flash flood warnings are issued, NWS officials believe that the Sulphur Mountain NEXRAD is the primary reason for the increase in advanced warning lead time because it provides advanced warning of heavy precipitation, often before severe weather hits the California coast; (4) users of the Sulphur Mountain NEXRAD data told GAO that the information it provides is valuable, accurate, and timely; (5) despite the improvements in flash flood warning lead time and user satisfaction, NWS data show that the Sulphur Mountain NEXRAD is not consistently meeting its 96-percent availability requirement; (6) from October 1995 through March 1998, the Sulphur Mountain NEXRAD was available as required for 20 months; for the other 10 months, availability ranged between 79 to 95 percent; (7) if the NEXRAD is not available as required, it increases the risk that NWS will not have the data it needs to accurately and quickly predict flash floods and other severe weather; (8) NWS headquarters officials acknowledged the availability shortfalls and stated that they are monitoring the failure rates of parts and are attempting to reduce the failure rates or to more quickly replace the parts that fail most often; (9) predicting wind shear at Los Angeles International Airport is not part of NEXRAD's mission; (10) the Federal Aviation Administration (FAA) uses three different systems to predict wind shear at airports--Terminal Doppler Weather Radar (TDWR), Weather Systems Processor (WSP), and Low Level Wind Shear Alert System (LLWAS); (11) TDWR is being deployed at high traffic airports that experience severe weather; (12) WSP is an enhancement to an existing air traffic control surveillance radar that is to provide FAA with 80 to 95 percent of the capability of TDWR; (13) WSP is to be installed at high to moderate traffic airports that experience limited severe weather; (14) LLWAS is used to supplement TDWR at nine high traffic airports at greatest risk of severe weather and it is used at other airports that will not get TDWR or WSP; and (15) Los Angeles International Airport currently has LLWAS and is scheduled to get WSP in 2001. |
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To gain a better understanding of the overall concept, key acquisitions, and implementation strategy, we reviewed relevant DOD plans, policies, guidance, and other documents pertaining to the GIG. We also reviewed briefings prepared for high-ranking DOD officials and other organizations within the department to obtain more up-to-date information on the status of GIG activities and costs of key components. Funding and cost information was obtained from budget exhibits and other accounting reports compiled by the DOD. We did not conduct a comprehensive review of the financial reports or records. Also, we did not evaluate the content and quality of the GIG architecture and standards. In addition, we interviewed key officials responsible for the GIG in the Office of the Assistant Secretary of Defense for Networks Information and Integration (DOD’s Chief Information Officer); the Defense Information Systems Agency; Office of the Under Secretary of Defense (Comptroller); Office of Program Analysis and Evaluation; Office of the Under Secretary of Defense for Acquisition, Technology and Logistics; and Office of the Joint Chiefs of Staff. We held interviews with officials representing the Offices of the Chief Information Officer for the Air Force, Army, Navy, and U.S. Marine Corps. To identify the challenges associated with GIG implementation, we examined studies, reports, and guides on the GIG; DOD’s effort to transition toward more network-based military operations; and DOD’s efforts to enhance its capability to acquire joint systems that were completed by DOD, the Defense Science Board, and other research entities, such as the Center for Strategic and International Studies. We examined reports and guides completed by the Congressional Research Service, Congressional Budget Office, and GAO on managing technology projects, architectures, and information technology investments. We held interviews with previously identified DOD officials to discuss key challenges associated with the development and implementation of the GIG. We performed our work from November 2003 to June 2004 in accordance with generally accepted government auditing standards. For the past two decades, DOD has been seeking solutions to improve interoperability and information sharing across its business and warfighting operations. Too often weapon and information technology systems have been acquired by the military services and defense agencies without regard for their ability to work in a joint operational environment. As a result, extra layers of redundancy and common systems have been put in place to support military operations, but without the ability to easily and quickly exchange data. DOD defines the GIG as a “globally interconnected, end-to-end set of information capabilities, associated processes, and personnel for collecting, processing, storing, disseminating, and managing information.” The GIG is meant to improve interoperability among DOD’s many information systems and weapon systems. More important, the GIG is to facilitate DOD’s effort to transform to a more network-based, or “netcentric,” way of fighting wars and achieving information superiority over adversaries, much the same way as the Internet has transformed industry and society on a global scale. Netcentric operations and warfare, according to DOD, are the combination of tactics, techniques, and procedures that a networked force can employ to create a decisive warfighting advantage. The GIG’s role is to create an environment in which users can access data on demand at any location without having to rely on (and wait for) organizations in charge of data collection to process and disseminate the information. Data could emanate from a variety of sources, including weapon systems belonging to other military services, space-based intelligence, surveillance, and reconnaissance satellites, and DOD logistics, financial, and other systems that carry out business operations. Ultimately, DOD expects that most of these systems will become part of the GIG. With greater data access and a more robust communications infrastructure, DOD expects the GIG to enable more timely execution of military operations, collaborative mission planning and execution, common views of the battlespace, and more timely assessments of the condition of equipment and the levels of supplies. For example, according to DOD officials, greater information sharing could dramatically increase capabilities to rapidly identify and strike time-critical targets, such as mobile surface-to-air missile sites. In the past, such targets have proved to be elusive because the enemy is able to move them to safety in a shorter time frame than it takes U.S. military forces to detect, assess, and attack the targets. By having greater command of a battle situation, DOD expects that lethality and survivability of equipment and personnel would be increased. Armor protection could be scaled down in favor of more agility. In addition, the GIG would reduce the substantial resources and logistics needed to bring command, control, and communications systems to the war-fighting environment. Table 1 illustrates how DOD envisions the GIG will help transform military operations. The GIG is to be much like the Internet, but with less dependence on ground-based and fixed systems and equipment to transmit and route data and more dependence on space-based and mobile, ad hoc systems to carry out these functions. Figure 1 shows the various layers of the GIG’s overall concept. At the core are communications satellites, next-generation radios, and an installations-based network with significantly expanded bandwidth. These will provide the basic infrastructure through which data will be routed and shared. In addition, the GIG would employ a variety of information technology services and applications to manage the flow of information and ensure the network is reliable and secure. Various information technology tools would be available to help users determine what information is available, where to find it, and how best to use it. DOD envisions that communities of interest would be developed, linking users with common interests who would collaborate on analyzing and sharing information. Ultimately, most of DOD’s sensors, weapon systems, business systems, and systems belonging to decision makers, military units, and allies would be tied into the GIG network—serving as both users and providers of data. DOD has taken a two-pronged approach to build the GIG: (1) invest in a set of core enterprise programs and initiatives to build a core network and information capability and (2) bring other existing and planned weapon systems, command, control, and communications systems, information technology systems, and logistics, personnel, and other business-related systems into the GIG network. The core network acquisitions are to be developed incrementally over time, with the aim of fielding the first increment of the GIG by 2010. The GIG is primarily being developed under the leadership and direction of DOD’s Office of the Assistant Secretary of Defense for Networks and Information Integration in coordination with other components in the Office of the Secretary of Defense and Joint Staff. The Defense Information Systems Agency, military services, combatant commands, and other defense agencies also play roles in implementing the GIG. In addition, DOD’s Strategic Command has responsibilities for eventually operating the GIG. Table 2 shows the key acquisitions for the GIG’s core network and examples of additional acquisitions that must be integrated with the GIG. According to DOD, the key acquisitions underway to build the GIG network capability include 1) Transformational Satellite (TSAT), a new constellation of communications satellites to transmit and route larger volumes of data; 2) Joint Tactical Radio System (JTRS), a new family of interoperable radio systems; 3) Global Information Grid-Bandwidth Expansion (GIG-BE), which includes state of the art optical network technologies and upgraded routers and switches to increase bandwidth for greater voice, data, and video transmissions as well as improvements in network services at about 90 DOD installations; 4) Network Centric Enterprise Services (NCES), a common set of services and applications to manage the network and help users locate and share information; 5) Cryptography Transformation Initiative, tools to protect sensitive information transmitted across the network and protect the network from attack; and 6) Horizontal Fusion, which is a portfolio of initiatives focused on developing and demonstrating data applications and tools for information sharing and netcentric operations. Table 3 reviews each of the key acquisitions for the GIG’s core capability, including the purpose, the financial investment between fiscal years 2004 and 2009, the military service or defense agency responsible for managing the acquisition, and the current status. Some of these acquisitions will require funding, including sustainment costs, beyond 2009 but amounts are not yet known. In developing the GIG’s core capability, DOD intends to build upon and enhance ongoing terrestrial and space-based networks and systems, such as the Advanced Extremely High Frequency satellite communication system and the Defense Information Systems Network. The new programs underway are intended to improve communications and networking capabilities significantly. For example, according to DOD officials, current telecommunication lines are not robust enough to handle the volume of information needed to facilitate optimal, strategic decision making. The GIG-BE is designed to remove current bandwidth constraints. The GIG-BE is to use advanced fiber-optic backbone and switching technology to upgrade telecommunications lines and provide initially up to 10 gigabytes per second of bandwidth at selected defense installations around the world. Also, unlike DOD’s legacy radio systems that cannot interoperate with one another, JTRS is software-based, meaning that the radios are essentially computers that can be programmed to imitate other types of radios and thus be readily configured to operate in different networks and waveforms based on common standards. JTRS is expected to act as a gateway for users with different hardware radios—a capability that speeds the transition to universal interoperability for DOD military operations. Also, unlike current communication satellites, TSAT is to be equipped with laser-optical payloads for high-capacity links to other air and space platforms. By using laser-optics, TSAT is intended to operate above the radiofrequency spectrum and provide relief to current military bandwidth constraints. NCES is to make use of commercial products and tools to manage messaging, storage, search, and other capabilities across platforms, but also require new and possibly customized services to ensure the sharing of information based on mission demands and priorities. Tools to allow users to “smartly” pull and fuse information will require investing in new data content and management techniques. Enhanced security (information assurance) capabilities will need to be developed, including encryption mechanisms and devices, intrusion detection systems, and secure network management. Most ongoing and planned weapon systems; command, control and communications systems; and business systems will need to be integrated with the GIG network, because they will be the primary providers and receivers of data needed to support future military operations. DOD plans to integrate most weapon systems into the GIG. In fact, some “transformational” weapon systems now under development require a more advanced communications infrastructure to perform as intended and to support voice, data, videoconferencing, and imagery transmissions. Without an integrated network that ties together different systems and enables information to flow freely across the battlefield, the high-paced warfare that DOD envisioned is likely to be constrained, according to DOD. For example, the Army is developing the Future Combat Systems, a new generation of manned and unmanned ground vehicles, air vehicles, and munitions that are to be lighter and more mobile yet lethal and survivable. Rather than rely on heavy armor to withstand an enemy attack, the Future Combat Systems will depend on superior information to see and kill the enemy before being detected. According to DOD, the ability to make this leap depends on (1) a network to collect, process, and deliver vast amounts of information, such as imagery and data, and (2) the performance of the individual systems themselves. Not only must systems within the Future Combat Systems interoperate effectively, they also must interoperate with the GIG. The GIG must perform at a level that enables the Future Combat Systems to quickly collect, process, and deliver data. DOD is also developing a new constellation of satellites— known as Space-Based Radar—to provide a near continuous, all- weather global capability of collecting intelligence, surveillance, and reconnaissance information. Space-Based Radar is expected to be a critical data provider to transformational systems, such as those within the Future Combat Systems. Like the Future Combat Systems, the satellites will require a more robust communications infrastructure to send massive amounts of imagery data in a timely fashion. According to DOD, if TSAT, a key GIG component, is not ready in time or cannot provide the capability originally planned, DOD may need to build additional capability into Space-Based Radar satellites and ground stations to reduce the dependency on the communications infrastructure to transmit data. DOD intends to integrate virtually all command, control, and communications, systems into the GIG. At the same time, DOD intends to develop and modify these systems to provide military commanders and forces with near-real time descriptions of the location and disposition of U.S. military forces and adversaries operating on the ground and in the air and to provide the ability to communicate across all elements involved in military operations. Each of the military services has major architectural initiatives underway (the Air Force’s C2 Constellation and ConstellationNet, the Army’s LandWarNet, and the Navy’s ForceNet) to transform their command, control, and communications systems and information infrastructures into the GIG. For example, the Army’s Warfighter Information Network-Tactical (WIN-T) program (part of LandWarNet) is intended to be the integrating communications network that links Future Combat Systems units with higher Army echelons and with the GIG. In addition, DOD considers numerous other systems to be important in achieving the GIG, including the Mobile User Objective System (satellite communications), Global Command and Control System/Joint Command and Control, Deployed Joint Command and Control, and Teleports (information transport system). DOD has further identified the need to eventually link the GIG to coalition, allied, and non-DOD users and systems. DOD also intends to integrate its business systems into the GIG. These include acquisition and procurement systems, financial management systems, personnel and health systems, logistics systems, and strategic planning and budgeting systems. Many of these play an important role in supporting military operations. For example, logistics systems are used to plan, control, and carry out the efficient and effective movement and maintenance of forces. The GIG’s success is dependent on DOD’s ability to successfully integrate the majority of its weapon systems, command, control, and communications systems, and business systems with the new core network. To make this happen, DOD has developed a blueprint or architecture for the GIG; developed new policies, guidance, and standards to guide implementation decisions; undertaken proactive efforts to “market” the GIG and its potential benefits; and is attempting to influence key budgeting and acquisition decision-making processes to align with the GIG concept. To help guide decision-making, DOD has developed an initial architecture for the GIG, which, according to DOD, presents the current information technology environment and desired (target) technology environment; describes how the commands, services, and defense agencies will operate in a netcentric environment, based on selected strategic, operational, and tactical scenarios; and identifies the actions and information requirements for conducting operations in a netcentric environment, how systems will need to function to access information, and emerging standards for the development and acquisition of systems. DOD also has developed a reference model so program managers of various architectures and systems can ensure GIG compliance. According to DOD, the reference model’s key purpose is to provide users with an understanding of the GIG through common definitions and terms of reference, standards, and templates for developing more detailed architectures. Future versions of the GIG architecture are to include more complete views of DOD’s operational environment and existing enterprise requirements. Furthermore, DOD is modifying its Joint Technical Architecture, which sets standard technologies and protocols to better ensure interoperability and to complement the GIG architecture. DOD is also in the process of issuing new policies, standards, and guidance to formalize the architecture. Specifically, DOD has created policy that requires all departmental architectures to be GIG compliant. DOD also has developed specific policies, standards, and guidance to implement the GIG and help ensure that the military services acquire systems that integrate with the GIG. Several policies establish the GIG as a cornerstone for enabling DOD to achieve information superiority, formally define the objectives and key elements of the GIG, and assign roles and responsibilities for the GIG on an enterprise basis. Others assign responsibility and define waiver procedures for specific aspects of the GIG, such as ground-based telecommunications networks and NCES. For example, DOD formalized a waiver process to assess network and telecommunications systems (such as local area networks) that are not GIG-compliant. In addition, DOD has set standards to address data connectivity. To provide a common format for the transmission of information across the GIG, DOD recently mandated that GIG systems must be Internet Protocol Version 6 capable, as well as Internet Protocol Version 4 (the Internet currently is based on version 4.), or obtain a waiver. Furthermore, DOD developed a netcentric data strategy, standardizing the way data will be described and used in systems that make up the GIG. Appendix I provides more details on these policies, standards, and guidance. DOD officials who developed the GIG concept also expect to influence decisions by participating in DOD’s key decision-making processes. Over the past couple years, DOD has revised its three primary decision-making processes for determining and delivering military capabilities— requirements setting, acquisition, and budgeting—to focus acquisitions and investment decisions on meeting joint mission needs, particularly with regard to interoperability. In revising these processes, DOD has emphasized compliance with the GIG architecture. DOD officials have taken further action intended to strengthen these decisions by developing tools and criteria for actively participating in the decision-making process—by assisting military services in preparing for major acquisition reviews (as part of integrated product teams) and/or by providing input to decision-making boards. The revisions DOD has made to its requirements setting, acquisition, and budgeting process are all fairly recent. Therefore, it is too early to assess whether they will be successful in achieving their goals. For example, DOD revised its requirements-setting process to shift the focus to a more capabilities-based approach for determining joint war- fighting needs rather than a threat-based approach focused on individual systems and platforms. Under the threat-based approach, the services were primarily responsible for defining requirements, selecting alternatives, and developing systems, which frequently resulted in the fielding of stovepiped systems and duplicating capabilities. DOD’s rationale for shifting to capabilities-based requirements is a recognition that there is greater uncertainty in future military conflicts without a clearly defined adversary and it will need to respond across a broader range of military operations. The new Joint Capabilities Integration and Development System, established in October 2003, is organized around key functional concepts and areas—command and control, force application, battlespace awareness, focused logistics, and force protection--aimed at improving joint warfighting capabilities. In addition, a sixth area has been established—netcentric operations—to enable planning across functional areas and support integration of netcentric capabilities. The Office of the Assistant Secretary of Defense for Networks and Information Integration and Joint Staff officials believe the joint concept will provide a more coherent framework for identifying capabilities gaps, comparing alternatives, aligning requirements to the GIG, and reduce the potential for stovepiped, duplicative capabilities. DOD officials also indicated that the department has begun revising its planning and budgeting process in an effort to instill more collaboration among different components of the department in investment decisions. For example, DOD is asking the military services to plan budgets around guidance that takes a joint perspective. Data collection and management processes are intended to be merged into a portfolio management approach that enables program reviews and budget reviews to occur in a more integrated manner rather than sequentially. To complement this process, DOD is planning to develop an investment portfolio management structure to better manage its information technology resources where decisions about what information technology investments to make, modify, or terminate, are based on the GIG architecture and other objectives, such as mission area goals. Other recent policies have focused on establishing more effective investment processes for information technology systems that need to integrate with the GIG. DOD has developed several mechanisms to complement the decision making that occurs within the Joint Capabilities Integration and Development System, planning and budgeting, and acquisition processes. For example, in November 2003, the Office of the Assistant Secretary of Defense for Networks and Information Integration, in consultation with the Joint Chiefs of Staff, Office of the Under Secretary of Defense for Acquisition Technology and Logistics, and U.S. Joint Forces Command, established a new Net-Ready Key Performance Parameter and review process to focus greater attention on systems interoperability for joint operations as well as the information-sharing requirements of the GIG. The Net-Ready Key Performance Parameter is built around compliance with the GIG architecture, and the reference model will be used to assess system information needs, information assurance, and the technical exchange of information. The Office of the Assistant Secretary of Defense for Networks and Information Integration has also developed a netcentric checklist to guide the Joint Capabilities Integration and Development System and acquisition reviews. The checklist is based on the GIG architecture and will be used to assess whether key standards and protocols are being considered and built into particular capabilities and systems being acquired. In addition, the Office of the Assistant Secretary of Defense for Network and Information Integration has established a systems engineering and evaluation capability to support the reviews. A team of systems engineers will provide end-to-end technical support to the office and funding has been requested to create a facility to test key GIG- related systems and components. DOD will be conducting specific netcentric reviews of major acquisition programs to assess whether they are transitioning to integrate with the future network. About 129 information technology, weapon systems, and business systems have been selected to participate in the initial round of assessments. These reviews are scheduled to be completed later this year. The most critical challenge ahead for DOD is making the GIG a reality. While DOD has taken steps to define its vision and objectives for the GIG on paper and in policy, it is not fully known how DOD will meet these objectives, particularly with respect to setting investment priorities, providing management attention and oversight, transforming operations, and advancing technologies. At the same time, DOD is beginning to make a heavy investment in the GIG as well as systems that will be heavily dependent on the GIG, such as the Army’s Future Combat Systems, and DOD is asking its components and the military services to accept its vision and plan toward it. In addition, DOD faces risks inherent with the nature and scope of the effort it is undertaking, for example, risks related to protecting data within the thousands of systems that will be integrated into the network. DOD recognizes these challenges, and many of the actions it is taking to implement the GIG are meant to address them. However, it is too early to assess how successful DOD will be in addressing the challenges and overcoming long-standing organizational impediments. Table 4 below highlights some of the key challenges facing DOD. While DOD has taken steps to establish a vision and objectives for the GIG, it is still not fully known how DOD will manage, oversee, and invest in this effort. Addressing these questions is a daunting task. DOD must find ways to make and enforce trade-off decisions for literally thousands of information technology systems, weapon systems, command and control systems, intelligence systems, and other systems. These decisions will need to span a wide range of organizations, including the military services and their respective major commands and functional activities, numerous large defense agencies and field activities, and various combatant and joint operational commands that are responsible for military operations for specific geographic regions or theaters of operations. Having accurate and reliable visibility over spending on systems that must integrate with the GIG will be necessary as well as having effective mechanisms for identifying and deciding which systems should be pursued and which should not. In 2003, we reported (as part of a survey of federal agencies enterprise architecture programs) that DOD had made progress in developing the GIG architecture, however, the department had not completed some essential architecture products that describe the desired (target) technology environment and provide a sequencing plan for transitioning to it. More specifically, at this point, DOD is largely leaving it up to its components and services to decide how best to migrate their systems to the GIG. There is no well-defined strategy that identifies what capabilities DOD will invest in and what it will not invest in; identifies how investments will align with the goals and objectives of the GIG architecture; determines what is affordable, particularly in light of near-term and sets out criteria for determining what legacy systems should remain or be phased out; and specifies by whom and how decisions will be enforced. In addition, it is unknown how senior leaders within DOD will be able to focus on the progress of the GIG as a whole, that is, whether it is being developed and fielded within cost and schedule, whether risks are being adequately mitigated, and whether the GIG is providing a worthwhile return on investment, particularly in terms of enhancing military operations. Until DOD implements an investment and oversight strategy for the GIG as a whole, it is at risk of making investments that do not fit its vision for the future. According to DOD officials, the enhancements DOD is making to its planning and budgeting processes are meant to begin addressing these questions. However, these changes may be difficult to implement for a number of reasons. First, to some degree because of the broad scope and crosscutting nature of the GIG concept, no office or single program is in charge of the GIG, making it more difficult to make and enforce trade-off decisions. Moreover, while key acquisition, budgeting, and requirements setting processes have been modified, they still largely operate under the same organizational structure, where it has been difficult to link acquisition and investment decisions to joint concepts like the GIG. Additionally, previous efforts that have been undertaken in past years to foster interoperability among DOD systems have had limited success, principally because management tools and leadership attention were not strong enough to provide sufficient oversight and overcome resistance by the military services to forgo their unique requirements in favor of requirements that would benefit the department, as the following examples illustrate: In our 2001 report on DOD’s efforts to improve its ability to attack time-critical targets, we noted that DOD had undertaken numerous efforts to achieve system interoperability, including the development of guidance, oversight controls, directives and policies, and technology demonstrations. However, success was limited because DOD had not yet overcome resistance from the military services, it lacked an architecture to guide interoperability efforts and some current oversight and control mechanisms, such as the interoperability certification process, were not working or were not being enforced. In 2003, we reported that two joint acquisition programs lacked mechanisms to overcome parochialism and stovepipes at the military service level. The JTRS program lacked a strong management structure to resolve operational requirements and funding issues among the services and DOD’s approach to planning Unmanned Aerial Vehicles lacked an effective strategic plan to ensure the military services and other defense agencies focus their development efforts on systems that complement each other. In 2004, we reported that DOD was making limited progress with its business modernization initiative—a departmentwide effort focused on transforming DOD business operations, including standardizing and optimizing business systems across DOD and reducing duplication. After 3 years of effort, we reported that we have not seen any significant change in the content of DOD’s business systems modernization architecture (which is to be integrated into the GIG architecture) or in DOD’s approach to investing billions of dollars in existing and new business systems. Further, DOD had not yet implemented an effective management structure and processes to provide adequate control and accountability over its $5 billion annual investment in business systems modernization. In particular, we reported that DOD had not yet clearly defined the roles and responsibilities for its new business investment domains, established common investment criteria, and conducted a comprehensive review of its existing business systems to ensure that they are consistent with the business modernization architecture. DOD acknowledged that it still had much more to do, including developing the business systems modernization architecture to a necessary level of detail, defining specific performance metrics, and clarifying the roles and responsibilities associated with managing the domains of portfolios of business systems and ensuring that these systems comply with the architecture. Several recent studies sponsored by DOD recognize that developing an investment strategy and adopting better management tools is critical for the success of the GIG. For example, a 1999 Defense Science Board study assessed DOD’s strategies and processes for attaining information superiority and advocated that (1) an executive office be established to lead and implement the GIG and that (2) the office develop an implementation plan, including technical milestones and measurable interim goals, and identify resources to permit the transition to and completion of the GIG. A 2004 report by the U.S. Joint Forces Command, documenting the processes and planned activities underway to achieve transformational improvements in joint military capabilities, recommended, among other things, that the GIG should include a time- phased plan for how future capabilities will link to current investments. In addition, the report recommends that such a plan should show how network development efforts underway by each of the military services will contribute to and be compatible with the GIG. Other studies have pointed to the need to strengthen current management processes to ensure warfighters themselves have more input into investment decisions. For example, a 2003 study chartered by the Secretary of Defense to examine how DOD develops, resources and provides joint capabilities, recommended moderate to more radical actions to streamline existing processes and/or establish alternative organizations to better integrate defense capabilities in support of joint military objectives. Organizational alternatives for strengthening the acquisition process ranged from the establishment of joint program executives for each of the Joint Capabilities Integration and Development System’s functional capabilities areas that would provide input and oversee resources on joint programs, to capability acquisition executives for each of the capability areas who would have direct oversight and decision authority over all programs. A 2004 study by the Center for Strategic and International Studies identified defense reforms needed to meet the challenges of a new strategic era and made a number of recommendations, including several to improve the acquisition of joint capabilities and establish a more effective resource allocation process. For example, the study recommended that the Joint Staff (J-6—Command, Control, Communications, and Computers) be expanded into a departmentwide, joint task force with budgetary and acquisition authority for joint command and control capabilities. In addition, to improve trade- off decisions across mission areas, the study advocates building capacities in the combatant commands for a stronger role in the resource allocation process. There are also many unknowns concerning how DOD will meet its requirements and vision in terms of people, processes, and, ultimately, operations. First, DOD has yet to determine how much information should be posted on the network; when it should be posted; and how and where it should be used. Once these factors are determined, DOD must develop rules of operation to ensure the network can work as intended without precluding the benefits that can be derived from more flexible and dynamic information sharing. Currently, various offices within DOD are working through questions on whether unlimited amounts of data should be made available through the GIG, including unprocessed intelligence, surveillance, and reconnaissance data, without the benefit of some assimilation and analysis. These are important questions that need to be addressed in the near future because they could affect the direction of investments in netcentric systems and non-network systems as well as changes that need to be made in how the intelligence community operates. Even after these questions are settled, significant operational challenges remain. Joint commanders and the military services may need to find ways to adapt to an environment where data can be more readily obtained and shared by lower levels in the chains of command. New operational concepts are being developed to guide how military operations are to be conducted in this enhanced technology environment. They will need to be followed by associated doctrine, tactics, techniques, and procedures. Developing joint operational concepts is one of the key tenets under the Joint Capabilities Integration and Development System; however, it is unclear how the concepts will be developed and translated by these boards into more detailed tactics, techniques and procedures. We recently reported that DOD had been proceeding with the JTRS program for several years without clear definition of how JTRS capabilities should be used in an operational environment and that the program’s concept of operations did not reflect the joint vision of JTRS but instead the service- centric radio-replacement perspective. If DOD is to achieve its long-term goals for netcentric warfare, it is imperative that it develop concepts and processes for how individual systems, such as JTRS, can be used to leverage DOD’s new network infrastructure and maximize interoperability and collaboration in military operations. Moreover, DOD must successfully persuade data owners to accept the value of sharing data with a broader audience and to trust the network enough to post data. We spoke with several officials in charge of GIG programs who acknowledged that facilitating these cultural changes— particularly with the intelligence community—will be difficult. In addition, DOD also faces a formidable task in persuading the military services and other users of the network to rely on information technology applications and services being developed by the Defense Information Systems Agency. This agency has been tasked with developing and providing key voice, video, and data connectivity through core enterprise services for the GIG, such as data query (search or discovery) capabilities and information assurance. However, the military services and defense agencies have historically been reluctant to rely on the Defense Information Systems Agency for these services. We have reported in the past that the military services have regularly bypassed Defense Information Systems Agency, preferring instead to procure their own telecommunications networks and commercial satellites bandwidth services because they were dissatisfied with the level of service provided by the agency as well as the cost and length of time it took to procure these services centrally. Building a reliable, secure network that will operate on the move, virtually anywhere and provide the necessary information and services to enable netcentric military operations presents considerable technical challenges. While DOD intends to utilize existing commercial communications and networking technologies, which have advanced significantly in recent years, the GIG requires DOD to advance a number of key technologies, develop a series of complex systems and software, field them without delay so schedules for other dependent systems are not disrupted, and develop the means to effectively manage and protect the network and its data. At this time, however, DOD is pushing ahead on several programs with immature technologies and with aggressive development and fielding schedules. As a result, DOD is at risk of not delivering required capabilities within budgeted resources. This, in turn, may affect schedules and funding for other systems depending on the GIG. For example, two key GIG- related programs—JTRS and TSAT—are facing schedule and performance risks, which are largely rooted in attempts to move these programs into product development without sufficient knowledge that their technologies can work as intended. In March 2004, we reported that none of the 20 critical hardware and software technologies for the Army’s initial JTRS radio development for ground vehicles and helicopters were sufficiently mature according to best practice standards. When product development began in June 2002, the Army determined that while many of the technologies within the program had been used in other radio applications, they could not be assessed as mature because they had not been integrated into a complex radio, such as JTRS. Mature backup technologies exist for some critical technologies, but program officials have cautioned that substituting them could complicate integration or result in degraded performance. Moreover, the program recently experienced a 4-month schedule slip that officials attribute to short-term technology deviations affecting size, weight, and power requirements for the radio sets. Further, the program entered product development with an ambitious schedule that program officials recognized as high risk. In particular, the program has a compressed test and evaluation phase that leaves little room for error and rework. We also recently reported that the TSAT program entered into product development with only one of its six critical technologies sufficiently mature. The remaining five technologies are not expected to reach maturity until 2006. Backup technologies exist for three of the five immature technologies, but they would degrade system performance. The other technology—single access laser communications—has no backup and program officials indicated any delay in maturing this technology would cause the first satellite launch date to slip significantly. DOD believes it has adequate measures to mitigate these risks, however, concern over TSAT technology readiness led the Air Force to schedule an interim review for November 2004, which will determine whether the program’s technology development has progressed sufficiently or whether alternative action should be taken. Similar risks extend to the systems that must be integrated with the GIG and on which DOD is dependent for achieving its vision for netcentric warfare. For example, our review of the Future Combat Systems determined that the program is at significant risk, in part because more than 75 percent of its critical technologies were immature at the start of development and many will not be sufficiently mature until the production decision. First prototypes for the systems that make up the Future Combat Systems will not be delivered until just before the production decision, and full demonstration of the Future Combat Systems’ ability to work and meet its goals will not occur until after production has begun. If the lessons learned from best practices and the experiences of past programs have any bearing, the Future Combat Systems program is likely to encounter “late-cycle churn,” a phrase used by private industry to describe the discovery of significant problems late in development and the resulting search for fixes when costs are high and time is short. Networking, network management, and secure network management challenges are considerable. Currently, mobile networking is limited, mainly to narrowband, fixed infrastructures, and relatively stable user groups. The GIG network will require new wideband waveforms that can handle the expected high data rates, throughput of information, and ability to transmit integrated voice, data, and video simultaneously. In addition, dynamic networking capabilities that can automatically adjust to changing circumstances, such as intrusions or node failures, are needed; however, the scalability of network management technologies for a network like the GIG with such a large number of nodes is unproven. To facilitate timely and prioritized access to information from a wide variety of sources, the network will require enhanced quality of service mechanisms and algorithms to manage bandwidth allocation and handle the flow of information and security. Furthermore, advances will be needed in several other technological areas, such as antennas, power sources, and the miniaturization of components to facilitate mobile communications. For example, current antennas do not support all of the portions of the radio frequency spectrum where the GIG network will operate and are limited to specific communications waveforms. Advanced multiband antennas will be needed to support mobile and simultaneous communications across different portions of the spectrum. Integrating other elements of the network will also be challenging. The increased bandwidth capability provided by the GIG-BE program may not be fully realized if the military services and defense agencies do not use compatible technologies and protocols in upgrading their networks. Even if the technologies and protocols are compatible, bandwidth may be limited if these networks are not properly designed and integrated to manage voice, data, and imagery transmissions. Network management policies may pose challenges if common agreement cannot be reached across the military services and defense agencies on standards and information assurance requirements. For example, DOD and the intelligence community have not yet reached agreement on how they will exchange information and verify security credentials on the GIG network. Information assurance itself may be one of the most critical challenges facing DOD. While building a network based on Internet protocols is expected by DOD to provide a more viable path to achieve interoperability and enable more dynamic and flexible information sharing, it also exposes DOD to the same vulnerabilities that face all users of the Internet, and it increases the opportunity for potential attackers with limited knowledge and technical skills to cause a great deal of damage. Establishing network and system security safeguards—such as firewalls, identifying the sender and recipient of information, protecting information from unauthorized access, and safeguarding data to prevent accidental and deliberate alterations—will be essential but difficult given the size the network and the thousands of systems and users that will be linked to it. Moreover, if the network is to be used to provide warfighters on the move with access to intelligence and other sensitive information on demand, information will need to be encrypted to safeguard data from misuse. However, the technologies needed to secure communications, such as software programmable encryption devices are still in their infancy. Further, the complexity and magnitude of enabling hundreds of systems and applications to operate in a secure, Web-based environment will require careful planning and coordination. Comprehensive plans will be needed to ensure that sensitive data and communications are safeguarded across diverse platforms. This will require DOD to identify sensitive data as well as applications, databases, storage subsystems, and media used to process and store the data. Once systems have been examined, data access models must be applied to determine proper security levels for information and how integration can occur across platforms without disrupting network and near-real time operations. No one security solution likely will address GIG requirements. Lastly, the enterprise information services planned for the GIG pose timing challenges. For example, in the near-term, DOD has established a goal to complete the transition to Internet Protocol Version 6 by fiscal year 2008. According DOD officials, the commercial industry may not be able to provide the necessary products for Internet Protocol Version 6 by the targeted milestone. Also, the transition will not be completed until a Joint Staff developed set of performance and technical criteria can be met. In addition, because of the enormous amount of data that will become available, new data fusion methods will need to be developed to help users rapidly identify, access, and make sense of available information. DOD is depending on the GIG to enable a fundamental transformation in the way military operations are conducted. While DOD’s vision of the GIG is compelling, the breadth and depth of the GIG and DOD’s objectives for netcentric warfare, present enormous challenges and risks—many of which have not been successfully overcome in smaller-scale efforts and many of which require significant changes in DOD’s culture. Moreover, even though DOD has begun to make heavy investments to implement the new network and to ask the military services to accept its vision for the GIG, important questions as to how DOD will make the GIG a reality and how it will oversee progress as a whole and ensure the GIG is providing an adequate return on DOD’s investment are only just beginning to be addressed, leaving DOD at risk of making investments that may not fit in with its vision for the future. Moreover, many new weapon systems and sensors, which are costing DOD tens of billions of dollars, are critically dependent on the future network to successfully achieve their own capabilities. Any disruptions in the schedule for key systems that support the network, therefore, can have significant ramifications. As such, it is important that DOD ensure it has sufficient knowledge about these systems (e.g., requirements, technologies, security) as it makes additional commitments to them and that it has effective risk mitigation plans to ensure that they can deliver promised capability on time. Our future work, therefore, will assess DOD’s progress in addressing these challenges in more depth as well as its progress in managing key acquisitions related to the GIG. DOD provided technical comments on a draft of this report that we incorporated where appropriate. We plan to provide copies of this report to the Secretary of Defense, the Assistant Secretary of Defense for Networks and Information Integration, the Under Secretary of Defense for Acquisition, Technology and Logistics, the Under Secretary of Defense (Comptroller), the Director of the Defense Information Systems Agency, and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3519, Cristina Chaplain at (202) 512-4859, or John Oppenheim at (202) 512-3111. Other individuals making key contributions to this report are Lily Chin, Arturo Holguin, and Yvonne Vigil. This policy establishes the Defense Information Systems Network (DISN) as DOD’s networking capability for the transfer of information in support of military operation in the context of the Global Information Grid (GIG). It further specifies that DISN shall be the means for wide-area and metropolitan-area networking unless granted a waiver through the DISN/GIG waiver board. This directive establishes policies for DOD information resources management, including information technology, and delineates, authorities, duties, and responsibilities for DOD information resources management activities. It also provides direction on establishing Chief Information Officers at various levels. This instruction implements an approach that considers both materiel (acquisition or procurement) and nonmateriel (doctrine, organizational, training, leadership, and personnel) aspects to ensure life-cycle interoperability and supportability of information technology and national security systems throughout DOD. It also implements an outcome-based, mission area focused process whereby information technology and national security systems interoperability and supportability requirements for new, modified, and fielded systems are documented, coordinated, implemented, verified, and approved to achieve an integrated, and secure information technology and national security systems infrastructure supporting global operations across the peace-conflict spectrum. The directive states that the GIG shall support all DOD missions with information technology, for national security systems, joint operations, joint task force, and/or combined-task for commands in a manner that offers the most effective, efficient, and assured information handling capabilities available, consistent with national military strategy, operational requirements, and best-value enterprise-level business practices. The policy assigns responsibilities to achieve DOD information assurance through a defense-in-depth approach that integrates the capabilities of personnel, operations, and technology, and supports the evolution to network- centric warfare. The instructions implements policy, assigns responsibilities, and prescribes procedures for applying integrated, layered protection of the DOD information systems and networks referenced in DOD Directive 8500.1. The policy establishes a goal to converge voice, video, and data traffic over DOD’s inter- network and the National Security Agency (NSA) as lead in developing the information assurance component of the GIG architecture. The policy establishes a goal of transitioning all DOD networking to the next generation of Internet Protocol, IPv6, by fiscal year 2008. As part of this transition, the strategy will be to minimize costs by ensuring products and systems procured, acquired, or in development after October 1, 2003, are capable of operating in IPv6 networks. The policy establishes a DOD-wide goal to institutionalize the practice of identifying all data assets on the GIG by fiscal year 2008. Information will be provided on each data asset to standardize the way data are described and used for all IT and national security systems. This practice will enable DOD to create tools to query data assets across platforms. The policy establishes a program to begin the development of core enterprise services within the GIG as part of the fiscal year 2006 program review process. Core enterprise services—such as messaging, collaboration, services management, security, discovery, and mediation—are to be developed to provide access and the delivery of data and services across the department. This instruction establishes polices and procedures for developing, evaluating and providing interoperability and supportability certification in support of the Joint Capabilities Integration and Development System for acquisition category, nonacquisition category and fielded capabilities. This instruction establishes the policies and procedures of the Joint Capabilities Integration and Development System. Procedures established in this instruction support the Chairman of the Joint Chiefs of Staff and the Joint Requirements Oversight Council in identifying, assessing, and prioritizing joint military capability needs. This policy assigns responsibilities for managing information technology investments as portfolios. It also establishes that decisions on what information technology investments to make, modify or terminate shall be based on architectures, risk tolerance levels, potential returns, outcome goals, and performance. This policy assigns responsibilities for the use of commercial wireless devices, services, and technologies in the DOD Global Information Grid. It also directs the development and use of a knowledge management process to promote the sharing of wireless technology capabilities, vulnerabilities, and vulnerability mitigation strategies throughout DOD and promotes joint interoperability using open standards throughout DOD for commercial wireless services, devices, and technological implementations. The directive updates DOD responsibilities for interoperability and supportability of information technology, including national security systems, and implements DOD Chief Information Officer’s responsibilities. It also defines a capability-focused, effects-based approach to advance information technology and national security systems interoperability and supportability across DOD and establishes the Net-Ready Key Performance Parameter to assess net-ready attributes required for both the technical exchange of information and the end-to-end operational effectiveness of that exchange. | The Department of Defense (DOD) is in the midst of transforming military capabilities. The transformation relies in part on the Global Information Grid (GIG), which is focused on building a new Internet-like network capability that DOD envisions will enable weapons and other systems and people to share information quickly, allowing warfighters to identify threats more effectively and to respond with greater precision and lethality. DOD plans to spend at least $21 billion through 2010 to build a core GIG capability. GAO was asked (1) to describe the GIG, including the concept, key acquisitions, and implementation and (2) to identify significant challenges facing DOD in implementing the GIG. The GIG is a huge and complex undertaking that is intended to integrate virtually all of DOD's information systems, services, and applications into one seamless, reliable, and secure network. DOD's overall concept is to enable data access for a variety of systems and users in the network no matter which military service owns a weapon system or where a user might be located around the world. DOD is looking to the GIG to form the basis of a network-centric or "netcentric" way of fighting wars and to create a decisive advantage over adversaries. DOD has taken the following two-pronged approach to building the GIG: (1) invest in key acquisitions to build a core networking capability, including new communication satellites, next-generation interoperable radios, a new ground-based communication network with significantly expanded bandwidth, and services and applications to manage and protect the network and help users locate, post, and share information; and (2) integrate other existing and planned weapon systems, information technology systems, and logistics, personnel, and other business-related systems into the GIG. To integrate other systems, DOD officials who created the concept for the GIG have developed an initial blueprint or architecture for the GIG and policies to formalize the GIG, and they are attempting to influence key acquisition and budgeting decisions to align investments and systems with the GIG. The most critical challenge ahead for DOD is making the GIG a reality. While DOD has taken steps to define its vision and objectives for the GIG on paper and in policy and is beginning to make a heavy investment in the GIG as well as systems that will be heavily dependent on the GIG, it is not fully known how DOD will meet these objectives. For example, it is not known which investments should take priority over others and how these decisions will be enforced. Moreover, it is not known how DOD will assess the overall progress of the GIG and determine whether the network as a whole is providing a worthwhile return on investment, particularly in terms of enhancing and even transforming military operations. According to DOD officials, the enhancements DOD is making to its planning and budgeting processes are meant to begin addressing these questions. Until DOD implements an investment and oversight strategy for the GIG as a whole, it is at risk of making investments that do not fit DOD's vision for the future. |
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